14 1 Accounting: More than Numbers Introduction to Business

the standards and rules that accountants follow while recording and reporting financial activities

GAAP compliance is ensured through an appropriate auditor’s opinion, resulting from an external audit by a certified public accounting (CPA) firm. Importantly, impact accounting is a scalable and efficient practice for businesses that aligns with increasing consumer demand for sustainable practices, marrying profitability with sustainability. Similar to accounting for governmental entities, studentscontinuing their study of accounting may take a specific course orcourses related to not-for-profit accounting. While the specificaccounting used in not-for-profit entities differs slightly fromtraditional accounting conventions, the goal of providing reliableand unbiased financial information useful for decision-making isvitally important. Some of the governmental and regulatory entitiesinvolved in maintaining the rules and principles in accounting arediscussed in Explain Why Accounting Is Important to BusinessStakeholders. The accounting system shown in Exhibit 14.3 converts the details of financial transactions (sales, payments, purchases, and so on) into a form that people can use to evaluate the firm and make decisions.

the standards and rules that accountants follow while recording and reporting financial activities

Accounting standards have also been established by the Governmental Accounting Standards Board for accounting principles for all state and local governments. Accounting standards relate to all aspects of an entity’s finances, including assets, liabilities, revenue, expenses, and shareholders’ equity. Specific examples of accounting standards include revenue recognition, asset classification, allowable methods the standards and rules that accountants follow while recording and reporting financial activities for depreciation, what is considered depreciable, lease classifications, and outstanding share measurement. While the rules established under GAAP work to improve the transparency in financial statements, they do not guarantee that a company’s financial statements are free from errors or omissions meant to mislead investors. There is plenty of room within GAAP for unscrupulous accountants to distort figures.

History of Accounting Standards

This makes it easier for investors to analyze and extract useful information from financial statements, including trend data over a period of time. Since accounting principles differ around the world, investors should take caution when comparing the financial statements of companies from different countries. The issue of differing accounting principles is less of a concern in more mature markets. Still, caution should be used, as there is still leeway for number distortion under many sets of accounting principles. Although privately held companies are not required to abide by GAAP, publicly traded companies must file GAAP-compliant financial statements to be listed on a stock exchange.

Investors suffered as a result because the crisis in confidence sent stock prices tumbling, and companies lost billions in value. Critics of principles-based accounting systems say they can give companies far too much freedom and do not prescribe transparency. They believe because companies do not have to follow specific rules that have been set out, their reporting may provide an inaccurate picture of their financial health. In the case of rules-based methods like GAAP, complex rules can cause unnecessary complications in the preparation of financial statements. These critics claim having strict rules means that companies must spend an unfair amount of their resources to comply with industry standards. This is a far more efficient process than having every company analyze the many layers in its supply chain.

Who Uses Financial Reports?

Instead, a service business does not sell tangible products to customers but rather provides intangible benefits (services) to customers. Figure 1.5 illustrates the distinction between manufacturing, retail, and service businesses. The generally accepted accounting principles (GAAP) are a set of accounting rules, standards, and procedures issued and frequently revised by the Financial Accounting Standards Board (FASB). Public companies in the U.S. must follow GAAP when their accountants compile their financial statements. As the term implies, service businesses are businesses thatprovide services to customers. Figure 1.5 illustrates the distinction between manufacturing,retail, and service businesses.

GAAP is a codification of how CPA firms and corporations prepare and present their business income and expense, assets, and liabilities in their financial statements. GAAP is not a single accounting rule, but rather an aggregate of many rules on how to account for various transactions. GAAP sets the rules that accounts follow when making journal entries and standardizes accounting so outside parties can make comparisons between companies. Investors, creditors, even employees count on the consistency of financial reporting to evaluate operations. Adopting impact accounting and innovating to reduce the energy and carbon footprint of business takes society steps closer to a transparent, accountable, and sustainable future, which is beneficial for our collective well-being.

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