FASB creates the rules that form the GAAP (Generally Accepted Accounting Principles).
In other words, FASB comes before GAAP, because it writes the standards.
The SEC (Securities and Exchange Commission) gave FASB the power to do this and oversees the process.
🧠 Analogy: Think of GAAP as the rulebook for a game.
FASB is the committee of referees that writes and updates the rulebook.
The SEC is like the league commissioner making sure the refs play fair.
🌍 International Standards
📘 IASB – International Accounting Standards Board
IASB creates IFRS (International Financial Reporting Standards).
These are the global equivalent of GAAP—used in most countries outside the U.S.
📌 Note: “IFRS standards are mostly the same as GAAP’s standards.” This means U.S. rules (GAAP) and international rules (IFRS) are similar but not identical.
🧠 Analogy: Think of IFRS as international traffic laws, and GAAP as U.S. traffic laws.
Both agree on stopping at red lights, but maybe one allows U-turns and the other doesn’t.
🧱 The Conceptual Framework of Accounting
This is like the foundation and blueprint for the whole accounting system.
Objective: The goal is to give useful, meaningful information to investors, lenders, etc.
Qualitative Characteristics: Information must:
Affect people’s decisions
Faithfully represent reality (no lies or distortions)
🧠 Analogy: If accounting is a map, the map must:
Be accurate (no fake roads),
Be relevant (shows the roads you're actually using),
And be clear (easy to read).
📊 Elements, Recognition, and Measurement
Elements – These are the building blocks of financial statements:
Assets, liabilities, revenues, expenses, equity, etc.
Recognition and Measurement:
To put something in financial statements, it must meet:
A clear definition (like what qualifies as an “asset”)
A way to measure it (usually in dollars)
🧠 Analogy: Think of building IKEA furniture:
You need to know what a “screw” is (definition),
And where it goes and what size it is (measurement).
📐 Principles vs. Rules in Accounting
Principles = Big-picture assumptions and guidelines
Rules = Detailed instructions for specific situations
🧠 Analogy:
Principles are like the dietary guidelines: eat more veggies, less sugar.
Rules are like a meal plan: eat 2 cups of spinach, 1 apple, no more than 25g sugar.