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What Is GAAP?
GAAP is a set of rules used for helping publicly-traded companies create their financial statements.
These rules form the groundwork on which more comprehensive, complex, and legalistic accounting
rules are based.
ACCOUNTING CONCEPTS
1. Business entity concept: A business and its owner should be treated separately as far as
their financial transactions are concerned.
2. Money measurement concept: Only business transactions that can be expressed in terms of
money are recorded in accounting, though records of other types of transactions may be
kept separately.
3. Dual aspect concept: For every credit, a corresponding debit is made. The recording of a
transaction is complete only with this dual aspect.
4. Going concern concept: In accounting, a business is expected to continue for a fairly long
time and carry out its commitments and obligations. This assumes that the business will not
be forced to stop functioning and liquidate its assets at “fire-sale” prices.
5. Cost concept: The fixed assets of a business are recorded on the basis of their original cost in
the first year of accounting. Subsequently, these assets are recorded minus depreciation. No
rise or fall in market price is taken into account. The concept applies only to fixed assets.
6. Accounting year concept: Each business chooses a specific time period to complete a cycle
of the accounting process—for example, monthly, quarterly, or annually—as per a fiscal or a
calendar year.
7. Matching concept: This principle dictates that for every entry of revenue recorded in a given
accounting period, an equal expense entry has to be recorded for correctly calculating profit
or loss in a given period.
8. Realisation concept: According to this concept, profit is recognised only when it is earned.
An advance or fee paid is not considered a profit until the goods or services have been
delivered to the buyer.
Accounting Conventions
There are four main conventions in practice in accounting: conservatism; consistency; full disclosure;
and materiality.
Conservatism is the convention by which, when two values of a transaction are available, the
lower-value transaction is recorded. By this convention, profit should never be overestimated, and
there should always be a provision for losses.
Consistency prescribes the use of the same accounting principles from one period of an
accounting cycle to the next, so that the same standards are applied to calculate profit and loss.
Materiality means that all material facts should be recorded in accounting. Accountants should
record important data and leave out insignificant information.
Full disclosure entails the revelation of all information, both favourable and detrimental to a
business enterprise, and which are of material value to creditors and debtors.
Hence, we record all the transactions related to a particular item in its account. For example, all-cash
transactions whether receipts or payments will be recorded in the Cash A/c. After this, we will
calculate the balance of Cash A/c.
The account classification applies to all the types of general ledgers. In other words, every account
will fall in one of the broad classifications given below. There are three types of accounts:
• Real Account
• Personal Account
• Nominal Account
I. Personal Accounts
2. Artificial Personal Accounts: Artificial persons are not human beings but can act and work
like humans. They have a separate identity in the eyes of law and are capable to enter into
agreements. These include H.U.F, partnership firms, insurance companies, co-operative
societies, companies, municipal corporations, hospitals, banks, government bodies, etc. For
example, Bank of Baroda, Oriental Insurance Co,
1. Real Accounts
2. Nominal Accounts
1. Real Accounts: These are the accounts of all the assets and liabilities of the organization. We
do not close these accounts at the end of the accounting year and appear in the Balance
Sheet. Thus, we carry forward the balances of these accounts to the next accounting year.
Therefore, we can also say that these are permanent accounts. We can further classify these
into:
2. Tangible Real Account: It consists of assets, properties or possessions that can be touched,
seen and measured. For example, Plant A/c, Furniture and Fixtures A/c, Cash A/c, etc.
3. Intangible Real Account: It consists of assets or possessions that cannot be touched, seen
and measured but possess a monetary value and thus can be purchased and sold also. For
example, Goodwill, Patents, Copyrights, etc.
4. Nominal Accounts: Nominal Accounts are the accounts relating to the expenses, losses,
incomes, and gains. These are temporary accounts and thus we need to transfer their
balances to Trading and Profit and Loss A/c at the end of the accounting year. Therefore,
these accounts have no balance to be carried forward next year as they are closed.
Personal Account:
Real Account:
Debit what comes in
Nominal Account:
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3.BRANCHES OF ACCOUNTING
In this article, we’ll cover:
• Financial accounting
• Cost accounting
• Auditing
• Management accounting
• Tax accounting
• Forensic accounting
• Fiduciary accounting
FINANCIAL ACCOUNTING
COST ACCOUNTING
Cost accounting deals with evaluating the cost of a product or service offered. It calculates the cost
by considering all factors, including manufacturing and administrative, that contribute to the output
production. The objective of cost accounting is to help the management fix the prices and control
the cost of production. It also pinpoints any wastages, leakages, and defects during manufacturing
and marketing processes.
MANAGEMENT ACCOUNTING
This branch of accounting provides information to management for better administration of the
business. It helps in making important decisions and controlling of various activities of the business.
The management can make decisions efficiently with the help of various Management Information
Systems such as Budgets, Projected Cash Flow and Fund Flow Statements, Variance Analysis reports,
Cost-Volume-Profit Analysis reports, Break-Even-Point calculations, etc.
Human Resource Accounting is the process of assigning, budgeting, and reporting the cost of human
resources incurred in an organization, including wages and salaries and training expenses.
Human Resource Accounting is the activity of knowing the cost invested for employees towards
their recruitment, training them, payment of salaries & other benefits paid and in return knowing
their contribution to organisation towards it's profitability.
AUDITING
TAX ACCOUNTING
Tax Accounting deals with taxation matters. Its functions include preparing and filing various tax
returns and dealing with their legal implications. Tax accountants help minimize tax payments and
help financial accountants prepare financials for tax reporting to various authorities.
FORENSIC ACCOUNTING
Forensic Accounting, also known as legal accounting, enables calculating damages or settling
disputes in legal matters. It involves deep investigations, carrying out recalculations to evaluate the
accounting. Such accounting techniques normally come into play when there are suspects of fraud
or mismanagement inside an entity.