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.

Recognition and measurement in financial statements

In December 1984, the FASB issued Statement of Financial Accounting Concepts No. 5, "Recognition and Measurement in Financial Statements of Business Enterprises", describing recognition criteria and providing guidance for the timing and nature of information included in financial statements. The recognition criteria established in the Statement are fairly consistent with those used in current practice. The Statement indicates, however, that when information more useful than currently reported information is available at a reasonable cost, it should be included in financial statements.