Generally Accepted Accounting Principles (GAAP)

Accounting is based on a set of principles on which there is general agreement, not on rules that can be proved.

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Accounting Principles
Accounting Concepts
Fundamental ideas or basic assumptions underlying the theory and practice of accounting and are broad working rules for all accounting activities.

Accounting Conventions
Customs or traditions or usage or unwritten laws which are in use as a guide in the preparation of accounting reports and statements since long.

Classification of Concepts

Classification of Conventions

(i) (ii) (iii) (iv) (v)

Separate Entity Concept Going Concern Money Measurement Cost Dual Aspect or Accounting Equation (vi) Accounting Period (vii) Accrual (viii) Periodic Matching of cost & revenue (ix) Realization (x) Verification 8/28/2013

(i)

Conservatism Convention or Prudence (i) Full Disclosure (ii) Consistency (iii) Materiality

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Accounting Concepts/Assumption

Separate Entity Concept;

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Accounting Concepts/Assumption

Separate Entity Concept;

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Accounting Concepts/Assumption

Separate Entity Concept;

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Accounting Concepts/Assumption
Separate Entity Concept;

According to this concept, business should be considered to be separate entity from the proprietor and therefore the private affairs of businessman /proprietor should have strictly no effect on business. This is applicable to all types of concerns. Ex: The money invested by a proprietor in business is shown in liability side of Balance Sheet .
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Accounting Concepts/Assumption Going Concern Concept;

According to this concept, It should be assumed that the business will continue for a fairly long time to come and there will neither be intention nor the necessacity to liquidate the business. It presumes that the firm will continue in operation long enough to charge against income, the cost of fixed assets over their useful lives, to amortize over appropriate period other cost which have been deferred under the accrual or matching concept, to pay liabilities when they become due and to meet the contractual commitments.

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Accounting Concepts/Assumption Money Measurement Concept;

According to this concept, only those business events or transactions are recorded in the books of accounts which can be expressed in terms of money. Although the others like- dedicated and trusted employees who are very useful and definitely an asset to the business, but their monetary measurement is not possible so they do not take place in the books of business.

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Accounting Concepts/Assumption Cost Concept;

This concept is closely related to going concern. According to this concept- ordinarily an asset is recorded in the accounting books at the price paid to acquire it and this cost will be basis for all subsequent accounting periods. This concept has an advantage of bringing objectivity in the preparation and presentation and presentation of financial statement.

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Accounting Concepts/Assumption Dual Aspect Concept;

According to this concept, There are two aspects of the transactions. i.e. For every debit there is an equal credit. Thus every business transaction has dual effect. As a matter of fact entire system of double entry book keeping is based on this concept.

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Accounting Concepts/Assumption
Accounting Period Concept;

As the life of business is considered to be fairly long enough i.e. indefinite, therefore its results of income and financial position after that uncertain period would not be helpful in taking corrective measures. So, the life of business is segmented for studying the results into uniform artificial periodic intervals at which income and position statements are prepared. Thus, it is based on STOP and SEE BACK How the things are going?

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Accounting Concepts/Assumption
Periodic Matching of Costs and Revenue Concept;

According to this concept the income made by the business during a particular period to achieve the paramount objective of earning profit can be measured only when the revenue earned during that period is compared with the expenditure incurred. On account of this concept necessary adjustments are made for all outstanding expenses, accrued incomes, prepaid expenses and unearned incomes etc. While preparing the final accounts at the end of accounting period.

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Accounting Concepts/Assumption
Realization Concept;
According to this concept, revenue is recognized when a sale is made. Sale is considered to be made at the point when goods passes to the buyer and he becomes liable to pay for it. Exceptions- Hire purchase and contract account.

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Accounting Concepts/Assumption Accrual Concept;

According to this concept The effects of transaction and other events are recognized when they occur or become accrued. An expenditure of current year even not paid in cash, will be taken into consideration for calculating P/L- a/c, but any expenditure related to next year, paid in cash, will not be included. The same thing is related to income /revenue. Therefore the accounts can not be maintained on cash basis but on accrual basis.

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Accounting Concepts/Assumption
Verification Concept;

According to this concept, the subject matter of accounting should be verified by an outsider certified person i.e. Chartered Accountant, for the relevance of accounts particularly where the business is managed by managers other than owners and no. of transactions are very large.

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Accounting Conventions
Conservatism Convention ;

Anticipate no profit but provide for all possible losses i.e. PLAY SAFE.
According to this conventionThis is an amendment to the cost concept and principally affects the current assets.

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Accounting Conventions
Full Disclosure Convention;

According to this convention, accounting reports should disclose fully and fairly the information they purport to represent. They should be honestly prepared and sufficiently disclose the information which is of material interest to proprietors, to present and potential creditors and to investors. This is gaining more importance because most of the big businesses are run by joint stock companies and management lies in the hands of managers who are not owners. The companies act 1956, also requires that the income statement and balance sheet should give a true and fair view of the state of affairs in prescribed forms provided by it.
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Accounting Conventions
Consistency Convention;

According to this convention, accounting practices should remain unchanged from one period to another so that comparison between two periods can be made. It does not refuse to introduce new accounting improved techniques but if adoption of such a techniques results in inflating or deflating the figures of profits as compared to previous year, a note to that effect should be given in the financial statements. Exp. If stock is valued at cost or market value whichever is less similarly if depreciation is charged on fixed assets written down value method, the same should be charged year after year.

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Accounting Conventions
Materiality Convention;

This principle is basically to the full disclosure principle, since the full disclosure principle requires that all facts necessary to make financial statements( not misleading) must be disclosed, whereas this convention requires that the items or events having an insignificant economic effect or not being relevant to the user need not be disclosed but only that which might influence the decision of the users. For Ex. While sending each debtor a statement of his account, complete details up to paise have to be given. However, when a statement of outstanding debtors is prepared for sending to the top management, figures may be rounded off to the nearest ten or hundred. The companies act permits ignoring of Paise while preparing financial statements. Similarly for tax purposes, income has to be rounded off to the nearest ten.
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