|Financial statements follow the same general format from company to company. Depending on the nature of the company's business, however, specific line items may vary. Still, the statements are usually similar enough to allow you to compare one business's performance against another's. The reason for this similarity is that accountants abide by Generally Accepted Accounting Principles, or GAAP. |
Most companies use accrual accounting: Income and expenses are booked when they are incurred, regardless of when they are actually received or paid. This system relies on the matching principle, which helps companies understand the true causes and effects of business activities. Accordingly,
Occasionally, a very small company will begin its existence using cash-basis accounting, which counts transactions when cash actually exchanges hands. This practice is less conservative when it comes to expense recognition, but sometimes more conservative when it comes to revenue recognition. But as companies increase in size and complexity, it becomes more important to match revenues and expenses in the appropriate time periods, so they tend to switch over to accrual accounting.
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