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18/01/2021 05:07:39 PM

ACCOUNTING STANDARDS AND PRINCIPLES (PART 1)

 

 

The Financial Accounting Standards Board (FASB), together with the Securities and Exchange Commission (SEC), establishes the rules and regulations that govern all accounting and financial reporting. These principles are known as Generally Accepted Accounting Principles (GAAP). As a result of the 2002 Sarbanes-Oxley Act, hospitality companies are now investing large sums of financial and human resources to ensure these principles are correctly followed. Failure to apply these principles to the company’s financial system properly can result in the termination, and in some cases imprisonment, of management, including the CEO of the company. Here is a brief recap of these principles: The cost principle states that all transactions, including the purchase or sale of an asset, must be recorded at its transaction price (cost) rather than its market value. In addition, fixed assets, like hotel buildings, must be depreciated over time on the company’s records. The application of this principle prevents management from arbitrarily inflating the value of an asset on the company’s balance sheet and from artificially increasing profits on its income statement as the market value of the asset increases over time. Unfortunately, the application of this principle can result in the value of a company’s assets being understated. An example of this is a hotel like the Waldorf-Astoria located in the heart of Manhattan. While its balance sheet shows the value of the hotel at its original cost less many years’ worth of depreciation expense, the true market value of the hotel is significantly higher than the value shown on the balance sheet. Unless you are aware of how this principle works, you could significantly underestimate the true value of the company.

 

What is Accounting Principles?

Accounting principles are the standards and rules that organizations must pursue when detailing money related information. Accounting standards help oversee the universe of accounting as indicated by general principles and ideas. They structure the basis for the more confounded, definite and legalistic standards of accounting. There are various standards, yet the absolute most eminent incorporate the income acknowledgment rule, going concern rule, collection guideline and coordinating rule.

 

The 08 Basic Accounting Principles

  1. The full disclosure principle requires that all potential events that could impact a company’s financial position or operating results be clearly reflected on the company’s financial statements or noted within footnotes attached to the financial statements. For example, a pending lawsuit against the company involving its pension plan must be noted for those analyzing the financial statements to properly gauge the future profitability and value of the company.
  2. The revenue recognition principle states that revenues should be recorded in the month they are earned, not when the contract is signed. For example, a controller should not recognize (record) $10,000 of room sales for a convention group until the convention actually takes place and the attendees have stayed in the hotel. Some companies violate this principle in an effort to show higher revenues and profit for a particular month.
  3. The matching principle, following the revenue recognition principle, requires that all expenses incurred in order to generate a particular revenue are recorded in the period the revenue is earned, even if the expense has not yet been paid. For example, if a business incurs $10,000 in labor costs to generate $30,000 of banquet revenue, the $10,000 should be recorded as an expense in the current month even though it will not be paid until the following month.

 

(Continued)

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