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accepted Generally accounting principles (GAAP), created with authoritative support, are principles, rules and guidelines required to follow by accountants when preparing financial statements. The Hierarchy of GAAP is a structure consists of four different categories of well- developed accounting principles. The categories are from A to D with category A having principles with the most authoritative support and category D having the lease. Major sources of The Hierarchy of GAAP are FASB Standard, Interpretations, and Staff Positions; APB Opinions; and AICPA Accounting Research Bulletins. This hierarchy is important because it minimize the financial data from being bias and inconsistency by using multiple sources of the GAAP instead of just one. For example, if two or more sources in a given category do not agree with a specific transaction, then a higher category should be followed. Two primary qualities that make its accounting information effective are relevance and reliability. Relevant information has predictive value, which help users foretell the outcome of events in the past, present, and future. Another reason why relevant information is effective is because it is presented in a timely manner that is early enough for the user to consider when making a decision. It also helps users clarified and adjusted expectations in the past because relevance information has feedback value. Reliability is another quality that makes its accounting information effective. Reliable information is verifiable, it represents what really happened, and it's unbiased. Comparability and consistency are two secondary qualities that make accounting information useful. Comparability gives users the ability to compare information between companies in the same industry to make their business decisions. Consistency is another important quality for accounting information to be effective. Consistent Accounting information compared over different time periods within one company are useful for users when making business decisions. With that said, all these qualities that makes accounting information legit, could only be useful for decisionmaking if the users fully understand it. For example, even if the information presented is reliably, consistent, and relevant, but to a user who does not understand it, the becomes information useless. An accrual-basis accounting system records transactions when an event occurred. For example, companies using accrual basis accounting system would record their revenue once it was earned even if they did not actually get pay yet. This is known as the revenue recognition principle and it's under GAAP. These companies also treats their expenses in the same manner, they record their expenses when it occurs, rather than when the expenses is paid. This principle is called the matching principle, which is also under GAAP. Unlike the accrual basis accounting system, the cash-basis accounting system does the opposite. Companies using this system recognized their earning when they receive the cash. Likewise with their expenses, it is only recognized and recorded once the expenses are paid. Because the cash-basis accounting system violates the revenue recognition and matching principle, it's prohibited under GAAP. Companies using different accounting system would generate different financial statements since the revenues and expenses are recorded in two different time frames. There are three types of business structures; sole proprietorship, partnership, and corporation. Sole proprietorship is a business owed by one person and it's easy to set up. The owner has complete control of the business. They pay lower taxes compared to corporations, but they are responsible for all debts of their business. The second business structure is partnership; established by two or more people as partners. Partnerships get the same tax treatment as Sole proprietorship, and the same responsibilities as well regarding debts of their business. Partnerships are mostly established because one does not have the financial ability to start up a business on their own. The third business structure is corporation. A corporation is owed by stockholders and is a separate legal entity. Owners receive shares of stock to claim their ownership. It's easy to change ownership in a corporation by simple sell the stock. It takes only a small amount of money to buy stock and become a stockholder. Because it's such a small amount of money buy stock, it is easier for corporation to raise money. Unlike Sole proprietorship and partnerships, corporations pay higher taxes and have no personal liability. ... View Full Document

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