Accounting Principles
January 21st, 2008 | 
Author: If everyone involved in the process of accounting followed their own system, or no system at all, there’s be no way to truly tell whether a company was profitable or not. Most companies follow what are called generally accepted accounting principles, or GAAP, and there are huge tomes in libraries and bookstores devoted to just this one topic. Unless a company states otherwise, anyone reading a financial statement can make the assumption that company has used GAAP.
If GAAP are not the principles used for preparing financial statements, then a business needs to make clear which other form of accounting they’re used and are bound to avoid using titles in its financial statements that could mislead the person examining it.Â
GAAP are the gold standard for preparing financial statement. Not disclosing that it has used principles other than GAAP makes a company legally liable for any misleading or misunderstood data. These principles have been fine-tuned over decades and have effectively governed accounting methods and the financial reporting systems of businesses. Different principles have been established for different types of business entities, such for-profit and not-for-profit companies, governments and other enterprises.
GAAP are not cut and dried, however. They’re guidelines and as such are often open to interpretation. Estimates have to be made at times, and they require good faith efforts towards accuracy. You’ve surely heard the phrase “creative accounting” and this is when a company pushes the envelope a little (or a lot) to make their business look more profitable than it might actually be. This is also called massaging the numbers. This can get out of control and quickly turn into accounting fraud, which is also called cooking the books. The results of these practices can be devastating and ruin hundreds and thousands of lives, as in the cases of Enron, Rite Aid and others.
Posted in Accounting
Well, you have just touched upon some major principles in accounting. However, they most of the time occur just in theory… It takes a lot a lot of accountability and ethics to bring them to practice. Any particular ideas how GAAP are enforced, apart only from legal punishments?
Here’s a more in-depth explanation of accounting principles:
http://www.accountingcoach.com/online-accounting-course/09Xpg01.html
hey … nice post at all…
but i thing you should also add some strategies for accounting management.. like… accounting outsourcing etc..
by d way,,
keep blogging… have a great day..
Just seeing the word GAAP reminds me of that accounting class I took back in college. Nice blog you have there, you should talk about other accounting principles as well.
nice post. the accounting principles are not followed by the companies honestly. that is why we see many companies failing.
informative post. keep blogging
And don’t forget the auditors at public accounting firms that sign opinions that the financials are in conformity with GAAP. They are responsible too as is my Los Angeles CPA firm.
It was a good read on the fundamentals of accounting. It would be nice to hear your thoughts about the accounting system that can be used as a restaurant accounting software.
Looking forward for your next posts on business accounting…
Yes definitely GAAP is very important for any company because different countries have different accounting rule. But International accounting standards are still need to be followed. But on some specific areas some company can go for GAAP.
What a great way to define accounting. Really helpful for any financial expert you must keep posting.
New interest in the current state of the financial industry, see Lehman’s scheme, will only increase the public’s interest in accounting. Good job.
Very informative. But what about accounting firm auditors, aren’t they suppose to make sure these companies are following the accounting principles?
Add ethics to the list now with the news about Goldman’s practice of allowing the shorts to design the mortgage security then short the security and make literally billions.