The basic characteristics of generally accepted accounting principles

Overview[ edit ] Definitions of complexity often depend on the concept of a confidential " system " — a set of parts or elements that have relationships among them differentiated from relationships with other elements outside the relational regime. Many definitions tend to postulate or assume that complexity expresses a condition of numerous elements in a system and numerous forms of relationships among the elements. However, what one sees as complex and what one sees as simple is relative and changes with time.

The basic characteristics of generally accepted accounting principles

Staff Accounting Bulletin No. Securities and Exchange Commission Action: Publication of Staff Accounting Bulletin Summary: The staff is providing this guidance due, in part, to the large number of revenue recognition issues that registrants encounter.

For example, a March report entitled Fraudulent Financial Reporting: Public Companies, sponsored by the Committee of Sponsoring Organizations COSO of the Treadway Commission, indicated that over half of financial reporting frauds in the study involved overstating revenue.

December 3, For Further Information Contact: They represent interpretations and practices followed by the Division of Corporation Finance and the Office of the Chief Accountant in administering the disclosure requirements of the Federal securities laws.

Selected Revenue Recognition Issues 1. Revenue Recognition - General The accounting literature on revenue recognition includes both broad conceptual discussions as well as certain industry-specific guidance.

Based on these guidelines, revenue should not be recognized until it is realized or realizable and earned. Paragraph 84 a continues "the two conditions The basic characteristics of generally accepted accounting principles realized or realizable and being earned are usually met by the time product or merchandise is delivered or services are rendered to customers, and revenues from manufacturing and selling activities and gains and losses from sales of other assets are commonly recognized at time of sale usually meaning delivery " [footnote reference omitted].

In addition, paragraph 84 d states that "If services are rendered or rights to use assets extend continuously over time for example, interest or rentreliable measures based on contractual prices established in advance are commonly available, and revenues may be recognized as earned as time passes.

Persuasive Evidence of an Arrangement Question 1 Facts: Company A has product available to ship to customers prior to the end of its current fiscal quarter.

Customer Beta places an order for the product, and Company A delivers the product prior to the end of its current fiscal quarter. Company A prepares a written sales agreement, and its authorized representative signs the agreement before the end of the quarter.

However, Customer Beta does not sign the agreement because Customer Beta is awaiting the requisite approval by its legal department. Customary business practices and processes for documenting sales transactions vary among companies and industries.

Business practices and processes may also vary within individual companies e. If a company does not have a standard or customary business practice of relying on written contracts to document a sales arrangement, it usually would be expected to have other forms of written or electronic evidence to document the transaction.

What are 'Accounting Principles'

For example, a company may not use written contracts but instead may rely on binding purchase orders from third parties or on-line authorizations that include the terms of the sale and that are binding on the customer.

In that situation, that documentation could represent persuasive evidence of an arrangement. The staff is aware that sometimes a customer and seller enter into "side" agreements to a master contract that effectively amend the master contract.

Registrants should ensure that appropriate policies, procedures, and internal controls exist and are properly documented so as to provide reasonable assurances that sales transactions, including those affected by side agreements, are properly accounted for in accordance with generally accepted accounting principles and to ensure compliance with Section 13 of the Securities Exchange Act of i.

Side agreements could include cancellation, termination, or other provisions that affect revenue recognition. The existence of a subsequently executed side agreement may be an indicator that the original agreement was not final and revenue recognition was not appropriate.

Pursuant to the terms of the arrangement, Customer A is a consignee, and title to the products does not pass from Company Z to Customer A until Customer A consumes the products in its operations.

Company Z delivers product to Customer A under the terms of their arrangement.

Glossary of NIH Terms

May Company Z recognize revenue upon delivery of its product to Customer A? Products delivered to a consignee pursuant to a consignment arrangement are not sales and do not qualify for revenue recognition until a sale occurs. The staff believes that revenue recognition is not appropriate because the seller retains the risks and rewards of ownership of the product and title usually does not pass to the consignee.

Other situations may exist where title to delivered products passes to a buyer, but the substance of the transaction is that of a consignment or a financing.

Accounting Topics

The staff believes that the presence of one or more of the following characteristics in a transaction precludes revenue recognition even if title to the product has passed to the buyer: The buyer has the right to return the product and: The seller is required to repurchase the product or a substantially identical product or processed goods of which the product is a component at specified prices that are not subject to change except for fluctuations due to finance and holding costs, 13 and the amounts to be paid by the seller will be adjusted, as necessary, to cover substantially all fluctuations in costs incurred by the buyer in purchasing and holding the product including interest.

The product is delivered for demonstration purposes. Accordingly, the staff believes that judgment is necessary in assessing whether the substance of a transaction is a consignment, a financing, or other arrangement for which revenue recognition is not appropriate.

Delivery and Performance Question 3 Facts: Company A receives purchase orders for products it manufactures.These concepts and principles are referred to as the Generally Accepted Accounting Principles or GAAP.

In this article, you will learn and familiarize yourself with the accounting principles and concepts relevant in the performance of the accounting procedures.

Characteristics of generally accepted accounting principles include all of the following except a. authoritative accounting the rule-making body established a principle of reporting.

b. standards are considered useful by the profession. A number of basic accounting principles have been developed through common usage.

They form the basis upon which modern accounting is based.

Basic Accounting Concepts and Principles - GAAP and ASPE

The best-known of these principles are as follows: Accrual principle. This is the concept that accounting transactions should be recorded in the accounti. While many colleges offer Forensic Accounting degree programs at the graduate level, Franklin University is one of the few schools offering an accredited online Forensic Accounting bachelor's degree in this high-demand field.

Gain a solid foundation in accounting.

The basic characteristics of generally accepted accounting principles

Financial accounting is the process of recording, summarizing and reporting the myriad of a company's transactions to provide an accurate picture of its financial position.

The Financial Accounting Standards Board (FASB) - To help accounting professionals easily navigate through plus years of unorganized US generally accepted accounting principles (GAAP) and standards the Trustees of the Financial Accounting Foundation approved the Financial Accounting Standards Board (FASB) Accounting Standards Codification (Codification.).

The Ten Generally Accepted Accounting Principles ( GAAP) - Invensis Technologies