Session

Accounting Principles
 GAAP
Generally Accepted Accounting Principles
• A widely accepted set of rules, conventions,
standards, and procedures for reporting
financial information, as established by the
Financial Accounting Standards Board.
• Rules and guidelines adopted for recording
and reporting of business transactions.
 Accounting Concepts Accounting Conventions

Separate Business Entity Full Disclosure

Going Concern Consistency

Money Measurement Conservatism

Accounting Period Materiality

Historical Cost

Matching Concept

Dual Aspect

Realization / Revenue Recognition

Accrual

Verifiable Objective
 Separate Business Entity

• This concept explains that the business is distinct from

the proprietor. Thus, the transactions of business only
are to be recorded in the books of business.

• As per the separate entity concept of accounting it

applies to all forms of business to determine the scope
of what is to be recorded or what is to be excluded
from the business books.
 Going Concern

• This concept assumes that the business has a

perpetual succession or continued existence.

• In other words, under this assumption, the

enterprise is normally viewed as a going concern
and it is not likely to be liquidated in the near
future.

• It is useful in valuation of assets and liabilities,

depreciation of fixed assets and treatment of prepaid
expenses.
 Money Measurement
• According to this concept, accounting transactions
are measured, expressed and recorded in terms of
money.

• This concept excludes those transactions or events

which cannot be expressed in terms of money.

• For example, factors such as the skill of the

supervisor, product policies, planning, employer-
employee relationship cannot be recorded in
accounts in spite of their importance to the
business.
 Accounting Period
• According to this concept, income or loss of a business
can be analysed and determined on the basis of
suitable accounting period instead of wait for a long
period, i.e, until it is liquidated.

• Being a business in continuous affairs for an indefinite

period of time, the proprietors, the shareholders and
outsiders want to know the financial position of the
concern, periodically.

• Thus, the accounting period is normally adopted for

one year. At the end of the each accounting period an
income statement and balance sheet are prepared.
 Historical Cost
• Business transactions are always recorded at the actual
cost at which they are actually undertaken.

• The basic advantage is that it avoids an arbitrary value

being attached to the transactions. Whenever an asset
is bought, it is recorded at its actual cost and the same
is used as the basis for all subsequent accounting
purposes such as charging depreciation on the use of
asset.

• For example, if a production equipment is bought for

Rs.1.50 crores, the asset will be shown at the same
value in all future periods when disclosing the original
cost.
 Matching Concept

• It is referred to as matching of expenses against

incomes. The main aim of the business concern is
to ascertain the profit periodically.

• To measure the profit for a particular period it is

essential to match accurately the costs associated
with the revenue.

• Thus, matching of costs and revenues related to a

particular period is called as Matching Concept
 Dual Aspect

• According to this concept, every business transaction

involves two aspects, namely, for every receiving of
benefit and. there is a corresponding giving of benefit.

• The dual aspect concept is the basis of the double

entry book keeping.

• Accordingly for every debit there is an equal and

corresponding credit.

• The accounting equation of the dual aspect concept is:

Capital + Liabilities = Assets
 Realization or Revenue
Recognition

• This concept speaks about recording of only those

transactions which are actually realized.

• For example Sale or Profit on sales will be taken

into account only when money is realized i.e.
either cash is received or legal ownership is
transferred.
 Accrual Concept

• Accrual concept is the most fundamental principle

of accounting which requires recording revenues
when they are earned and not when they are
received in cash, and recording expenses when
they are incurred and not when they are paid.

• The accrual concept ensures that the profit or loss

shown is on the basis of full fact relating to all
expenses and incomes
 Verifiable Objective
• Under this principle, accounting data must be verified.
In other words, documentary evidence of transactions
must be made which are capable of verification by an
independent respect.

• In the absence of such verification, the data which will

be available will neither be reliable nor be dependable,
i.e., these should be biased data.

• Verifiability and objectivity express dependability,

reliability and trustworthiness that are very useful for
the purpose of displaying the accounting data and
information to the users.
Convention of Full Disclosure
• The disclosure of all material information is one of the
important accounting conventions. According to this
conventions all accounting statements should be
honestly prepared and all facts and figures must be
disclosed therein.

• The disclosure of financial information are required

for different parties who are interested in the welfare
of that enterprise.

• The Companies Act lays down the forms of Profit and

Loss Account and Balance Sheet. Thus convention of
disclosure is required to be kept as per the
requirement of the Companies Act and
Income Tax Act.
 Convention of Consistency
• The Convention of Consistency implies that
accounting policies, procedures and methods
should remain unchanged for preparation of
financial statements from one period to another.

• Under this convention alternative improved

accounting policies are also equally acceptable.

• In order to measure the operational efficiency of a

concern, this convention allows a meaningful
comparison in the performance of different
period.
 Convention of Conservatism
• This convention is closely related to the policy of
playing safe.

• This principle is" often described as "anticipate no

profit, and provide for all possible losses." Thus,
this convention emphasize that uncertainties and
risks inherent in business transactions should be
given proper consideration.

• For example, bad and doubtful debts is made in

the books before ascertaining the profit.
 Convention of Materiality

• According to this convention consideration is

given to all material events, insignificant details
are ignored while preparing the profit and loss
account and balance sheet.

• The evaluation and decision of material or

immaterial depends upon the circumstances and
lies at the discretion of the Accountant.