Accountants are responsible for maintaining the standards. When financial statements come up for scrutiny, they make sure that go here they are comparable with audited financial information from other companies.
Although it may sound daunting, it isn’t impossible. All this can be done by an accountant professional.
Accounting professionals are self-regulated. They will determine the best way for company activity and financial records to be recorded. This is done by the Accounting Practices Board of American Institute of Certified Public Accountants. This group is responsible of defining the “Generally Accepted accounting Principles” (GAAP) that public accountants must observe for clients.
Although it is beyond the scope this paper will cover, the process of introducing or changing GAAP is complex and requires many reviews.
GAAP is crucial to maintain consistency across an accounting practice. Not only within a company, it’s also important for all other regulated entities. Every publicly held company should be audited annually. Stockholders have to be sure that the financial information of the company conforms with GAAP.
Prepare all financial information according to GAAP
o Management can depend on these records to make course corrections within their departments or for the entire company’s benefit.
Investors and lenders are able to make sound business decisions based only on the financial records.
o Prospective stockholders and stockholders are informed about the financial health of their company.
Stocks are fairly priced on the stock market
o Deceptive, unfair, or even criminal practices are minimized.
These are the core principles of GAAP. It’s not an exhaustive description. GAAP is extremely complex and requires extensive study. But it shows the underlying goal of all that detail.
1. Historical Cost Principle: An asset’s value is the cost of its assets, less any depreciation and amortization. Companies are not permitted by law to declare their assets at their current market value. This is hard to do and subjective. The actual cost of an item can be compared to its historical cost, which is objective.
2. Revenue Recognition Principal: This simply refers to revenue being recognized as earned. It is possible that it will not be recognized until it has been received. If you provide a service at the end of December and they don’t pay for it until January next, then your December revenue total would include this amount. Even though January is the month you received payment, it will not be December.