Accounting practices follow positive guidelines and procedures. Such guidelines and procedures are referred to as generally common accounting principles (GAAP) . GAAP include a combination of legally mandatory standards and commonly celebrated ways of calculating financial records. GAAP veil such things as revenue recognition, balance sheet item classification, and outstanding part measurements. The Financial Accounting Standards Board (FASB), the American Institute of Certified Public Accountants (AICPA), and the Securities and Exchange Commission (SEC) provide guidance about acceptable accounting practices.
Although there is some discretion in interpretation of accounting principles, GAAP are based on four general components:
Consistency - All information should be obtained and presented consistently across all periods. If there is a contrast in the means of reporting from one period to the next, this must be famed in the financial statements along with a worthy reason for the inequity.
Reliability - The procedures and results must be able to be replicated by an independent party. This ensures that the business is representing adequate financial records. If procedures and results are not favorable and instead are based on subjective information, they are likely to be disputed.
Disclosure - All relevant information that could influence the notion and assessment of the financial records of the business should be disclosed in the financial statements. This should include all information that is famous enough to affect assessments and decisions
Comparability - The financial statements and documentations of such in a business must be able to be compared to similar businesses within its industry. This is well-known so that investors may decide the success of a business in relation to others in its same category.
Relevance - The information obtained from financial statements should provide information that is famous in predicting the future financial spot of the business.
Although adherence to GAAP is not required, it lends credibility with creditors and stockholders because it adds validity to financial statements and prevents financial misrepresentation. Creditors and stockholders are able to regain an true represent of the financial state of a business and form sound decisions based on the financial records of the business. Furthermore, outside agencies will steal that the business has adhered to GAAP. Also, when a business follows GAAP, management is more able to follow the records in order to execute runt adjustments within departments or grand decisions regarding the financial future of the business. Adherence to GAAP principles also helps to minimize erroneous and criminal practices because it provides guidelines and procedures for ethical accounting practices.
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