Accountants establish measurement and reporting rules that business people use to facilitate communication. Suppose a store sells a compact disk player in December to a customer who agrees to pay for it in January. Should the business recognize (report) the sale as a December transaction or as a January transaction? If the storeowner uses accrual accounting rules, he will include the effects of the sale in the store’s December profits because the customer purchased the compact disk player in December. If the storeowner uses cash accounting rules, he will recognize the sale in January when he collects the cash from the customer. Whether the storeowner uses accrual accounting rules or cash accounting rules is not important as long as he also follows the rule requiring him to disclose which method he uses. Accounting rules do not eliminate diverse financial reporting practices. Because businesses may use different rules, however, clear communication also requires full and fair disclosure.

<a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=jpg::::/sites/dl/free/0072989432/0072989432_001_00006.jpg','popWin', 'width=350,height=345,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (K)</a>
© Bob Daemmrich/Stock Boston

Communication would certainly be simpler if each type of business activity were reported using only one measurement method. Unfortunately, world economies have not yet evolved to the point of attaining uniformity in financial reporting. Even in highly sophisticated countries such as the United States, significant diversity in reporting methods exists. Well-educated business people can understand and interpret accounting information prepared using a variety of measurement rules.

The measurement rules used in the United States for financial accounting are called generally accepted accounting principles (GAAP)Rules and regulations that accountants agree to follow when preparing financial reports for public distribution.. Financial reports issued to the public must follow GAAP. This textbook introduces these principles so you will be able to understand business activity presented in accounting reports issued in the USA.

It is worth mentioning that, for convenience and efficiency, many internal business reports use accounting data that conform to GAAP. Companies are not required, however, to follow GAAP when preparing management accounting reports. Although there is considerable overlap between financial and managerial accounting, managers are free to construct internal reports in whatever fashion best suits the effective operation of their companies.