Accounting Principles

Accounting Principles

GAAP are the gold standard for financial statement preparation. A company is legally liable for any misleading or misunderstood data if it does not disclose that it has used other accounting methods. "Cooking the books" is when a company tries to make their business appear more profitable than it is.

If everyone involved in the accounting process used their own system, or no system at all, it would be impossible to determine whether a company was profitable or not. Most businesses adhere to what are known as generally accepted accounting principles, or GAAP, and there are entire books devoted to this topic in libraries and bookstores. Unless otherwise stated, anyone reading a financial statement can assume that the company used GAAP.

If GAAP are not the principles used to prepare financial statements, a company must state which other form of accounting is being used and must avoid using titles in its financial statements that could mislead the person reviewing it.

GAAP are the gold standard for financial statement preparation. A company is legally liable for any misleading or misunderstood data if it does not disclose that it has used principles other than GAAP. These principles have been refined over time and have effectively governed accounting methods and business financial reporting systems. For different types of business entities, such as for-profit and non-profit corporations, governments, and other enterprises, different principles have been established.

However, GAAP are not black and white. They are guidelines, and as such, they are frequently open to interpretation. Estimates must be made from time to time, and they require good faith efforts to be accurate. You've probably heard the term "creative accounting," which refers to when a company goes a little (or a lot) above and beyond to make their business appear more profitable than it actually is. This is also known as number massage. This can quickly spiral out of control and turn into accounting fraud, also known as cooking the books. As in the cases of Enron, Rite Aid, and others, the consequences of these practices can be devastating, destroying hundreds of thousands of lives.