Key Concepts in Understanding Accounting and the Importance of Financial Statements

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Part I. There are a number of different concepts that will help to understand what financial statements are and the role that they play in the American financial system. The first important concept is that of Generally Accepted Accounting Principles, or GAAP. The GAAP are the established guidelines for the creation of financial statements. The GAAP applies specifically to public companies, although a number of private companies and not-for-profit organizations will also use the GAAP system. What these guidelines do is that they ensure consistency between financial statements. Investors can rely on the fact that these statements have been produced according to the same set of rules. This consistency makes the statements more reliable. Having reliable statements is central to the financial system, because it encourages investors to put money into the system by making them feel safe. Investors feel safe with the GAAP system because the statements follow the principle of accurately portraying the financial condition of the company. Another system that is used for the creation and presentation of financial statements is the IFRS, or International Financial Reporting Standards. This system is basically the international version of GAAP. IFRS is used in over 100 countries around the world, so it has the advantage of delivering statements that are universally consistent. This is seen as an advantage in attracting capital worldwide, especially as the financial system in general
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