These standards are protected by accounting professionals. They make sure that a financial statement can be compared to similar financial reports from other companies by ensuring that the accounting professional examines it, learn more here.
This can seem overwhelming but don’t worry. The accountant professional can help.
You can self-regulate the profession of accounting. They choose the most appropriate way to record company activity on the financial records. They do this through the Accounting Practices Board of American Institute of Certified Public Accountants. This group is made up of highly qualified professionals. This group establishes the “Generally Accredited Accounts Principles” (GAAP). For the benefit of their clients, all public accountants must adhere to them.
It is impossible to describe the process for changing existing GAAP or introducing new GAAP. However it is extensive and provides many opportunities for review.
GAAP is designed to maintain consistency in all companies and within every company. All public companies must have their accounts audited every year by a Certified Public Accountant. Stockholders have assurances from the CPA that financial information they receive from their company is compliant with GAAP.
All financial data must be prepared according to GAAP
To improve the company, the management can examine the records and make the necessary corrections to their departments or the whole company.
o Financial records may be useful to investors and lenders in making sound decisions.
Potential stockholders, stockholders, and the company’s financial health can be viewed.
The stock market is fair-valued
o Criminal, deceptive, or unfair practices are minimized.
These are just a few of the GAAP’s principal principles. This is not a complete explanation of GAAP. It is complex and requires careful study. It does however show the fundamental purpose of all that detail.
1. Historical Cost Principle. The company’s assets will be valued at their original costs, minus any appropriate deductions. This prevents companies from stating assets as market values. It is extremely difficult to determine and subjective. It’s very objective since the historical cost shows what the actual cost was, which is why it is so difficult to assess.
2. Revenue Recognition Principle: This principle simply states that revenue can be recognized only when it has been earned rather than when it is received. For example, if your customer pays you for a service you provided at Christmas but doesn’t pay you until January, the December revenue number will include this amount. Even though the month in which the payment was made is January, it won’t.