What Exactly Is Accounting Anyhow?

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Anyone who has worked in a office environment at some point or another has already established to consult with accounting department. They are the folks who pay and send out the expenses that keep your business moving forward. They are responsible for a lot more than that, though. From time to time called “bean counters” they also keep their eye on profits, expenses and losses. Unless you’re running your own personal company and performing as your own certified public accountant, you’d have no way of knowing just how worthwhile – or otherwise – your business is without some sort of financial reporting.

Regardless of what business organization you are in, even when all you are doing is balance a checkbook, that is still accounting. It’s portion of even a kid’s life. Saving an allowance, spending it at one time – they’re accounting principles.

What exactly are some other businesses where accounting is crucial? Well, farmers must follow careful accounting methods. Most of them run their plots of land year to year through loans to plant the seed. If it is a good year, a profitable one, chances are they’ll will pay off their loan; otherwise, they may have to carry the loan over, and accrue more interest charges.

Every company and every individual require some kind of accounting system in their lives. Otherwise, the finances can get away from them, they don’t know what they’ve spent, or whether they can expect a profit or a loss from their investing. Staying on top of accounting, whether it’s for a multi-billion dollar business or for a personal checking account is a necessary activity on a daily basis if you’re smart. Not doing so can mean anything from a bounced check or posting a loss to a company’s shareholders. Both scenarios can be equally devastating.

Accounting is basically information, and this information is published periodically in enterprise as a profit and loss statement, or an income statement.

Accounting Principles

If everyone involved in the process of accounting followed their own system, or no system at all, there’s be no way to truly tell whether a company was profitable or not. Most companies follow what are called generally accepted accounting principles, or GAAP, and there are huge tomes in libraries and bookstores devoted to just this one topic. Unless a company states otherwise, anyone reading a financial statement can make the assumption that company has used GAAP.

If GAAP are not the principles used for preparing financial statements, then a business needs to make clear which other form of accounting they’re used and are bound to avoid using titles in its financial statements that could mislead the person examining it.

GAAP are the gold standard for preparing financial statement. Not disclosing that it has used principles other than GAAP makes a company legally liable for any misleading or misunderstood data. These principles have been fine-tuned over decades and have effectively governed accounting methods and the financial reporting systems of businesses. Different principles have been established for different types of enterprise entities, such for-profit and not-for-profit companies, governments and other enterprises.

GAAP are not cut and dried, however. They’re guidelines and as such are often open to interpretation. Estimates have to be made at times, and they require good faith efforts towards accuracy. You’ve surely heard the phrase “creative accounting” and this is when a company pushes the envelope a little (or a lot) to make their company look more profitable than it might actually be. This is also called massaging the numbers. This can get out of control and quickly turn into accounting fraud, which is also called cooking the books. The results of these practices can be devastating and ruin hundreds and thousands of lives, as in the cases of Enron, Rite Aid and others.

Related articles

• Why Businesses Spend Money on Accounting (thinkup.waldenu.edu)
• How Does Accounting Help a Business? (thinkup.waldenu.edu)
• What Are Accounting Audit Irregularities in Financial Statement Fraud? (brighthub.com)
• How Does Accounting Help a Business? (thinkup.waldenu.edu)
• Crisis? What Crisis? Don’t Blame The Accounting (blogs.forbes.com)

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