Generally Accepted Accounting Principles

          The accounting profession has developed standards that are generally accepted and universally practiced. This common set of standards is called generally accepted accounting principles (GAAP). These standards indicate how to report economic events.

        The Securities and Exchange Commission (SEC) is the agency of the U.S. goverment that oversees U.S. financial markets and accounting standard-setting bodies. The primary accounting standard-setting body in the United States is the Financial Accounting Standards Board (FASB). Many contries outside of the United States have adopted the accounting standards issued by the International Accounting Standards Board (IASB). In recent years the FASB and IASB have worked closely to try to minimize the differences in their standards.

        One important principle is the cost principle. The cost principle (or historical cost principle) dictates that companies record assets at their cost. This is true not only at the time the asset is purchased, but also over the time the asset is held. For example. if Best Buy purchases land for $30,000, the company initially reports it on the balance sheet at $30,000. But what does Best Buy do if, by the end of the next year, the land had increased in value to $40,000? Under the cost principle it continues to report the land at  $30,000.

        Critics contend the cost principle is irrelevant. They argue that market value (the value determined by the market at any particular time) is more useful to financial decision markers. Proponents of the cost principle counter that cost is the best measure. The reason: Cost can be easily verified, whereas market value is often subjective. Recently, the FASB weighed the reliability of cost figures versus the relevance of market value.

post by : Rony Sutiyanto