Question

2. Firms speak of the use of Generally Accepted Accounting Principles (GAAP). Why is this approach important and who assures that it is followed? (There are several parties involved)

3. What is accrual accounting and how does it differ from cash based accounting?

Answer 1

2.) GAAP are the accounting standards which are consists of basic principles of accounting . It assists in evaluating the accuracy and consistency of the financial statements and provide true and fair view for decision makers.
Importance of GAAP

• It helps in following due diligence .
• It helps in evaluating the key insights of the financial statements so that materiality can not be compromised.
• It provides a quality assurance of financial reports.
• It helps in comparing competitive industries.

GAAP are controlled by FASB generally known as the Financial Accounting Standards Board which is a nongovernmental entity. The FASB creates guidelines that company should follow while reporting information for financial statements or auditing purposes.

3) Accrual Accounting is based on the  accounting concept in which expenses and revenues are reported when they are earned without giving importance to when the actual amount was paid or will be paid. For Example - During a Sale of $1000 ,the company received $600 as cash and rest was credit , but revenue of whole $1000 will be recorded . This is an example of accrual accounting .Taxes are paid on the whole revenue recorded.

Cash Accounting is based on old system in which record transaction on the basis of how much cash was spent or earned during a period , It gave importance to monetary value of each transaction. Taxes are not paid on money that hasn’t been received yet.