The Different Kinds of Accounting Principles
If every person involved in the practice of accounting followed their own system, or no system at all, there’d be no way to truly tell whether a firm was profitable or not. Nearly all companies 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 assume that a business has used the GAAP system unless they specifically state otherwise. When GAAP methods are not used the company needs to make clear which other form of accounting they have used and are banned from using misleading titles in their financial statements. The majority of accountants consider GAAP the gold standard for financial statements and summaries. If a company does not disclose it doesn’t use GAAP it makes them financially liable for any misunderstanding in the data they supply. GAAP methods have been fine-tuned over many decades and bascially created a whole way for the financial systems of companies to work. Different rules have been established for different types of business entities, such for-profit and not-for-profit companies, governments and other enterprises.
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