Accounting by Rich Peterson

Author:Rich Peterson
Language: eng
Format: epub
Publisher: Rich Peterson
Published: 2020-09-11T00:00:00+00:00

KEEPING IN STEP WITH FINANCIAL REPORTING AND ACCOUNTING STANDARDS

The free movement of capital is absolutely essential in a free-market economic system and in international capital flows between countries. Investors and creditors invest their capital to work where they think they can get the best return on investment, based on the risks they are willing to take. Before making these decisions, they must have the accounting information provided in the financial statements of companies.

Imagine the confusion that would result if all companies were allowed to invent their own accounting methods for measuring profits and assigning values ​​to assets and liabilities. What if all companies adopted their own individual accounting terminology and followed their own style of financial statement presentation?

Recognize American standards

The official standards and rules that govern the accounting and financial reporting of companies based in the United States are known as GAAP (Generally Accepted Accounting Principles). When you go through a business financial statements, you have the right to assume that the business has fully complied with GAAP when reporting its cash flows, profitable activities and financial condition - unless the company does not clearly indicate that it has reduced its financial statements using certain other accounting bases or deviated from GAAP in one or more important respects.

If GAAP is not the basis for the preparation of its financial statements, a company must clearly indicate that another accounting basis is used and avoid using titles for its financial statements associated with GAAP. For example, if a company uses a simple accounting basis for receipts and disbursements - which is well below GAAP - it should not use the terms of the income statement and balance sheet. These terms are an integral part of GAAP, and their use as titles for the financial statements implies that the company uses GAAP.

I will not bore you with a long and historic speech on the development of accounting and financial reporting standards in the United States. The general consensus (supported by law) is that companies should use consistent accounting methods and terminology. General Motors and Microsoft must use the same accounting methods, as well as Wells Fargo and Apple. Obviously, businesses in different industries have different types of transactions, but the same types of transactions should be accounted for in the same way. This is the goal.

There are over 10,000 public companies in the United States and easily over a million private companies. Now, am I telling you that all of these companies should use the same accounting policies, terminology, and presentation styles for their financial statements? Putting it so hard makes me breathe a little. The correct answer is that all businesses must use the same GAAP rulebook. However, the rulebook allows alternative accounting methods for certain transactions. In addition, accountants must interpret the rules when applying GAAP in real situations. The devil is in the details.

In the United States, GAAP is the gold standard for the preparation of financial statements for business entities (although gold is somewhat tarnished). The assumption is that any deviation from GAAP would result in misleading financial statements.

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