GAAP and Financial Statements

When accountants take transactions, only those they can reliably verify, they have to record these transactions somewhere. That’s where the following statements are used:

 

·        General Journal – The general journal is used to record all transactions as they occur. Even adjusting and closing entries are recorded in a general journal. It is basically like a diary of all financial transactions that occurred. The accountant would post the date, a description of the transaction, and whether it is a credit or debit.

·        Ledger – A ledger is a book that holds all the accounts and balances. Each account is on its on page. When accountants take and copy information from the journal to the ledger that is referred to as posting.

·        Trial Balance – Next, after the accountant completes the ledger entries, he prepares a trial balance. This lists all accounts with their balances that are taken from the ledger. The trial balance mainly provides a way to check and verify that all transactions were recorded correctly.

·        Income Statement – The income statement is used to record all revenue and expenses of the company for a certain period of time. This is the way the company can determine the incomes income or loss of the company. Revenue is recorded first followed by expenses.

·        Balance Sheet – This report shows the financial position of the company at the end of the period. Here is where all assets, liabilities, and owner’s equity is recorded.

 

All these forms are used by accountants to record a company’s transactions and to provide financials of the company. Every one of these transactions and statements that are listed above are all governed, supported, and backed by GAAP. If not, the transactions are not accurate, which results in inaccuracies in reporting. This in turn will result in the SEC coming down on the company right away.

 

So as you can GAAP is very important in the accounting profession. You cannot do anything without having to know these standards, rules, and principles, and following them.