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GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
Contents of the Lecture
 Meaning of GAAP
 GAAP
 Accounting Standards
Generally Accepted Accounting
Principles
 GAAP are the body of doctrines
commonly associated with the theory
and procedure of accounting serving
as an explanation of current
practices and as guide for selection
of conventions and procedures where
alternatives exist.
GAAP
 According to American Institute of
Certified Public Accountants (AICPA),
the principles which have substantial
authoritative support become a part
of Generally Accepted Accounting
Principles
AS-1 Disclosure of Accounting
Policies
According to AS-1 issued by ICAI, the
‘Fundamental Accounting
Assumptions’ while drafting accounts
of a business enterprise are:
 Going Concern,

 Matching (or Accrual)

 Consistency.
AS-1 Disclosure of Accounting
Policies
Considerations in selection of
Accounting Policies are:
 Prudence

 Substance over Form

 Materiality
GAAP
The GAAP includes the following concepts:
1. Accounting Entity
2. Money Measurement
3. Going Concern
4. Accounting Period
5. Cost
6. Revenue Recognition (or Realization)
7. Matching (or Accrual)
8. Dual Aspect
GAAP contd…….
9. Full, Fair and Adequate Disclosure
10. Verifiable Objectivity
11. Materiality
12. Consistency
13. Conservatism (or Prudence)
14. Timeliness
15. Industry Practices
16. Substance over Form
Accounting Entity
 A business is treated as a separate entity
that is distinct from its owner(s), and all
other economic proprietors.
 For example, if the household expenses
(Rs.12,000/-) of proprietor are shown as
business expense, the profits of a
business will be understated to the
extent of Rs.12,000/-.
Money Measurement
 Only those transactions which are
capable of being expressed in term
of money are included in the
accounting records.
 For e.g., entrance of a new
competitor in the market, rift
between production and marketing
department, ill health of the
managing director etc.
Going Concern
 The business activities will continue
for a fairly long period of time unless
and until the business has entered
into a process of liquidation.
 It does not imply permanent
existence but simply stability and
continuity for a period sufficient to
carry business plans.
Accounting Period
 The economic life of an enterprise is
artificially split into periodic intervals
which are accounting periods, at the end
of which an income statement and position
statement are prepared to show the
performance and financial position.
 The use of this assumption further
requires the allocation of expenses
between capital and revenue.
Cost Principle
 An asset is ordinarily recorded in the
accounting records at the price paid
to acquire it at the time of its
acquisition and the cost becomes the
basis for the accounts during the
period of acquisition and subsequent
accounting periods.
Revenue Recognition (or
Realization)
 Revenue is considered as realized or
earned on the date when the sale
process is complete and transfer of
title or ownership takes place
 Revenue results in increase in
owner’s equity. It has nothing to do
with inflow of cash. Goods can be
sold for cash or on credit.
Matching (or Accrual)
 The expenses incurred in an
accounting period should be matched
with the revenues recognized in that
period, that is, if revenue is
recognized on all goods sold during a
period, cost of those goods sold
should also be charged to that
period.
Dual Aspect
 The entry made for each transaction is
composed of two parts – one for debit and
another for credit. Every debit has equal
amount of credit. So, the total of all debits must
be equal to the total of all credits
 Sum of assets on one hand and sum of
obligations on other hand must agree. Identity
of assets and obligations (capital and liabilities)
is expressed in the form of a basic Accounting
Equation as given below:
Assets = Capital + Liabilities
Full, Fair and Adequate
Disclosure
 Full disclosure essentially means that
nothing is omitted.
 Fair Disclosure means that the accounting
principles have been applied in a fair
manner so as to report the true and fair
view of the results of the business.
 Adequacy is a qualification which ensures
that anything which influences the
decision of the user must always be
reported.
Verifiable Objectivity
 Accounting records are based on
documentary evidence which can be
verified objectively and substantiates
the recorded event
 Source documents such as sales bill,
purchase bill, pay in slip, cash memo
etc. ensure objective recording of
business transactions.
Materiality
 Materiality requires that accounting
should focus on material facts and
resources should not be wasted in
recording and analyzing immaterial
and insignificant fact.
Consistency
 Whatever accounting practices are
selected for a given category of
transactions, they should be followed on a
horizontal basis from one accounting
period to another to achieve compatibility
 However, it does not mean lack of
flexibility. It does not prelude desirable
changes in accounting procedures.
Conservatism (or Prudence)
 ‘anticipate no profit but provide for
all probable losses’
 In the situation of uncertainty and
doubt, the business transactions
should be recorded in such a manner
that the profits and assets are not
overstated and the losses and
liabilities are not understated.
Timeliness
 Financial reports must be timely to
have any usefulness for decision
makers.
 If the quarterly reports are made
available on half-yearly basis, the
information contained in the
quarterly report would not be very
useful to the decision makers
Industry Practices
 Sometimes, practice prevailing in a
particular industry is given
precedence over generally accepted
accounting principles
 Example is valuation of gold on the
basis of market price
Substance over Form
 Transactions and other events should
be accounted for and presented in
accordance with their substance and
financial reality and not merely with
their legal form
ACCOUNTING STANDARDS
 An Accounting Standard is a selected
set of accounting policies or broad
guidelines regarding the principles
and methods to be chosen out of
several alternatives
 Accounting Standards are formulated
with a view to harmonise different
accounting policies and practices in a
country.
Objective of AS
 The objective of Accounting Standard is to
reduce the accounting alternatives in the
preparation of financial statements within
the bounds of rationality, thereby ensuring
comparability of financial statements of
different enterprises with a view to provide
meaningful information to various users of
financial statements to enable them to
make informed economic decisions.
International Harmonization of
Accounting Standards
 International Accounting Standards
Committee (IASC) was set up in
1973
 IASC is renamed as International
Accounting Standards Board (IASB)
 ICAI being a member body of IASC,
constituted the Accounting Standards
Board (ASB) on 21st April, 1977
 The ASB gives due consideration to
International Financial Reporting
Standards (IFRSs) / International
Accounting Standards (IASs) issued
by IASB and tries to integrate them,
to the extent possible, in the light of
conditions and practices prevailing
in the country.

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