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Full disclosure principle. Financial statements normally provide informationabout a company's past performance. However, pending lawsuits, incomplete

transactions, or other conditions may have imminent and significant effects onthe company's financial status. The full disclosure principle requires that financialstatements include disclosure of such information. Footnotes supplementfinancial statements to convey this information and to describe the policies the

company uses to record and report business transactions.Principle of conservatism. Accountants must use their judgment to recordtransactions that require estimation. The number of years that equipment willremain productive and the portion of accounts receivable that will never be paidare examples of items that require estimation. In reporting financial data,accountants follow the principle of conservatism, which requires that the lessoptimistic estimate be chosen when two estimates are judged to be equallylikely. For example, suppose a manufacturing company's Warranty RepairDepartment has documented a three-percent return rate for product X duringthe past two years, but the company's Engineering Department insists thisreturn rate is just a statistical anomaly and less than one percent of product Xwill require service during the coming year. Unless the Engineering Department

provides compelling evidence to support its estimate, the company's accountantmust follow the principle of conservatism and plan for a three-percent return

rate. Losses and costssuch as warranty repairsare recorded when they areprobable and reasonably estimated. Gains are recorded when realized.Materiality principle. Accountants follow the materiality principle, whichstates that the requirements of any accounting principle may be ignored when

there is no effect on the users of financial information. Certainly, trackingindividual paper clips or pieces of paper is immaterial and excessively

burdensome to any company's accounting department. Although there is nodefinitive measure of materiality, the accountant's judgment on such mattersmust be sound. Several thousand dollars may not be material to an entity suchas General Motors, but that same figure is quite material to a small, family-

owned business.

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Principles.topicArticleId-21081,articleId-21005.html

consistency principle.The consistency principle requires accountants to be consistent from one accounting period to

another in applying accounting principles, methods, practices, and procedures. In other words,

the readers of a companys financial statements can presume that the same rules and

measurements were followed in all of the years being reported. If a change is made to a more

preferred accounting method, the effects of the change must be clearly disclosed.The Financial Accounting Standards Board refers to consistencyas one of the characteristics or

qualities that makes accounting information useful.

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current liabilities

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Now that we're more familiar with what a company owns, let's move to the other side ofthe balance sheet, what it owes. Similar to assets, there are two main categories ofliabilities: current liabilities and noncurrent liabilities.Obligations the firm must pay within a year are known as current liabilities. The main lineitems you should be concerned with in this category are short-term debt and accounts

payable.Short-Term Debt. This refers to money the company has borrowed for a term of less thanone year. It's often in the form of a line of credit that may be drawn down at thecompany's discretion. Typically, the proceeds are used for short-term needs. Often, theamount of long-term debt that must be paid back within one year is also lumped into thisline item. The amount of short-term borrowings is an important figure, especially if acompany is in financial distress or pays a high dividend, because the entire amount mustbe paid back relatively quickly, leaving little wiggle room.Accounts Payable. Accounts payable represents bills the company owes for goods orservices it hasn't paid for yet. It is the opposite of accounts receivable, and generallyspeaking, investors like to see the opposite trends for the two line items. For example,with receivables, we'd prefer a company to collect what it's owed as soon as possible.However, if a company can postpone paying what it owes for a longer period of time--without getting in trouble--it will hold on to its cash for longer period of time,a plus forcash flow.

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Accrued liabilities areliabilitieswhich have occurred, but have not been paid or loggedunderaccounts payableduring an accounting period; in other words, obligations for goods andservices provided to a company for which invoiceshave not yet been received. Examples wouldinclude accrued wages payable, accrued sales tax payable, and accrued rent payable.

http://en.wikipedia.org/wiki/Accrued_liabilities

noncurrent laibilites.

Noncurrent liabilities are the flip side of noncurrent assets. These liabilities represent

money the company owes one year or more in the future. Although you'll see a variety of

line items in this category, the most important one by far is long-term debt.Long-Term Debt. This represents money the company has borrowed, typically by issuingbonds, that doesn't need to be paid back for several years. Too much long-term debt isgenerally risky for a company, because the interest on debt must be repaid no matter howthe business is doing. Determining how much debt is too much is very firm-specific anddepends on many things including the interest rate a company pays on its debt, and thestability of the firm's earnings and cash flows. One good way to determine if a company

can afford the interest payments on its debt is to see how many times the firm's operatingincome--otherwise known as income before interest and taxes (EBIT)--will cover itsinterest expenses (interest coverage ratio).

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Notes Payable Definition

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Notes payable is a written promise to pay a certain amount at some future date. The accountappears on the balance sheet when the company borrows money and signs a note or contractstating they will repay the amount plus interest.

Notes Payable Example

Tim wants to start his business and as he does so he begins to look for financing. He goes tothe bank and signs a note for $10,000 with an interest rate of 6%. The note is due in exactly

one year which Tim believes will be enough time to get his business off the ground. At the endof the year Tim will owe the bank $10,600. This is the principal amount of $10,000 plus the6% interest over the year which equals $600.

Current assetsCurrent liabilities are what a company currently owes to its suppliers and creditors. Theseare short-term debts, all due in less than a year. Paying them off normally requires thecompany to convert some of its current assets into cash.

Investopedia explains Generally AcceptedAccounting Principles (GAAP)

GAAP are imposed on companies so that investors have a minimum level of consistency

in the financial statements they use when analyzing companies for investment purposes.

GAAP cover such things as revenue recognition, balance sheet item classification andoutstanding share measurements. Companies are expected to follow GAAP rules when

reporting their financial data via financial statements. If a financial statement is not

prepared using GAAP principles, be very wary!

That said, keep in mind that GAAP is only a set of standards. There is plenty of room

within GAAP for unscrupulous accountants to distort figures. So, even when a company

uses GAAP, you still need to scrutinize its financial statements.

Read more: http://www.investopedia.com/terms/g/gaap.asp#ixzz1ewBnA17F

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