Accounting principles are the guidelines set by an accounting body that every entity must follow when they are preparing their financial statements. These accounting principles are mandatory to follow for the companies that are listed on the stock exchange and for other private companies also.
The reason for this is that by following the accounting principles, company will not be able to misstate their accounts, and their financial statements are not falsified or fraudulent. This helps the investor in making a right decision and lessens the risk in the investment. The common set of accounting principles that are practiced in all the countries over the world are either GAAP (Generally Accepted Accounting Principles) or IFRS (International Financial Reporting Standards). GAAPs are usually practiced in the United States. However, IFRS is practiced almost all over the world. The countries that do not follow these accounting principles have their own standards and the companies operating in those countries are bound to follow those rules while preparing their financial statements.
For the investment purposes, it is necessary to be aware of the difference in the accounting principles in different countries. This will help the investor in understanding and comparing the financial position of the company in a better and judgmental way. It is very easy to tamper with the numbers, confuse, and mislead the investors when comparing the financial position of the overseas companies for investment. However, the problem of the varied accounting principles of the different companies does not have a huge impact on the mature markets.
A regulatory body in the country applies the accounting principles so that the statement of financial position of the company contains authentic numbers, and the investments of the investors are risk free. Before the advent of the general accounting principles, the directors of the company used to overstate the profits and understate the expenses of the company to attract the potential investors.
In 20th century, many companies eventually went towards bankruptcy due to material misstatements of the financial positions. Without the accounting principles, it was useless to even audit the accounts of the company as there were no specific rules of recording transactions and presenting information and directors, and the management of the company could counter that the data is true and fair according to their judgment.