Introduction to accounting principles and practices

Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) are two frameworks for financial reporting. GAAP is used in the United States and was developed by the Financial Accounting Standards Board (FASB), and is rules-based. This means it gives specific guidelines and detailed procedures for the sake of accounting consistency in financial reporting.

IFRS was developed by the International Accounting Standards Board (IASB) and is used in over 140 countries. It applies a principles-based approach, which means it puts emphasis on broader guidelines and professional judgment. GAAP offers precision in terms of how accounting should be done, IFRS offers flexibility and adaptability to various contexts (Huang, 2024).

The development of GAAP is due to the U.S.\\\\\\\'s complex financial and regulatory environment, particularly following major corporate scandals. IFRS, on the other hand, was developed to maintain harmony among global accounting practices, and so as to have comparability and efficiency across international markets.

Is implementation of international standards feasible? In theory, yes—it promotes transparency and eases cross-border investments. However, full convergence faces challenges, such as cultural and legal differences between countries, resistance from established institutions, high transition costs for businesses, different tax systems, and regulatory oversight. Nonetheless, gradual convergence through joint projects by FASB and IASB continues. As global commerce expands, the pressure to adopt a uniform set of accounting standards could also increase (Huang, 2024).

Accounting originated in ancient civilizations such as Mesopotamia and Egypt, where it was used for record-keeping in trade and government. The double-entry bookkeeping system, developed during the Italian Renaissance by Luca Pacioli, laid the foundation for modern accounting (Ibukun-Falayi, 2021).

The purpose of accounting has always been to provide accurate and systematic financial information. It supports decision-making, ensures financial integrity, and maintains accountability.

Accounting has certainly shaped the development of societies by enabling economic growth by allowing businesses to assess their performance, supporting capital markets, and giving governments the ability to be accountable with public funds (Ibukun-Falayi, 2021).

Could society function without accounting? Modern economies rely on financial information to operate efficiently—so without accounting, businesses couldn’t track profitability, investors would not have access to important data, and fraud would go unchecked. So society in its current form is inseparable from structured accounting systems.

The Securities and Exchange Commission (SEC) regulates accounting practices in the United States. Established after the 1929 stock market crash, the SEC’s primary mission is to protect investors, maintain fair markets, and facilitate capital formation. The SEC oversees the financial reporting of public companies. It does not directly develop accounting standards, but it recognizes the FASB as the authoritative standard-setting body. It enforces compliance with GAAP and reviews public company filings for accuracy and transparency. Through actions such as requiring periodic financial statements and enforcing civil penalties for non-compliance, the SEC supports investor confidence in the market.

The cash basis of accounting records revenues and expenses only when cash is received or paid. It’s simple and suitable for small businesses. Example: A freelance designer receives $2,000 for a project in April, but completed it in March. Under cash basis, the revenue is recorded in April.

The accrual basis records revenues and expenses when they are earned or incurred, regardless of when cash is exchanged. Example: The same designer records the $2,000 as income in March (when the work was completed), even though payment was received in April.

Accrual accounting provides a more accurate financial picture and is required by GAAP for publicly traded companies (Das et al., 2022).

Adjusting entries ensure that income and expenses are recognized in the correct accounting period. They are made at the end of accounting periods. Example of an Adjusting Entry: A company pays $1,200 for a one-year insurance policy on October 1. At the end of December, only three months have been used.

This reflects the expense incurred during the period and adjusts the balance sheet accordingly.

Financial accounting focuses on external reporting and involves preparing standardized documents like the balance sheet, income statement, and cash flow statement for stakeholders, investors, and regulatory bodies.