Practice eye explains the generally accepted Accounting Principal and describe their importance.

1. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
The Accounting Principles Board served as the deliberative body for the American Institute of
Certified Public Accountants (AICPA), a professional association for those in the accounting
industry. This board offered opinions and statements on generally accepted accounting principles
(GAAP) in the United States from 1959 to 1973. These standards are used by accountants with
federal agencies and corporations. The AICPA replaced the Accounting Principles Board with
the Financial Accounting Standards Board (FASB) in 1973 to increase responsiveness to
accounting issues.
The historical reputation of the AICPA provided legitimacy to the Accounting Principles Board
during its brief life. The AICPA was created in 1887 as the leading industry organization for
accountants working in the U.S. This institute set ethical, educational and professional standards
for accountants at a time when corporations were expanding worldwide. The first board within
the AICPA was the Committee on Accounting Procedure, which existed from 1936 to 1959. The
board built on the committee’s work in preventing corrupt accounting principles that contributed
to the 1929 stock market crash.
The U.S. Securities and Exchange Commission (SEC) relied on the Accounting Principles Board
to establish accounting standards. The SEC is authorized under the Securities Exchange Act of
1934 to set standards for bookkeeping by publicly traded companies. SEC officials have worked
with AICPA since 1934 to use the organization’s accounting knowledge for the public good.
This public-private partnership allows the SEC to consult with leading accountants on ways to
keep accurate accounting ledgers. Most of the opinions by the Accounting Principles Board and
FASB have been incorporated into federal policies on public accounting.
The board issued 35 opinions and statements during its 14-year existence. Corporations and
government agencies still use 19 board opinions as part of GAAP. A December 1967 decision by
the board created criteria for reporting asset depreciation and deferred compensation. In August
1970, the board generated principles for reporting the transfer of assets as part of business
combinations and mergers. The board’s decision in October 1972 set standards for corporate
reporting of stocks used as payment for employees.

2. The AICPA replaced the Accounting Principles Board with FASB in 1973 because of criticisms
of the previous board. The Accounting Principles Board was seen by critics as insufficiently
independent from the federal government and corporations. The design of the FASB is informed
largely by the failings of its past boards. The FASB requires its members to resign from
corporate boards and sell off business interests during their five-year terms. These requirements
allow FASB members to create accounting standards independent of personal and financial
interests.
Generally accepted accounting principles (GAAP) are the guidelines, rules, and procedures used
in recording and reporting accounting information in audited financial statements. Various
organizations have influenced the development of modern-day accounting principles. Among
these are the American Institute of Certified Public Accountants (AICPA), the Financial
Accounting Standards Board (FASB), and the Securities and Exchange Commission (SEC). The
first two are private sector organizations; the SEC is a federal government agency.
The AICPA played a major role in the development of accounting standards. In 1937 the AICPA
created the Committee on Accounting Procedures (CAP), which issued a series of Accounting
Research Bulletins (ARB) with the purpose of standardizing accounting practices. This
committee was replaced by the Accounting Principles Board (APB) in 1959. The APB
maintained the ARB series, but it also began to publish a new set of pronouncements, referred to
as Opinions of the Accounting Principles Board. In mid-1973, an independent private board
called the Financial Accounting Standards Board (FASB) replaced the APB and assumed
responsibility for the issuance of financial accounting standards. The FASB remains the primary
determiner of financial accounting standards in the United States. Comprised of seven members
who serve full-time and receive compensation for their service, the FASB identifies financial
accounting issues, conducts research related to these issues, and is charged with resolving the
issues. A super-majority vote (i.e., at least five to two) is required before an addition or change to
the Statements of Financial Accounting Standards is issued.
The Financial Accounting Foundation is the parent organization to FASB. The foundation is
governed by a 16-member Board of Trustees appointed from the memberships of eight
organizations: AICPA, Financial Executives Institute, Institute of Management Accountants,
Financial Analysts Federation, American Accounting Association, Securities Industry
Association, Government Finance Officers Association, and National Association of State
Auditors. A Financial Accounting Standards Advisory Council (approximately 30 members)
advises the FASB. In addition, an Emerging Issues Task Force (EITF) was established in 1984 to
provide timely guidance to the FASB on new accounting issues.
The Securities and Exchange Commission, an agency of the federal government, has the legal
authority to prescribe accounting principles and reporting practices for all companies issuing
publicly traded securities. The SEC has seldom used this authority, however, although it has
intervened or expressed its views on accounting issues from time to time. U.S. law requires that

3. companies subject to the jurisdiction of the SEC make reports to the SEC giving detailed
information about their operations. The SEC has broad powers to require public disclosure in a
fair and accurate manner in financial statements and to protect investors. The SEC establishes
accounting principles with respect to the information contained within reports it requires of
registered companies. These reports include: Form S-X, a registration statement; Form 1O-K, an
annual report; Form 1O-Q, a quarterly report of operations; Form S-K, a report used to describe
significant events that may affect the company; and Proxy Statements, which are used when
management requests the right to vote through proxies for shareholders.