If everyone engrossed in the process of accounting followed their own scheme, or no classification at all, there’s be no way to truly tell irrespective of whether a company was profitable or not. Most companies follow what are called usually accepted accounting principles, or GAAP, with there are great tomes in libraries and bookstores fervent to just this one topic. Unless a company states otherwise, anyone reading a financial statement can make the assumption that company has used GAAP.
If GAAP are not the principles used for preparing monetary statements, then a business necessitates to make clear which other form of accounting they’re used in addition to are bound to avoid using titles in its fiscal statements that could mislead the human being examining it.
GAAP are the gold standard for preparing financial statement. Not disclosing that it has used principles other than GAAP makes a company legally liable for any misleading or misunderstood data. These principles have been fine-tuned over decades with have effectively governed accounting methods plus the monetary reporting systems of businesses. Separate principles have been established for distinct types of business entities, such for-profit and not-for-earnings companies, governments along with other enterprises.
GAAP are not cut as well as dried, nonetheless. They’re guidelines plus as such are often open to interpretation. Estimates have to be made at times, and they require good faith efforts towards accuracy. You’ve surely heard the phrase “creative accounting” along with this is when a company pushes the envelope a mini (or a lot) to make their business look more profitable than it might actually be. This is also called massaging the numbers. This can get out of control and in a little while turn into accounting fraud, which is also called cooking the books. The results of these practices can be devastating as well as ruin hundreds with tens of millions of lives, as through the cases of Enron, Rite Aid in addition to others.