Different Sorts of Accounting Systems
If all businesses used their own system of accounting, or indeed no system at all, there would be no way to tell which businesses are profitable and which are not. Because of this most businesses now use a common set of accounting principles, which are called generally accepted accounting principles, or GAAP for short. Unless a company states otherwise, anyone reading a financial statement can make the assumption that company has used GAAP. When GAAP methods are not used the company needs to make clear which other form of accounting they have used and are banned from using misleading titles in their financial statements. The majority of financial accountants consider GAAP the gold standard for financial statements and summaries. 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. There are a number of other financial reporting systems which are used for other types of business type such as governments, charities and not for profit businesses.
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