If every person involved in accounting followed their accounting system or had no system whatsoever, there would no way to determine if a business was financially successful, or even not. The majority of companies adhere to what’s known as generally accepted accounting standards GAAP, also known as GAAP. there are a lot of books in bookstores and libraries that are devoted to this specific issue. If a company doesn’t state it when they present the financial statements can conclude that the companies have used GAAP.
If GAAP isn’t the only method employed in the preparation of the financial statement, a company must be clear about the different accounting methods is using and must not use titles in its financial statements which may mislead the person who is looking at it.
GAAP is the standard used to prepare financial statements. In the absence of revealing that they have employed other principles than GAAP is a legal requirement for a business to be accountable for any inaccurate or incorrectly interpreted data. These principles have been refined over time and have successfully controlled accounting practices and accounting systems used by businesses. Different principles have been developed for different kinds of business entities like a for-profit and non-profit businesses, government agencies, and other companies.
GAAP cannot be cut and dried, but. They are guidelines and are frequently subject to interpretation. Estimates must be made sometimes and are based on honest efforts to ensure accuracy. You’ve probably heard of “creative accounting” and this is the process where a business puts a little pressure on the limit (or more) to create a better than what it be. It’s also known as manipulating numbers. This could spiral out of control and rapidly become a fraud in accounting, which is also known as cheating the books. The consequences of these actions can be catastrophic and destroy thousands of lives, such as in the case in the cases of Enron, Rite Aid, and other companies.