Accounting Theory

Three meanings come to mind when you ask about principles of accounting…

1. Principles of Accounting was often the title of the introductory course in accounting. It was also common for the textbook used in the course to be entitled Principles of Accounting.

2. Principles of accounting can also refer to the basic or fundamental accounting principles: cost, matching, full disclosure, materiality, going concern, economic entity, and so on. In this context, principles of accounting refers to the broad underlying concepts which guide accountants when preparing financial statements.

3. Principles of accounting can also mean generally accepted accounting principles (GAAP). When used in this context, principles of accounting will include both the underlying basic accounting principles and the official accounting pronouncements issued by the Financial Accounting Standards Board (FASB) and its predecessor organizations. The official pronouncements are detailed rules or standards for specific topics.

n 1979 the Financial Accounting Standards Board (FASB) issued its Statement of Financial Accounting Standards No. 33 entitled Financial Reporting and Changing Prices. (You will find the original Statement No. 33 on www.FASB.org.) In short, Statement No. 33 required large companies to report supplementary information on the effects of changing prices on its inventory and its property, plant and equipment. (In the late 1970’s the U.S. was experiencing double-digit inflation rates and the SEC was advocating the reporting of replacement cost.)

One disclosure required by Statement 33 was the reporting of the effects of general inflation as indicated by the change in the consumer price index. In other words, a large company had to disclose in the notes to its financial statements some key amounts after adjusting inventory and property, plant and equipment amounts for the changes in the purchasing power of the U.S. dollar. The second disclosure reported the effects of the changes in the specific prices of inventory and property, plant and equipment.

In 1986 the FASB issued its Statement No. 89 which no longer required the reporting of the information. As a result, most companies stopped the calculations and reporting. Two of the factors in deciding to stop the calculations was the lack of use by financial analysts and a decline in the rates of inflation in the U.S. In other words, the accounting for price level changes failed to pass the cost/benefit test.

Description of the Examination

The Principles of Accounting examination covers the information and skills taught in two semesters (or the equivalent) of college-level accounting. The emphasis of the exam is on financial and managerial accounting. Colleges may award credit for a one- or two-semester course in financial accounting including some managerial accounting topics, or for one semester of financial accounting and one semester of managerial accounting.

The examination contains 78 questions to be answered in 90 minutes. Any time candidates spend on tutorials or providing personal information is in addition to the actual testing time.
Knowledge and Skills Required

Questions on the Principles of Accounting examination require candidates to demonstrate one or more of the following abilities:

* Familiarity with accounting concepts and terminology
* Preparation, use, and analysis of accounting data and financial reports issued for both internal and external purposes
* Application of accounting techniques to simple problem situations involving computations
* Understanding the rationale for generally accepted accounting principles and procedures

The subject matter of the Principles of Accounting examination is drawn from the following topics. The percentages next to the main topics indicate the approximate percentages of exam questions on those topics.
Approximate Percent of Examination
60-70% Financial accounting
(concerned with providing financial statements and reports of interest to company managers as well as bankers, investors, and other outsiders who must make a financial assessment of a company)

* Generally accepted accounting principles
* Rules of double-entry accounting
* The accounting cycle
* Presentation of and relationships between general-purpose financial statements
* Valuation of accounts and notes receivable
* Valuation of inventories
* Initial costs of plant assets
* Depreciation
* Liabilities
* Investments
* Capital
* Cash and stock dividends
* Treasury stock
* Purchase and sale of merchandise
* Revenue and cost apportionments
* Cash control
* Division of profits and losses in partnership accounting
* Cash flow analysis

30-40% Managerial accounting
(concerned with the use of accounting data for internal purposes to help management in planning and controlling functions in a company)

* Analysis of departmental operations
* Budgeting
* Cost-volume profit (break-even) analysis
* Direct costing and absorption costing
* Financial statement analysis
* Performance evaluation
* Process and job-order systems
* Standard costs and variances
* The manufacturing environment
* Use of differential (relevant) cost
Accounting provides information about the financial position of a business or company.mesa accounting firm