In the United States, the term Accounting Principles refers to Generally Accepted Accounting Principles (GAAP). Instituted by the Financial Accounting Standards Board (FASB), GAAP provides a framework for reporting financial data. There are five concepts that generally describe GAAP. The first is the entity concept: the organization being examined is separate from its owners and other organizations. The second is the principle of reliability or objectivity: accounting reports are based on data that are reliable and objective. Third is the cost principle: assets are recorded at their actual, historical costs. Fourth is the going concern concept: the entity being examined is expected to stay in business for the foreseeable future. Last is the concept of a stable monetary unit. In the U.S., the dollar is the accepted currency for accounting reports.
The GAAP concepts are fundamental to all users of financial data: managers, owners, shareholders, creditors, and the general public. It is necessary to understand the principles of accounting in order to properly and correctly interpret the data contained in financial statements.
As the owner of a company, the balance sheet, income statement, statement of cash flows, and the budget are all important. The budget provides the plan for the coming period or periods, and shows what the company is expecting to do. The income statement shows historical data about revenues, expenses, and income. The balance sheet contains historical data which shows the overall levels of assets, liabilities, and owners’ equity as of a certain date. The statement of cash gives a report of payments and receipts of cash during a specific time frame. Which of these is most important is dependent on what information is required, and this will vary from circumstance to circumstance. In short, all four of the documents are extremely valuable to a company’s owner.