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Generally Accepted Accounting Principles: Accounting Concepts and Conventions

Generally Accepted Accounting Principles (GAAP) include accounting concepts and conventions that guide the recording of financial transactions and reporting of financial information. The key accounting concepts are separate entity, going concern, money measurement, historical cost, verifiable evidence, dual aspect, periodicity, realization, accrual, and matching. Accounting conventions include full disclosure, consistency, conservatism, and materiality. Modifying conventions allow flexibility in applying GAAP based on industry practices, substance over form, and use of judgment.

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125 views

Generally Accepted Accounting Principles: Accounting Concepts and Conventions

Generally Accepted Accounting Principles (GAAP) include accounting concepts and conventions that guide the recording of financial transactions and reporting of financial information. The key accounting concepts are separate entity, going concern, money measurement, historical cost, verifiable evidence, dual aspect, periodicity, realization, accrual, and matching. Accounting conventions include full disclosure, consistency, conservatism, and materiality. Modifying conventions allow flexibility in applying GAAP based on industry practices, substance over form, and use of judgment.

Uploaded by

deolavinash
Copyright
© Attribution Non-Commercial (BY-NC)
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Generally Accepted

Accounting Principles
Accounting Concepts and
Conventions
Accounting Principles
Accounting principles may be defined as the
rules or general guidelines adopted by the
accountant universally while recording
accounting transactions. These are also named
as Generally accepted accounting principles
(GAAP) are classified into two categories:
 Accounting Concepts
 Accounting Conventions
Accounting Concepts
 1. Separate Entity Assumption
 Business is treated as a separate entity
distinct from its owner
 Economic activity of an entity must be kept
separate from other personal or business
entities. So even the proprietor is the
creditor of the business to the extent of his
capital.
Accounting Concepts

 2. Going Concern – Continuity


Assumption
 There is an assumption that the life of an
entity will be long enough to fulfill its
financial and legal obligations.
 Implications are:
Assets are classified as current assets & fixed
assets and liabilities are classified as short term &
long term liabilities.
Accounting Concepts
 3. Money Measurement
 All financial reports are based on the
monetary unit of the firm’s home country.
 Only those transactions which are capable
of being expressed in terms of money are
included in the accounting records.
 Adjustments for inflationary trends are not
shown in the financial statements of the
entity.
Accounting Concepts
 4. Historical Cost
 Cost is the proper basis for the recording
of assets, expenses, equity, etc.
 All the assets are recorded at the price
paid for acquiring it.
 It has the limitation that it ignores the
excessive inflation in the economy.
Accounting Concepts
 5. Verifiable and Objective Evidence
 Accounting records should be definite,
verifiable and free from personal bias of the
accountant.
 Each recorded transaction/event should have an adequate
evidence to support it.
 Underlying verifiability must exist for the
information contained in the financials.
 The historical cost must be verifiable through legitimate
proof of purchase.
Accounting Concepts

 6. Dual Aspect Concept


 Every transaction has dual aspect i.e.
double effect one is debit and the other is
credit.
 For every debit, there is a credit. For
instance if Mr. A starts business with Rs.
10,000, it will have double effect.
 Debit– Cash and Credit– Capital
Accounting Concepts
 7. Periodicity – Accounting Period
Assumption
 The life of an entity is divided into short
economic time periods on which reporting
statements are fashioned.
 At the end of each accounting period an
income statement and position statement
are prepared to show the performance and
financial position.
Accounting Concepts
 8. Realisation Concept
 Revenue from any business transaction
should be included in accounting records
only when it is realised.
 Persuasive evidence of an arrangement exists.
 Delivery has occurred or services have been
rendered
 The seller’s price to the buyer is fixed
 Collectability is reasonably assured
Accounting Concepts
 9. Accrual Concept
 Accrue means to become due especially
an amount of money.
 The concept recognizes the revenues and
expenses as and when they occur not
when its is actually gets collected and paid
respectively.
Accounting Concepts

 10. The Matching Concept


 Requires that revenue and expenses
related to generating the corresponding
revenue be recorded in the same period.
 As a sale is made, the appropriate
charges for COGS or other expenses
should be consistent from one accounting
period to the next.
Accounting Conventions

 1. Full Disclosure
 The financial statements of a firm should
act as means of conveying and not
concealing.
 These must disclose all the relevant &
reliable information necessary for the
formation of valid decisions by the users.
Accounting Conventions
 2. Consistency
 Firms must employ consistent accounting
procedures from period to period.
 Variations or changes in accounting policy
and procedures must be justifiable.
 Standards used to value inventory,
depreciate assets, or accrue expenses
must be consistent from one accounting
period to the next.
Accounting Conventions
 3. Conservatism
 The principle of “anticipate no profit but
provide for all probable losses’ should be
applied.
 It requires that in situation of uncertainty &
doubt, the business transactions should be
recorded in such a manner that the profits
and assets are not overstated and the
losses & liabilities are not understated.
Accounting Conventions

 4. Materiality
 The amount of an item is material if its
omission would affect the judgment of a
reasonable person who is relying on the
financial statements.
 Material details must be given due
consideration whereas trivial items should
be ignored.
Departures from GAAP
Modifying Conventions
Variations from GAAP are sometimes
required. The following modifying
conventions give guidance and must be
considered when departing from what is
generally acceptable.
Modifying Conventions

 1. Industry Practices & Peculiarities


The peculiarities and practices of an industry
(such as banking, investment, insurance etc)
may warrant selective exceptions to
accounting principles . Some differences in
accounting also occur in response to legal
requirements.
Modifying Conventions

 2. Substance over form


The economic substance of a transaction
determines the accounting treatment, even
when the legal aspects of the transaction
indicate otherwise.
Example : lease contract
Modifying Conventions

 3. Application of Judgment
An accountant may depart from GAAP if the
results of departure appear reasonable
under the circumstances, especially when
the strict adherence to GAAP will produce
unreasonable results.

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