The Basics of the GAAP Method of Accounting
If every person engaged in the process of accounting followed their own method, or no system at all, there’d be no way to truly tell whether a firm was profitable or not. A lot of businesses 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. Everyone can presume that a firm has used the GAAP system unless they specifically state otherwise. 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 headings in its financial statements that could mislead the person examining it. GAAP are the gold standard for preparing financial statement. If a company doesn’t disclose it doesn’t use GAAP it makes them financially liable for any misunderstanding in the data they supply. These principles have been fine-tuned over decades and have effectively governed accounting methods and the financial reporting systems of businesses. There are a number of other financial reporting systems which are used for other types of business type such as governments, charities and not for profit businesses.
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