Basic Accounting Concepts &

Principles

Financial Accounting J S Matharu

 GAAP
 GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES

 Ground rules which define the

parameters and constraints within
which accounting reports are
generated.

Financial Accounting J S Matharu

 GAAP
 It is a combination of authoritative
standards set by policy boards and
the accepted ways of doing
accounting

 In India, it is set by the Accounting

Standards Board (ASB) of the
Institute of Chartered Accountants of
India (ICAI) Financial Accounting J S Matharu
 Accounting Concepts /
Conventions
 Business Entity
Business Entity
 Separate Existence
 Distinct Legal Identity

 Going Concern
 Life of infinite duration
 Profits measured for accounting periods as a
segment of infinite life

 Periodicity concept
 One year period is taken up for measuring
performance and appraisal of financial position

Financial Accounting J S Matharu

 Accounting Concepts /
Conventions
 Money Measurement
 Money is common denominator
 Helps in aggregation and summarisation

 Human resources are assets but not

recorded

 Matching
 Matching of income with expenses of the
same period

Financial Accounting J S Matharu

 Accounting Concepts /
Conventions
 Cost concept
 Generally all transactions recorded at
cost and not market value

 Realisation
 Change in value of an asset is recorded
only when business realises it

Financial Accounting J S Matharu

 Accounting Concepts /
Conventions
 Conservatism
 Selecting the method of measurement which
yields the gloomiest immediate results
 Anticipate no immediate gains but provide

for all possible losses

 If in doubt, write it off

 Lower of cost or market price

Financial Accounting J S Matharu

 Accounting Concepts /
Conventions
 Materiality
 Trivial assets of small value may be written
off as expenses

 Accrual
 Income is recognised when the right to
receive cash arises without waiting for
actual receipt
 Expenditure is recognised when the

obligation to pay cash arises without waiting

for actual Financial
payment Accounting J S Matharu
 Accounting Concepts /
Conventions
 Consistency
 Similar treatment of transaction e.g.
depreciation methods, inventory valuation
etc.
 Changes can be made but should be

disclosed with their effects

 Dual Aspect
 Every transaction has two aspects
 E.g. increase in one asset & decrease in

another
 E.g. increase in one asset increases a

liability Financial Accounting J S Matharu

 Qualitative Characteristics of
Financial Statements
 Understandability
 Structured presentation
 Adequate disclosure
 Relevance
 Helping to evaluate past, present and
future events
 Helping to confirm or correct the past
evaluations
Financial Accounting J S Matharu
 Qualitative Characteristics
of Financial Statements
 Reliability
 Faithful representation according to
GAAP
 Free from material error or bias
 Transactions to be presented according
to economic substance and not legal
form
 Prudence i.e. allowing understatement
of profits under uncertainty but cannot
be willful
 Transparency (more information like
segment reporting)
Financial Accounting J S Matharu
 Qualitative Characteristics of
Financial Statements
 Comparability
 Consistency
 Disclosure regarding policies
 Corresponding information for the
preceding periods

Financial Accounting J S Matharu

 True and fair view
 Financial statements must meet the
minimum threshold of all qualities
mentioned before. If so, they give a true
and fair view of the financial statements

 An adequate and effective internal control

system helps to ensure that financial
statements are free from any material
error or bias

Financial Accounting J S Matharu

 True and fair view
 Internal audit helps to identify
weaknesses of the internal control
system. It is carried out by internal
staff.

 External Audit is audit of financial

statements by external auditors. They
provide reasonable assurance that the
statements provide true and fair view
of the financial position and operating
results
Financial Accounting J S Matharu
 Accounting Standards
 They codify acceptable accounting
practices

 They suggest the rules for

recognition, measurement,
treatment, presentation and
disclosure of accounting transactions
in the financial statements of an
organisation.
Financial Accounting J S Matharu
 Importance of Accounting
Standards in India
 Accounting Standards (AS) in India are
legislated by the Companies Act, 1956 and
so have the weight of law.
 The balance sheet and the P & L Account
should be prepared as per the AS
 The Directors and the Auditors should
mention that the annual accounts have
been prepared as per the AS

Financial Accounting J S Matharu

 List of existing AS issued by
ICAI
 AS 1 Disclosure of Accounting Policies
 AS 2 Valuation of Inventories
 AS 3 Cash Flow Statements
 AS 4 Contingencies and Events Occurring after
the Balance Sheet Date
 AS 5 Net Profit or Loss for the period, Prior Period
Items and Changes in Accounting Policies
 AS 6 Depreciation Accounting
 AS 7 Construction Contracts (revised 2002)
 AS 8 Accounting for Research and Development
 AS 9 Revenue Recognition
 AS 10 Accounting for Fixed Assets

Financial Accounting J S Matharu

 List of existing AS issued by
 ICAI in Foreign
AS 11 The Effects of Changes
Exchange Rates (revised 2003),
 AS 12 Accounting for Government Grants
 AS 13 Accounting for Investments
 AS 14 Accounting for Amalgamations
 AS 15 (revised 2005) Employee Benefits including
treatment of Retirement Benefits
 AS 16 Borrowing Costs
 AS 17 Segment Reporting
 AS 18 Related Party Disclosures
 AS 19 Leases
 AS 20 Earnings Per Share

Financial Accounting J S Matharu

 List of existing AS issued by
ICAI
 AS 21 Consolidated Financial Statements
 AS 22 Accounting for Taxes on Income.
 AS 23 Accounting for Investments in Associates in
Consolidated Financial Statements
 AS 24 Discontinuing Operations
 AS 25 Interim Financial Reporting
 AS 26 Intangible Assets
 AS 27 Financial Reporting of Interests in Joint Ventures
 AS 28 Impairment of Assets
 AS 29 Provisions, Contingent Liabilities and Contingent
Assets
 AS 30 Financial Instruments: Recognition and
Measurement and Limited Revisions to AS 2, AS 11
(revised 2003), AS 21, AS 23, AS 26, AS 27, AS 28
and AS 29
 AS 31, Financial Instruments: Presentation
Financial Accounting J S Matharu