MEANING AND NATURE OF

ACCOUNTING PRINCIPLE

VEENA MADAAN
M.B.A (Finance)
MEANING OF GAAP
 Generally Accepted Accounting principles:
 Principles of accounting are the general law or rule
adopted or proposed as a guide to action, a settled
ground or basis of conduct or practice
 According to American Institute of Certified Public
Accountants(AICPA): GAAP have substantial
authoritative support and general acceptability. GAAP
must be relevant (meaningful), objective (reliable) and
feasible(implemented without much cost and
complexity)
Classification of Accounting
Principles
Accounting Accounting
Concepts Convention
 Accounting Concepts
Accounting concepts are basic assumptions or
fundamental propositions with in which
accounting operates. They are generally
accepted accounting rules based on which
transactions are recorded and financial
statements are prepared. It is important to
follow the accounting concept because it
enables the user of financial statements to
understand them better and in the same
manner
Accounting Conventions

Accounting conventions are the outcome

of accounting practices or principles
being followed by the enterprise over a
period of time conventions may undergo
a change with time to bring about
improvement in the quality of accounting
information.
Accounting Concepts
Going Concern Assumption
Consistency Assumption
Accrual Assumption
Accounting Principles
Accounting Entity/Business Entity
Money Measurement.
Accounting Period Principle.
Full Disclosure Principle.
Materiality Principle.
Prudence / Conservative Principle.
Cost Concept /Historical Cost Principle.
Matching Concept / Matching Principle
 Revenue Recognition Concept.
 Verifiable Objective concept.
 Dual Aspect / Duality Principle.
Consistency Assumption
Once selected and adopted, should be
applied consistently year after year. The
concept helps in better understanding of
accounting information and makes it
comparable with that of previous years.
Going concern Assumption
It is assumed that business shall
continue for a foreseeable period and
there is no intention to close the
business or scale down its operations
significantly. This implies that it will not
be dissolved in the immediate future
unless there is clear evidence of closure
Accrual Assumption
A transaction is recorded in the book of
accounts at the time when it is entered
information and not when the settlement
take place.Thus, revenue is recognised
when it is realised, i.e., when sale is
complete or services are rendered; it is
immaterial whether cash is received or
not.
Accounting Entity or
Business Entity Principle
According to this principle business is
considered to be separate and distinct from its
owners. Business transactions ,therefore, are
recorded in the book of accounts from the
business point of view and not from that of the
owners . Owners being regarded as separate
and distinct from business they are considered
creditors of the business to the extent of their
capital.
 Money measurement
Principle
The money measurement principle transaction
and events that can be measured in money
term are recorded in the book of account of
the enterprise.
The principle suffers from two major limitation:
a) Transaction and events that cannot be
measured in money term are not recorded in
the book of account.
b). The value of money is considered to have
static value as the transaction are recorded at
the value as the transaction date.
 Accounting Period
Principle
The life of an enterprise is broken in to smaller
period so that its performance is measured at
regular intervals. According to the companies
act and banking regulation Act, accounting
period should consist of twelve months. The
period of twelve month is regarded as ideal
and convenient period for accounting.
accounting period facilitates the business in
assessing its worth after a year
Full Disclosure Principle
“There should be complete and
understandable reporting on the financial
statement of all significant information relating
to the economic affairs of the entity”A part
from legal requirements good accounting
practice require all material and significant
information should be disclosed whether
information should be disclosed or not always
depends on materiality of the information.
Materiality Principle
The materiality Principle refers to the relative
importance of an item or an event acc to the
American accounting association “an item
should be regarded as material if there is a
reason to believe that knowledge of it would
influence the decision of an informed investor".
Thus, whether an item is material or not will
depend on its nature and/or amount.
 Cost concept or
Historical Cost principle
An assets is recorded in the books of accounts
at the price paid to acquire it and the cost is
the basis for all subsequent accounting of
asset. Asset is recorded at cost at the time of
its purchase but is systematically reduced in
value by charging depreciation. The market
value of an asset may change with the
passage of time but for accounting purpose it
continues to be shown in the books of
accounts at it book value.
Prudence or conservative
Principle
It takes in to consideration all prospective
losses but not the prospective profits. The
application of this concept ensure that the
financial statements present a realistic picture
of the state of affairs of the enterprise and do
not paint a better picture than what it actually
is the concept of conservatism needs to be
applied with more caution and care so that the
results reported are not distorted.
Verifiable Objective
Concept
The verifiable objective concept holds
that accounting should be free from
personal bias. Measurement that are
based on verifiable evidence are
regarded an objective. It means all
accounting transaction should be
evidenced and supported by business
document.
 Revenue recognition
Concept
Revenue is considered to have been realised
when a transaction has been entered in to an
obligation to receive the amount has been
established. It is to be noted that recognising
revenue and receipt of an amount are two
separate aspect .
E.g.: An enterprise sell goods in Feb. 2013 &
receives the amount in April 2013. revenue of
this sales should be recognised in Feb. 2013
when the are sold
Matching Concept or
matching Principle
It is important to match „ revenues‟ of
period with the „expenses‟ of that period
to determine correct profit(or loss)for the
accounting period.
Dual Aspect or Duality
Principle
 Every business transaction has double effect . There
are two sides of every transaction. This is evident
when we study the accounting term i.e., assets, capital
and liabilities.
 Assets: These are the valuable articles owned by the
business.
 Capital: it is the proprietor‟s claim against the assets of
the business and the cash is the asset of the business
itself
 Capital=Assets
Liabilities: capital invested by the proprietor
falls short so the business has to borrow
funds and thus the loan on side of the
liability of the firm and on the other side it
will be in the form of cash or other assets.
Capital+ liabilities= asset
or
Asset = Capital +Liabilities
or
Capital = Assets – Liabilities
or
Liabilities= Asset - capital
 THANKYOU

Download A Hand Full Of Money And Holding A Tree Royalty Free Stock
Images - Image: 21217329