Accounting professionals are the guardians of these standards. They ensure that, when we examine a financial report, we can reasonably infer that it was prepared using sound accounting principles and is comparable to other audited financial reports for other companies, visit us.
This may sound daunting but do not be afraid. To help you get through all this, the accountant professional is here.
The accounting profession can be self-regulated. They choose the most appropriate method to record company activities on the financial books. They do so through the Accounting Practices Board of American Institute of Certified Public Accountants (AICPA), a group of highly experienced professionals. This group defines what is known “Generally Accredited Accounting Principles” or GAAP. All public accountants are required to adhere to them for the benefit of all their clients.
Although it is not possible to describe the process for introducing new GAAP or changing existing GAAP, it is an extensive process with lots of review opportunities.
GAAP exists to ensure consistency across all companies and within each company. All public companies are required to have their accounts audited at least every year by a Certified Public Accountant. The CPA provides assurances to stockholders that they are able to rely on financial information from their company as it is compliant with GAAP.
Preparing all financial data according to GAAP
Management can look at the records and make necessary corrections for their own departments or for the company as whole to improve the company.
o Financial records can help lenders and investors make sound decisions.
o Potential stockholders and stockholders are able to get a true picture of the company’s financial condition.
Stocks are fair-valued on the markets
o Criminal, deceptive or unfair practices are minimized.
These are some of GAAP’s primary principles. This is not a comprehensive explanation of GAAP. It is very detailed and requires much study to master. However, it shows the core purpose behind all that detail.
1. Historical Cost Principle. In general, the company’s assets are valued at their original cost, minus any appropriate depreciation. This prevents companies stating their assets as market value. It is very difficult to assess and subjective. The historical cost shows the actual cost, which makes it very objective.
2. Revenue Recognition Principle: This simply says that revenue can be recognized when it has been earned and not when it is received. For example, if you offer a service at Christmas, but your customer doesn’t pay you until January of next year, your December revenue number will include that amount. January will not even though it is the month in the which the payment was deposited.