Careful Observation of Accounting Principles is a Must

Perhaps, all businesses know and understand just how important it is to adopt an accounting system. After all, any business would want to make sure that their entity is always in the pink of financial health. But what could be more perplexing than for businesses to each have its own accounting system, or even none at all? If this were to happen, then there would probably be no way to tell if the business were truly profitable or not, which could lead business settings to go haywire. That is why it is necessary for businesses to follow the rules and procedures stipulated in the GAAP or Generally Accepted Accounting Principles. Almost all businesses and accountants refer to the GAAP in making financial reports and carrying out other accounting functions. If, however, a business states in its policy that it does not follow the GAAP, then it should specify which type of accounting system they are adopting in order to avoid using titles in their financial statements, which could misinform interested parties who are reading it.

Generally Accepted Accounting Principles is considered as a bulwark in the preparation of a financial statement. The principles in the GAAP are not just merely cut-and-paste guidelines. These have always been made open for careful analysis and interpretation and are constantly updated and modified in order to effectively direct the business’s accounting methods and financial reporting systems. Different principles have also been created to suit different types of businesses, whether these entities are for profit, non-profit or government. Moreover, a business that does not disclose that it has applied principles out of the GAAP can be legally held liable for misinterpretation of data.

There are times when a business makes estimates in order to be able to achieve the highest level of accuracy. You might have probably heard of some businesses that massage with numbers, or do ‘creative accounting’ of their sort. Creative accounting is when a business pushes itself a little or even to the limit to make their business appear more profitable than its present condition. This occurrence can cause a business to go haywire because it can be held liable for accounting fraud. The results of this kind of malpractice can be devastating and can badly affect many people. Classic examples wherein creative accounting was found are the companies Rite Aid and Enron. In 2002, Rite Aid was pressed with federal and criminal charges for making false statements to the Securities and Exchange Commission. Enron, on the other hand, also crumbled into bankruptcy also because of accounting fraud.