Accounting Information

By Easwar Koovappadi

GAAP is an acronym for generally accepted accounting principles. Financial statements are usually prepared in accordance with generally accepted accounting principles that have been codified over a period of time. It is the responsibility of the management to prepare the financial statements. CPA will verify that it is in fact prepared in accordance with GAAP and issue a report with their findings. Usually, when you look at an unqualified auditor's report, one can assume that the financial statements are prepared in accordance with it.

It would result in utter confusion, if businesses were to prepare their financial statements in accordance with its own unique accounting methods. Hence the fundamental idea was to provide a well defined set of rules that all can follow. This would make comparison of the same business over a period of time as well as comparisons with other businesses in the same industry possible. The data would be comparable. In preparation of the financial statements, one has to look at all types of transactions and determine the correct application of accounting principles.

Does this mean that every accountant in every business will always come up with the same number for profit for a given period? No, it does not happen. Within GAAP there are alternative methods that could be used for a given situation. However, once a method is chosen the same has to follow consistently. Differing treatment of valuation of cost of goods sold, sales revenue recognition and depreciation could lead to different results. Each business has to choose an appropriate method that is consistent with its unique situation. Depreciation is an example. The costs of physical property and equipment are spread over its useful life, so that the cost of the asset gets apportioned. This may not be in relation to its use. Some methods might have the impact of charging higher amount now, while others may result in a lower charge to expense. However, both may be acceptable . For most businesses the question on choice of the accounting method depends on its impact on net income.

Easwar has an extensive knowledge of issues related to currency, exchange, taxes, cost savings ideas and loves to write about it. For additional resources please visit http://www.improveprofitsnow.blogspot.com

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