PART 05: FINANCIAL ACCOUNTING

 

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FINANCIAL ACCOUNTING

PART 05

 

Generally Accepted Accounting Principle

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Generally Accepted Accounting Principles (GAAP) 

• Rules and guidelines used in preparing accounting reports

• Developed on the basis of globally accepted accounting standard

• To bring uniformity in the preparation and presentation of financial statements.

GAAP 

 

1. Accounting Assumptions 

 

2. Accounting Principles 

 

3. Modifying Principles 

 

4. Accounting Standard

Accounting Principles

 
1. Dual Aspect Concept:

This is the basic principle of accounting.
 

According to this concept, every business transaction has two aspects – giving aspect (Credit - Cr.) and a receiving aspect (Debit - Dr.).
 

The duality principle is commonly expressed in terms of fundamental accounting equation,
 

Asset = Liabilities + Capital

 

 

2. Objectivity or Verifiability Concept:

 
Accounting transactions should be recorded in an objective manner.
 

So that, it is free from bias of accountants and others.
 

This can be possible when each transaction is supported by verifiable documents or vouchers.
 

3. Cost Concept (Historical cost):

 
Assets are to be recorded in the books of accounts at their purchase price and not at the market price

4. Revenue Recognition (Realization) Concept:
 

Revenue is recorded at the time when the title of goods passes from seller to buyer.
 

Unearned or unrealized revenue should not taken into account
 

5. Matching Concept:
 

The expenses incurred during the accounting period are matched with the revenues earned during the same period.
 

6. Full Disclosure Concept:

 
All material and relevant facts concerning financial performance of an enterprise must be fully and completely disclosed in the financial statements

 

Modifying Principles

 
1. Consistency Concept:

 
The accounting methods or practices adopted in the organization should be consistently applied year after year.
 

This facilitates the inter-firm as well as intra-firm comparison.
 

2. Conservatism Concept (Prudence):

 
The profits should not be recorded until realized but all losses, even those which may have a remote possibility, are to be provided for in the books of accounts
 

3. Materiality Concept:

 
The concept of materiality requires that in accounting we should focus on material facts

4. Timeliness Concept:

 
Accounting information should be made available in time
 

5. Substance over form and legality:

 
Substance over form is an accounting concept which means that the economic substance of transactions and events must be recorded in the financial statements rather than just their legal form
 

6. Variation in Accounting Practice:

 
Certain industries may deviate from GAAP

 

 

Accounting Standards

 
Institute of Chartered Accounts of India (ICAI) constituted an Accounting Standard Boards (ASB) in April 1977 for developing accounting standards. Accounting standards are certain set of rules and guidelines based on the principles and methods of accounting to be followed for the presentation of
financial statements 

 

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