Some Principles of Accounting

Following your own system of accounting, or worse, not having a properly established system of keeping records is courting trouble. It's difficult to tell for sure whether  the company is gaining profits or it's already losing a lot of money. Most companies follow a standard system called GAAP or generally accepted accounting principles. There are numerous resources available in bookstores and on the Internet regarding GAAP. It pays to learn more about it through sufficient research.

A company is assumed to be using GAAP once it has published a financial statement unless it has stated otherwise. If it did not use GAAP as its main guideline, then the company needs to be specific and clear as to what other form of accounting it has used. They must not use titles that misinform anyone reviewing their financial statements since these are grounds for sanctions. This is because misinformed data could mislead the public about the current performance of the company.

GAAP provides the standards and rules that accountants follow in bookkeeping transactions and preparing the financial statements. There is a certain way of summarizing and recording the dealings of a business. GAAP is said to be the gold standard of preparing the financial statement of a company. For decades, these principles of accounting had been refined to effectively report the actual gains or losses of businesses. These principles have effectively regulated accounting methods as well as the reporting system of finances. There are different principles that were established for various types of businesses. Examples are not-for-profit and for-profit companies, industries and government units. It is imperative that a business or any enterprise should disclose whether they have complied with GAAP or not.

In GAAP, financial information must be summarized and reported objectively because clients and other companies who rely on this information must be assured that the reports are free from biases and inconsistencies, whether deliberate or unintentional. There are different principles included in GAAP. Some examples include the principle of regularity, principle of sincerity, and principle of prudence. Regularity means the company should conform to enforced laws and regulations while sincerity means reflecting the realities of the company's finances in good faith. The principle of prudence entails showing everything as is and that the CPA should not make things look better than they actually are. Every accountant should understand and put these principles to practice if he wants to keep the high standards of his job.

These standard guidelines are not necessarily cut and dried as they are open to various interpretations depending on who actually uses them. There are times when one has to make estimates but it should be done in good faith gearing towards accuracy. There is "creative accounting" wherein a company makes their business appear more profitable than they actually are and this is also called numbers massaging. If this gets out of control turning into an accounting fraud then it leads to ruining thousands of lives like in the case of the Enron scandal that broke out late 2001 where irregularities in accounting which led to the company's bankruptcy. A business should avoid this practice because these do not reflect good management as well as accounting skills of the company.