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If all businesses used their own system of accounting, or indeed no system at all, there would be no way to tell which companies 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. Everybody can presume that a firm has used the GAAP system unless they specifically state otherwise. 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 headings in its financial statements that could mislead the person examining it. The majority of 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 companies.

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