Generally Accepted
Accounting Principles
MMS Semester I
By Prof. Megha Hemdev
Meaning
Generally Accepted Accounting
Principles (GAAP) is the standard
framework or guidelines for financial
accounting.
It includes standards, conventions,
rules which accountants follow in
recording, summarizing transactions
and in preparation of financial
statements.
Classification of GAAP
Concepts of Accounting
Conventions of Accounting
Concepts of Accounting
Includes basic assumptions or
condition on which accounting is based
These concepts provide a foundation
for accounting process
No enterprise can prepare its financial
statements without considering these
concepts
Separate Business Entity
Business unit is separate from its
owner i.e. sole proprietor is different
from sole trading concern
Proprietor is considered the creditor of
business
Only business transactions must be
recorded
Personal transactions of the owner
must not be recorded
Money Measurement
Business transactions must be recorded in
common unit of measurement
Business transactions must be expressed in
money terms
Eg: INR in India
Hence only monetary transactions can be
recorded .
Transactions of qualitative nature even
though of great importance to business
cannot be recorded
Cost Concept
An asset is recorded in the books at
cost or price paid at the time of
purchase (Original price)
This cost will form the base for all
further accounting
Acquisition Cost relates to the past i.e.
Historical cost
Justification for Cost
Concept
This cost is objectively verifiable
Current values are difficult to
determine
Difficult to keep track of up and down
of the market price
But information based on historical cost
may not be useful to its users
Going Concern Concept
Assumption that business will continue
for a long time, it will go on and on
Also called as continuity concept
Realization/Revenue
Recognition Concept
Income is recorded only when it is
realized i.e. Either it is received or
earned
Sales revenue are considered as
recognized when sales are effected
during accounting period irrespective
of the fact whether cash is received or
not.
Accrual Concept
Income is recorded when it is earned
and expenses are recorded when it
becomes payable
All expenses and revenues related to
accounting period must be considered
irrespective of the fact the revenues
are received in cash or not or expenses
have been paid in cash or not
Dual Aspect
Every business transactions have two
effects and involves exchange of benefits
Benefit received and benefit given both
the aspects should be recorded in the
books
Also called as Double Entry System of
Book-keeping
Keeps the equation Assets = Liabilities +
Capital in balance
Matching Concept
Expenses incurred in an accounting
period should be matched with the
revenue recognized in that period
Eg: if revenue is recognized on all
goods sold during a period, cost of
those goods sold during a period
should also be charged to that period
Periodicity Concept
Life of the business is divided into
appropriate segments of time Eg: 12
months for studying the results of the
business
While life of business is considered to be
indefinite, it is necessary that the
management should review the
performance after each segment of time
It can either be a financial year or
Calendar year.
Objective Evidence Concept
All business transactions should be
evidenced and supported by documents
such as invoice, cash memos etc.
These supporting documents form the
basis of for making the books of accounts
and for their verification by auditors later.
Where there is no evidence the policy
statements of management serves as the
necessary evidence
Accounting Conventions
Customs and traditions followed by an
accountant which are followed by an
accountant while preparing financial
statements
Conservatism Convention
While recording business transactions
we have to anticipate no profit but
provide for all possible losses
Based on the policy of play safe while
writing books of accounts
Encourages making excess provision to
prevent losses
It may understate profits and overstate
liabilities
Consistency Convention
Any policy adopted for accounting
should be continuous or consistent
throughout the business and it need
not be changed generally unless and
until the circumstances change
In case of change, it should be
disclosed with a note.
Convention of Disclosure
All information significant to users of
financial information must be disclosed
either in the financial statements or in
its foot note
All information disclosed should be
relevant, reliable comparable and
understood by the concerned
authorities.
Convention of Materiality
Deals with relative importance of
accounting information
Accountants should incorporate only
that information which is material and
useful to users
Insignificant details should be ignored
