Accounting Principles and Ethics

Accounting Principles and Ethics
Generally Accepted Accounting Principles (GAAP) “guides both the nature of bookkeeping entries made and their interpretation.” (McLean, 2003)   There are several agencies that ensure that organizations are in compliance with GAAP. “The Sarbanes-Oxley Act of 2002 required the Security Exchange Commission (SEC) to designate an organization(s) as having the authority to promulgate accounting standards for public companies in the United States, which it did in April 2003 when it reaffirmed the Financial Accounting Standards Board (FASB) as the designated private-sector standard setter for public companies. We have established a working protocol with the SEC for its staff to first refer issues it identifies that may have accounting standard setting implications to the FASB for consideration, with the understanding that the SEC staff reserves the right to exercise its legislative authority to deal with any issues it identifies.” (Smith, 2005) Now that we know the purpose of the GAAP we will examine of what it consist.
When following the GAAP an organization needs to list assets, liabilities and owner equity. All assets and liabilities are tallied and then their difference is the owner/organization’s equity. This is the company “worth.” Assets are recorded in terms of their monetary value at their original costs and not at the projected value. The reports need to reveal all relevant information, which includes the good and the bad. This helps the investors, lenders, regulators, and internal management know the true value of the organization.
Current financial reporting standards require three basic financial statements, the balance sheet, income statement and the cash flow statement. The balance sheet shows the balance between assets and liabilities plus organization’s equity. The income statement shows the revenues, expenses, and net income of the organization over the course of the reporting period. The cash flow statement shows the...