Generally Accepted Accounting

Principles - GAAP
GAAP refer to a common set of accepted accounting
principles, standards, and procedures that companies
and their accountants must follow when they compile
their financial statements.
GAAP improves the clarity of the communication of
financial information.
 Generally Accepted
Accounting Principles
(GAAP or U.S. GAAP) is the
accounting standard adopted
by the U.S. Securities and
Exchange Commission
(SEC). While the SEC
previously stated that it
intends to move from U.S.
GAAP to the International
Financial Reporting
Standards (IFRS), the latter
differ considerably from
GAAP and progress has
been slow and uncertain.
Assumptions:
 Business Entity: The business is separate from its
owners and other businesses. Revenue and expense
should be kept separate from personal Expense
 Monetary Unit: A stable currency is the unit of
record. The FASB accepts the nominal value of the U.S.
dollar as the monetary unit of record, unadjusted for
inflation.
 Periodicity: The economic activities of an enterprise
can be divided into artificial time periods.
 Going Concern: Continuation of an entity as a going
concern is presumed.
Principles:
 Historical cost principle: Companies must account for
and report the acquisition costs of assets and liabilities
rather than their fair market value.
 Revenue recognition principle: Companies should
record revenue when earned but not when received. The
flow of cash does not have any bearing on the recognition of
revenue.
 Matching principle: Expenses have to be matched with
revenues as long as it is reasonable to do so. Expenses are
recognized not when the work is performed, or when a
product is produced, but when the work or the product
actually makes its contribution to revenue.
 Full disclosure principle: The amount and kinds of
information disclosed should be decided based on trade-off
analysis as a larger amount of information costs more to
prepare and use.
Constraint :
 1. Estimates and Judgments: Certain measurements
cannot be performed completely accurately, and must
thereforeutilize conservative estimates and judgments. For
example, a company cannot fullypredict the amount of
money it will not collect from its customers, who having
purchasedgoods from it on credit, ultimately decide not to
pay. Instead, a company must make aconservative estimate
based on its past experience with bad customers.

 2. Materiality: Inclusion and disclosure of financial

transactions in financial statements hinge on theirsize and
effect on the company performing them. Note that
materiality varies acrossdifferent entities; a material
transaction (taking out a $1,000 loan) for a local
lemonadestand is likely immaterial for General Electric,
whose financial information is reported inbillions of dollars.
3. Consistency: For each company, the preparation of
financial statements must utilize measurementtechniques
and assumptions that are consistent from one period to
another. Companies can choose among several different
accounting methods to measure the monetary value of
their inventories. What matters is that a company
consistently applies the same inventory method across
different fiscal years.

4. Conservatism: Financial statements should be prepared

with a downward measurement bias. Assets and revenues
should not be overstated, while liabilities and expenses should
not be understated.
Three major financial statements
required under US GAAP are
1. Income statement
2. Balance Sheet
3. Cash flow statement
Difference between Indian and US
GAAP :
 The manner of presenting financial statements in
both is different. In Indian GAAP, these are
prepared in accordance with schedule VI of the
companies Act, 2013, whereas in US GAAP, these
are not prepared under any specific format.
 In Indian GAAP, Cash Flow statement is mandatory only
for companies whose shares are listed in stock
exchanges. Thus companies that are not listed escape
this provision. In US GAAP, it is mandatory for every
company to present its Cash Flow statement whether it
is listed in the stock exchange or not.
• Depreciation in Indian GAAP is calculated according
to rates prescribed in the Companies Act of 2013.
But in US, depreciation depends on the useful life of
the asset.

• InUS, the current portion of any long term debt is

taken as current liability, while in Indian GAAP, there
is no such requirement and hence the interest
accrued on this long term debt is not taken as
current liability.