Accounting Terms

Week 2: Lecture

Accounting Terms

The following is a short list of accounting terms you should be familiar with:

  • FASB (pronounced “fahsbee”): The Financial Accounting Standards Board. The body that is responsible for establishing generally accepted accounting principles (see next entry below). The FASB is funded by the Financial Accounting Foundation, an organization composed of people from public accounting, businesses, and the public. These are the people that makes the rules in financial accounting.
  • GAAP (pronounced “gap”): Generally Accepted Accounting Principles. These are pronouncements from the FASB that constitute “the rules” for how various transactions are to be accounted for. As such, GAAP pretty much represents “the bible” for how things are done in financial accounting. In the US, the all public corporations are required to prepare their financial statements according to GAAP.
  • Accrual vs Cash Accounting: Accrual accounting means a firm accounts for the effect of a transaction when it occurs rather than when the cash is received or paid. Cash accounting, as you would expect, means a firm accounts for the effect of a transaction when the cash changes hands. Here is an example that illustrates the difference:

    Assume Macy’s sells $20,000 worth of men’s suits in December 2015. The customers all put the purchases on their Macy’s charge accounts and pay for the suits in January, 2016. Here is what the transaction would look like if Macy’s used Accrual Accounting:
     
      December 2015 January 2016
    Sales $20,000 $0
    Cash at end of month $0 $20,000
         
    Here is what the transaction would look like if Macy’s used Cash Accounting:
     
      December 2015 January 2016
    Sales $0 $20,000
    Cash at end of month $0 $20,000
         
    As you can see, the big difference is that under accrual accounting Macy’s recognizes that a sale took place in December. Most people believe the accrual accounting system produces a better picture of what is actually taking place. As a result, accrual accounting is almost universally used in US Corporations.