Accounting Principles

If all relevant parties in the operation of accounting followed their particular system, or no system by any means, there's be absolutely no way to honestly tell whether a firm was profitable or not. Many organisations follow what exactly are called GAAP, or GAAP, high are huge tomes in libraries and bookstores dedicated to just this one topic. Unless a business states otherwise, anyone reading an economic statement will make the assumption that company has utilized GAAP.

If GAAP are certainly not the principles for preparing financial statements, then a small business to make clear which other form of accounting they're used and so are bound to don't use titles in their financial statements which could mislead the person examining it.  

GAAP include the defacto standard for preparing financial statement. Not disclosing which it has utilized principles in addition to GAAP produces a company legally accountable for any misleading or misunderstood data. These principles are already fine-tuned over decades and have absolutely effectively governed accounting methods plus the financial reporting systems of companies. Different principles are actually established for several types of business entities, such for-profit and never-for-profit companies, governments and also other enterprises. 

GAAP usually are not cut and dried, however. They're guidelines therefore in many cases are offered to interpretation. Estimates have to be made from time to time, plus they require good faith efforts towards accuracy. You've surely heard the phrase "creative accounting" this also is when a firm pushes the envelope a trifle (or possibly a lot) to generate their business look more profitable than it will be. This is also called massaging the numbers. This could leave control and quickly transform into accounting fraud, because it's called cooking the books. The final results of such practices could be devastating and ruin hundreds and maybe thousands of lives, as with the instances of Enron, Rite Aid among others.