Introduction to Accounting and Business
LO 2 – Generally Accepted
Accounting Principles
@ 2012, Cengage Learning
LO 2
Generally Accepted Accounting Principles
 Financial accountants follow generally
accepted accounting principles (GAAP) in
preparing reports.
 Within the U.S., the Financial Accounting
Standards Board (FASB) has the primary
responsibility for developing accounting
principles.
LO 2
Generally Accepted Accounting Principles
 The Securities and Exchange Commission
(SEC), an agency of the U.S. government,
has authority over the accounting and
financial disclosures for companies whose
shares of ownership (stock) are traded and
sold to the public.
 Many countries outside the United States
use generally accepted accounting
principles adopted by the International
Accounting Standards Board (IASB).
LO 2
Proprietorship
A proprietorship is
owned by one
individual.
 70% of business entities
in the U.S. are
proprietorships.
 They are easy and
cheap to organize.
 Resources are limited
to those of the owner.
 Used by small
businesses.
LO 2
Partnership
 A partnership is
similar to a
proprietorship
except that it is
owned by two or
more individuals.
 10% of business
organizations in the
U.S. (combined with
limited liability
companies) are
partnerships.
 Combines the skills and
resources of more than
one person.
LO 2
Corporation
 A corporation is
organized under
state or federal
statutes as a
separate legal
taxable entity.
 Corporations generate
90% of business
revenues.
 20% of the business
organizations in the U.S.
are corporations.
 Ownership is divided
into shares, called
stock.
(continued)
LO 2
Corporation
 A corporation is
organized under
state or federal
statutes as a
separate legal
taxable entity.
 Can obtain large
amounts of resources
by issuing stocks.
 Used by large
businesses.
LO 2
Limited Liability Company (LLC)
 A limited liability
company (LLC)
combines the
attributes of a
partnership and a
corporation.
 10% of business
organizations in the
U.S. (combined with
partnerships).
 Often used as an
alternative to a
partnership.
 Has tax and legal
liability advantages for
owners.
LO 2
Business Entity Concept
 Under the business entity concept, the
activities of a business are recorded
separately from the activities of its owners,
creditors, or other businesses.
LO 2
Business Entity Concept
Owner
Owner’s
Business
LO 2
Business Entity Concept
Owner
Owner’s
Business
The owner purchases merchandise for the
business, and the business pays the amount due.
LO 2
Business Entity Concept
Owner
Owner’s
Business
The business entity concept allows this entry in
the owner’s business records because it relates
directly to the activities of the business.
LO 2
Business Entity Concept
Owner
Owner’s
Business
The owner buys a television set for home use by
writing a check on his personal bank account.
LO 2
Business Entity Concept
Owner
Owner’s
Business
The purchase of personal items with personal funds,
even by the owner, is not an economic event that relates
to the activities of the business.
LO 2
Cost Concept
 Under the cost concept, amounts are
initially recorded in the accounting records
at their cost or purchase price.
LO 2
Cost Concept
Aaron Publishers purchased a building on
February 20, 2010, for $150,000. Other amounts
related to this purchased are shown on the
next slide.
LO 2
Cost Concept
 Price listed by seller on January 1,
2010
 Aaron Publishers’ initial offer to buy
on January 31, 2010
 Purchase price on February 20, 2010
 Estimated selling price on December
31, 2012
 Assessed value for property taxes,
December 31, 2012
$160,000
140,000
150,000
220,000
190,000
LO 2
Objectivity Concept
 The objectivity concept requires that the
amounts recorded in the accounting
records be based on objective evidence.
 Only the final agreed-upon amount is
objective enough to be recorded in the
accounting records.
LO 2
Unit of Measure Concept
 The unit of measure concept requires that
economic data be recorded in dollars.