Business and the Role of Accounting

The owner of R&R Equipment Company has decided to omit an asset and related liability, received 1 week before year end, from their year end balance sheet. The owner feels this is alright since they are omitting both and both sides will still balance. The reasoning behind this might be because the inventory has not yet had a chance to sell and has not yet made any profit for the company. Another reason behind this could be that his company has been using the cash basis method of accounting. The cash basis method of accounting “recognizes the impact of transactions in the financial statements only when a company receives or pays cash.” (Horngren, Sundem, Elliott, Philbrick, 2006) It is my opinion that using this method of accounting may hinder or omit relevant transactions and information that may later impact the company in a negative manner.

Generally Accepted Accounting Principles (GAAP) refers to the practices that are to be followed while making ready and passing out financial statements. There might be circumstances when Randy’s decision is acceptable. These circumstances might include the relevance of the information and the consistency of the information. The relevance of the information refers to if it makes an impact on the decision being made. The consistency of information refers to unchanging policies and procedures used. The cost benefit criterion could also be used in this situation.

Circumstances that this action would not be acceptable under GAAP would include the use of the reliability concept. This concept states “the quality of information that assures decision makers that the information captures the conditions or events it purports to represent.” (Horngren, Sundem, Elliott, Philbrick, 2006) Under the guidelines of GAAP revenue recognition is straightforward. FASB’s Statement of Financial Accounting Concepts no. 5 states “revenue