Financial Accounting: An Integrated Statements Approach, 2nd Edition

Chapter 1 The Role of Accounting in Business 21

As shown above, GAAP supports and determines the content of the financial state-
ments. GAAP are established in the United States by the Financial Accounting
Standards Board (FASB).^7 In establishing GAAP, the FASB publishes Statements of
Financial Accounting Standards. The FASB establishes GAAP by relying on eight sup-
porting accounting concepts.
Understanding these concepts that support the FASB pronouncements is essential
for analyzing and interpreting financial statements. We discuss these concepts next. We
conclude this section by describing recent financial reporting frauds, the accounting
concepts that were violated, and underlying contributing factors.

Business Entity Concept

A business entity could be an individual, a not-for-profit organization such as a church,
or a for-profit company such as a real estate agency. The business entity conceptapplies
accounting to a specific entity for which stakeholders need economic data. Once the entity
is identified, the accountant can determine which economic data and activities should be
analyzed, recorded, and summarized in the financial statements for stakeholders.
The accounting for Hershey Foods Corporation, a for-profit corporation, is sepa-
rated from the accounting for other entities. For example, the accounting for transac-
tions and events of individual stockholders, creditors, or other Hersheystakeholders
are not included in Hershey Foods Corporation’s financial statements. Only the
transactions and events of the corporation as a separate entity are included in
Hershey’s financial statements.

Financial Statements

Generally Accepted Accounting Principles

(GAAP)

Retained

Earnings

Statement

Income

Statement

Statement

of

Cash Flows

Balance

Sheet

Basic Accounting Concepts

• Business Entity Concept


• Cost Concept


• Going Concern Concept


• Matching Concept
  
  
  • Objectivity Concept
  
  
  • Unit of Measure Concept
  
  
  • Adequate Disclosure Concept
  
  
  • Accounting Period Concept
  
  
  
  

7 The Securities and Exchange Commission also has authority to set accounting principles for publicly
held corporations. In almost all cases, the SEC adopts the principles established by the FASB.