Chapter 2

Accounting Concepts

By Miss Saira Baloch

 Generally Accepted Accounting
Principles GAAP
•These are the collection of commonly-followed
accounting rules and standards for financial reporting
•GAAP must be followed when a company prepares
and distributes its financial statements outside of the
company
•These are set by Financial Accounting Standard
Board and Security and Exchange Commission SEC.
These are as follows:

.
 Business Entity Principle
• It states that the accounting for a business or
organization should be kept separate from the
personal affairs of its owner, or from any other
business or organization.
•Business is an entity separate from the owner
 Reliability/Objectivity Principle

•The objectivity principle states that accounting

will be recorded on the basis of objective
evidence
•Accounting entries will be based on fact and not
on personal opinion or feelings.
 Going Concern Principle

•This principle assumes that a company will

continue to exist long enough to carry out its
objectives.

•The going concern principle allows the

company to delay its payments for future.
 Cost Principle
• The term "cost" refers to the amount spent
when an item was originally obtained
• The amounts shown on financial statements are
referred to as historical cost amounts.
•The cost principle states that the accounting for
purchases must be at their cost price and not at
market price.
 Monetary Unit Assumption
•Economic activity is measured in U.S. dollars,
and only transactions that can be expressed in
U.S. dollars are recorded.
•Because of this principle, it is assumed that the
dollar's purchasing power has not changed over
time as a result accountants ignore the effect of
inflation on recorded amounts
 Ethics in Accounting
•Ethics is the set of moral values or principles
•Ethics in accounting is the study of moral
values and judgments applied to accountancy.
•Accountants have a responsibility towards
public, customers and colleagues that includes
honorable behavior.
•Following are the ethical principles
accounting professionals must
follow:
 Ethics in Accounting Cont….
•Integrity : To be straightforward and honest in all
professional and business relationships
•Objectivity: To not allow biasness or influence of
others in making business judgments
•Professional competence and due care: To maintain
required level of professional knowledge and skills
•Confidentiality : To maintain and respect the
secrecy of information
• Professional behavior - To comply with relevant
laws and regulations and avoid any action that
damages the reputation of the profession.