Accounting Principles - Bookkeeping

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 business 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 business 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.

Bookkeeping

So what goes on the accounting and bookkeeping departments? What do these people do on a daily basis?

Well, one thing they do that's terribly important to everyone working there is Payroll. All the salaries and taxes earned and paid by every employee every pay period have to be recorded. The payroll department has to ensure that the appropriate federal, state and local taxes are being deducted. The pay stub attached to your paycheck records these taxes. They usually include income tax, social security taxes pous employment taxes that have to be paid to federal and state government. Other deductions include personal ones, such as for retirement, vacation, sick pay or medical benefits.  It's a critical function. Some companies have their own payroll departments; others outsource it to specialists.

The accounting department receives and records any payments or cash received from customers or clients of the business or service. The accounting department has to make sure that the money is sourced accurately and deposited in the appropriate accounts. They also manage where the money goes; how much of it is kept on-hand for areas such as payroll, or how much of it goes out to pay what the company owes its banks, vendors and other obligations. Some should also be invested.

The other side of the receivables business is the payables area, or cash disbursements. A company writes a lot of checks during the course of year to pay for purchases, supplies, salaries, taxes, loans and services. The accounting department prepares all these checks and records to whom they were disbursed, how much and for what. Accounting departments also keep track of purchase orders placed for inventory, such as products that will be sold to customers or clients. They also keep track of assets such as a business's property and equipment. This can include the office building, furniture, computers, even the smallest items such as pencils and pens.