In 1929, the U.S. stock market crashed, leading to a 10-year economic depression that crippled the nation and threw countless households and businesses into bankruptcy. Follow-up hearings shed light on the causes of the crash, one of which was a lack of public confidence in accounting procedures.
Businesses were releasing financial reports, but no regulations were governing these reports. Accountants could — and did — say whatever they wanted.
In response, the United States government created standards for the accounting industry. The Securities and Exchange Commission (SEC) was established in 1934. Other regulatory agencies soon followed. Together, these agencies worked to set policies and laws for the financial industry and continue to oversee it to the present day.
Current laws and rules vary depending on the size and situation of a company. Publicly held corporations, for example, are held to different standards than private companies. Large organizations are subject to more stringent rules than mom-and-pop operations. But whatever the rules, accountants are responsible for knowing and following those that apply to their particular situation.
The ins and outs of accounting laws and regulations are complex. To understand them, accountants need specialized education delivered by academic accountancy programs, such as University of North Dakota’s master’s in accountancy online. The program’s accounting curriculum prepares students to understand the many regulations that keep the industry running smoothly.
Generally Accepted Accounting Principles
The backbone of the U.S. financial regulatory industry is known as generally accepted accounting principles, or GAAP. According to the website Accounting.com, GAAP is “a set of rules that encompass the details, complexities, and legalities of business and corporate accounting.”
GAAP’s purpose is to set consistent accounting and recording standards so every organization’s finances can be reliably evaluated. GAAP is monitored and updated continually by the Financial Accounting Standards Board (FASB), a regulatory body that uses GAAP as the basis for its approved accounting methods and practices.
The heart of GAAP is a set of 10 basic accounting principles and guidelines. The website Invensis describes them this way:
- The Business as a Single Entity Principle. Business and personal finances must always be kept separate. In the eyes of the law, a business and its owner are separate entities.
- The Specific Currency Principle. All amounts on a financial statement are expressed in the same currency. In the U.S., this means all numbers are expressed in U.S. dollars. If a transaction occurred in a foreign currency, it must be converted for consistency.
- The Specific Time Period Principle. Financial statements must clearly specify the time period they cover. They must have a start date and an end date.
- The Historical Cost Principle. When considering historical costs, factors such as inflation and recession are not considered. All costs are recorded at their actual amounts, not their relative values.
- The Full Disclosure Principle. Companies must reveal everything about their financial functioning in their statement. They are not permitted to hold anything back.
- The Recognition Principle. Revenue is recorded as soon as a product is sold or a service is tendered, not when the payment is received. Particularly where services are concerned, this practice can sometimes mean a significant gap between recording a transaction and cash receipt.
- The Non-Death Principle. The accountant assumes that a business will continue to operate forever and will have no end date.
- The Matching Principle. The accrual system of accounting must be used. As part of this process, every debit should be matched with a credit and vice versa.
- The Materiality Principle. This principle allows accountants to use their best judgment in certain cases. If an amount is small enough to be immaterial, the accountant has discretion about how to handle it. For instance, a $1 mistake might be ignored, but a $1,000 mistake is a different matter.
- The Conservative Accounting Principle. If accountants can report an item in two possible ways, the more conservative choice should be made. This decision might mean, for instance, valuing an asset at a lesser rather than a greater amount.
Along with these 10 guiding principles, accountants must adhere to a slew of laws and rules that apply to their specific situation and industry. There are far too many to list individually — indeed, too many for anyone to remember.
For this reason, the FASB maintains a database that lists every accounting principle and law. Called the Accounting Standards Codification, this searchable online database is the go-to resource for accountants in the United States.
But laws cannot cover every eventuality, so a concept called “generally accepted industry practices” is a final consideration for accountants. Accounting.com explains that no universal GAAP model covers all organizations in every industry. Rather, accountants must follow best practices for their specific area of business.
Following all of these guidelines is a complex proposition — but accountants, with their detail-oriented mindset, are uniquely qualified to carry out the task. With care and attention, an effective accountant can adhere to the relevant accounting laws, regulations and principles.
University of North Dakota’s Master’s in Accountancy Online Degree
University of North Dakota’s Master of Accountancy (M.Acc.) online program helps students master accounting principles and the skills necessary to reap the career benefits of accounting at the highest levels.
UND is accredited by the Association to Advance Collegiate Schools of Business International, which only recognizes about 30% of business programs in the United States. The master’s in accountancy online program offers practitioner and fundamentals tracks. Coursework is done online, which allows busy professionals to study accountancy and earn their degree without disrupting their work or personal lives.
For more information, contact UND today.
Historical background – U.S. Legal
Definition and three rules of GAAP – Accounting.com
10 GAAP principles – Invensis
Accounting Standards Codification – Financial Accounting Standards Board
Additional considerations – Accounting.com