Why do the numbers go here instead of there? That’s the basis of accounting theory...understanding why things work the way they do in accounting.

The goal? Fairness. Clarity. Depth of disclosure.

But wait, wait, wait...isn’t accounting about numbers? Yes, so many numbers. But the theory is largely about regulations and new standards…as if numbers weren’t mind-numbing enough.

Related or Semi-related Video

Finance: What is GAAP?21 Views

00:00

Finance allah shmoop what is a gap Yeah not this

00:09

Nor this Nor this gap is an accounting term that

00:13

stands for generally accepted accounting principles And it is basically

00:18

the accounting code of hammurabi or the ten commandments that

00:22

is There are lots and lots and lots of ways

00:24

that clever bean counters could define and or account for

00:28

the notion of profits lots of ways to recognize revenues

00:32

versus sales and lots of ways to think about how

00:34

much that ten commandment frisbee factory is appreciating in value

00:39

each year Well the world according to gaff outlines the

00:42

structure under which accountants must you know count beans the

00:45

basic idea Well sort of in the vein of the

00:47

golden rule that is do unto others as you'd have

00:50

them do unto you Gap requires that accountants always present

00:54

their numbers in the most reasonably conservative manner possible such

00:58

that they never overstate how profitable or how well the

01:02

company is doing Gap is the framework the map the

01:05

religion and the destinations we want to go inside this

01:09

neck of the accounting woods are three income statement cash

01:12

flow statement balance sheet will none of these three key

01:15

elements mean anything however unless they all follow the same

01:20

rules they're linked like gears in an overpriced swiss watch

01:25

and the eighteen zillion individual rules on their own mean

01:28

nothing like what is revenue Is it a dollar you

01:31

collect in cash at a video game arcade booth Is

01:34

it the promise to pay that dollar in a year

01:37

Well there are lots of ways to account for this

01:39

notion of revenue so don't think of gaff isa siri's

01:42

of rules rather think of it as this you know

01:45

key mathey kind of finance e a county religion it's

01:49

all about quote doing right unquote and part of that

01:52

issue is a natural conservatism that has to come with

01:56

it kind of amish you'd think would be a good

01:59

gap Accountants Well if you're thinking about how to account

02:02

for five dollars promised to you in a year well

02:04

you have to recognize that there is risk you won't

02:07

collect it and that money a year from now is

02:09

worth less than its face value and well that you

02:12

should categorise those revenues way off in the distance differently

02:17

from how you'd categorize collecting the five dollar bill in

02:19

cash that day and putting it in your cigar box

02:22

there right So gap is basically the force in accounting 00:02:26.44 --> [endTime] May it be with you

Up Next

Finance: What is Reg G?
5 Views

What is reg G? No, it's not an up-and-coming rap star...though we know what our rapper name is now. Hit play to find out.

Finance: What is piggyback registration?
2 Views

Piggyback registration occurs when a company's newly printed shares are sold to the public, and the existing shares "piggyback" onto them.

Finance: What is shelf registration?
3 Views

A shelf registration is a kind of public offering where banks and other institutions can offer new securities in companies without going through an...

Finance: What is Regulation A?
7 Views

Reg A is an exemption for the sale of securities. We wonder if it has any sweet steel drums in the background.

Find other enlightening terms in Shmoop Finance Genius Bar(f)