• The process of recording of business
transactions is called accounting.
• The action or process of keeping
financial accounts is called

GAAP (Generally Accepted Accounting

The rules that govern accounting
are called GAAP (Generally
Accepted Accounting Principles).
GAAP (Generally Accepted
Accounting Principles):

• The common set of accounting principles,
standards and procedures.

• Combination of authoritative standards (set by
policy boards) and simply, the commonly
accepted ways.
GAAP (Generally Accepted
Accounting Principles):

• Provides a fair financial image of the company.
• Provides with different Information:
– Revenue recognition.
– Balance sheet item classification.
– Outstanding share measurements.
3 Main Categories of GAAP:
• Assets: An asset is an item of value owned by a
• Liabilities: In accounting, liabilities are obligations
of the company, to transfer something of value to
another party.
• Equity: Equity is the owner's value in an asset or
group of assets.

The GAAP principles are divided into two categories:

1. Accounting Concepts: Accounting Concepts are basic
assumptions or conditions upon which science of
accounting is based.

2. Accounting Conventions: Accounting Conventions
include those customs and traditions which are followed
up by an accountant while preparing a financial

Accounting Concept Includes:

Separate Entity Concept

 It is helpful in keeping the business affairs strictly free from the
effect of the private affairs of the proprietor(s).

 Amount invested by the proprietor is shown as “ Liability”.

 Amount paid for the personal expenses of the proprietor are shown
as drawings from the capital of the proprietor.

 Money Measurement Concept

 Only the transactions which can be recorded in terms of money
are recorded.

 This is being used so as to provide a common yardstick (i.e.
money) for measurement.
Dual Aspect Concept (IMP)

 Every business transaction has a dual affect i.e. it affects two

 This is based on accounting equation:
Liabilities = Assets.

 Owner’s equity + Outsider’s equity = Assets.

 This equation can be explained as “for every debit there is
an equivalent credit”.
Matching Concept

It is the basis for recording expenses and includes two

1. Identify all the expenses incurred during the
accounting period.

2. Measure the expenses and the match the expenses
against the revenues earned.

Revenues – Cost = Net income or Profit.

Going Concern Concept

Business would continue to operate
indefinitely in the future. Business will not
cease doing business, neither; it will sell its
assets to pay off its liabilities.

Cost Concept

Assets and liabilities should be recorded at the
historical cost i.e. costs as on acquisition.

Accounting Concepts
Accounting Period Concept

Accounting period is the span of time, at the end of which
financial statements are prepared to throw light on the
results of the operations at the end of a relevant period and
the financial position at the end of a relevant period.
Realization Concept

The Revenue principle governs two things:

1. When to record revenue
2. Amount of revenue to record

To be recognized, revenue must be:

Earned: Goods are delivered or a service is

Realized: Cash or claim to cast (credit) is received in
exchange for goods and services rendered.

Full Disclosure

Financial statements should be honestly prepared and sufficiently,
disclose information which is of material interest to proprietors,
present and potential creditors and investors.
Accounting Conventions

Only material or significant details are to be recorded leaving
the insignificant or minute details. This is done to prevent
overburdening of accounts.

that’s all for the presentation.