Accounting Theory

This chapter will introduce you to the fundamental theories and rules that guide the system of accounting. The key tenets of accounting are explained, including: double entry, substance over form, the matching principle, the revenue recognition principle, cost-benefit, materiality, and conservatism, as is their impact on the overall application of GAAP (Generally Accepted Accounting Principles). The underlying intent behind creating financial reports is for the information in the reports to be reliable enough to support sound business decision-making. By the time you finish this chapter, you should have a better understanding of the overall structure of accounting rules and guiding principles.

The financial accounting standards board's conceptual framework project

Experts have debated the exact nature of the basic concepts and related principles composing accounting theory for years. The debate continues today despite numerous references to generally accepted accounting principles (GAAP). To date, all attempts to present a concise statement of GAAP have received only limited acceptance.

Due to this limited success, many accountants suggest that the starting point in reaching a concise statement of GAAP is to seek agreement on the objectives of financial accounting and reporting. The belief is that if a person (1) carefully studies the environment, (2) knows what objectives are sought, (3) can identify certain qualitative traits of accounting information, and (4) can define the basic elements of financial statements, that person can discover the principles and standards leading to the stated objectives. The FASB completed the first three goals by publishing "Objectives of Financial Reporting by Business Enterprises" and "Qualitative Characteristics of Accounting Information". Addressing the fourth goal are concepts statements entitled "Elements of Financial Statements of Business Enterprises" and "Elements of Financial Statements".