Accounting Principles 101

If everyone involved in the process of accounting followed their own system, or no system at all, there is no way to really talk about a company that was profitable or not.Most companies follow what are called generally accepted accounting principles, or GAAP, and there are significant tomes in libraries and bookstores devoted to just this one topic. Unless a company states otherwise, anyone can read a balance sheet makes the assumption that the company GAAP.

If GAAP are not the principles used in preparing financial statements, when a company needs to make clear which other form of accounting used, and are obliged to avoid using titles in its financial statements which may mislead the trial.

GAAP is the gold standard for preparing financial statements. Not to disclose that it has used principles other than GAAP do legally responsible for any misleading or misinterpreted data. These principles have been refined over decades and have effectively governed the accounting practices and financial reporting of companies.Various principles have been established for different types of business entities, for-profit and non-profit businesses, governments and other companies.

GAAP is not cut and dried, however. They are guidelines and as such are often open to interpretation. Calculations must be made sometimes, and they require good faith efforts for accuracy. You’ve probably heard the term “creative accounting” and this is when a company limits in a small (or much) to make their business look more profitable than it actually can be. This is also called massaging the numbers. This could get out of control and rapidly turn into accounting fraud, also called cooking the books. The results of these methods can be devastating and destroy hundreds and thousands of lives, as in the cases of Enron, Rite Aid and others.