I am pleased to know that you are planning to open your own business. There are numerous decisions that need to be made in order to begin and I hope I can be of assistance to you with my accounting background. I will briefly discuss with you GAAP, cash basis versus accrual basis accounting, and selecting a type of business.
GAAP is referred to as generally accepted accounting principles and are financial accounting standards used for preparation and presentation of financial statements. GAAP is a collection of methods from the Securities and Exchange Commission (SEC), American Institute of Certified Public Accountants (AICPA), Financial Accounting Standards Board (FASB), and Government Accounting Standards (GASB).
In order for your financial statements to be in accordance with GAAP the following qualities needs to be present in order to consider the information useful:
1. Understandability-the quality of the information.
2. Relevance- the ability of the information to make a difference.
3. Reliability-the ability to verify the information presented.
4. Consistency- the same uses the same accounting standards for similar events.
5. Comparability-the ability to identify similarities and differences between companies.
GAAP has four basic assumptions, principles, and constraints.
The assumptions are:
1. Business Entity-the business is separate from its owners.
2. Going Concern-the business ability to keep functioning.
3. Monetary Unit-the uses of stable currency.
4. Time Period-the activities are broken into time frames.
The principles are:
1. Cost principle-to report cost at acquisition price.
2. Revenue principle-to report money when it’s earned.
3. Matching principle-to match expenses with revenues.
4. Disclosure principle-to present all information in financial statements.
The constraints are:
1. Objectivity principle-the financial statements should be based on evidence.
2. Materiality principle-the significance of items should be...