GAAP

Business Entity Concept This concept provides that the accounting for a business or organisation be kept separate from the personal affairs of its owner , or from any other business or organisation. This means that the owner of a business should not place its personal assets on the business balance sheet or any other personal expenses. E.g - Mr. X has three rooms in a house he has rented for $3,000 per month. He has set up a single-member accounting practice and uses one room for the purpose. Under the business entity concept, only 1/3 of the rent or $1,000 should be charged to business, because the other two rooms or $2,000 worth of rent are expended for personal purposes. Dual Aspect Concept Dual aspect concept means Double entry book keeping system. This means that there are two aspects of accounting one is in the assets of the business and other represented by the claims against them. E.g Assets = Liabilities + Capital Debit = Credit , Shareholders equity + Liab = Assets. Shareholders equity = Sh. Capital + Retained Earnings. Going Concern/Continuation Concept The accountant assumes that the business will go on for a long period of time and will not be wound up in the foreseeable future. A bank is in serious financial troubles and the government is not willing to bail it out. The Board of Directors has passed a resolution to liquidate the business. The bank is not a going concern. An oil and gas firm operating in Nigeria is stopped by a Nigerian court from carrying out operations in Nigeria. The firm is not a going concern in Nigeria, because it has to shut down. Accounting Period concept Companies act makes it statutory to close their accounts get them audited and report to the shareholders once in a year. Money Measurement Concept The items or transactions which are measured in terms of money will be recorded in financial statements.

E.g Skill and competency of employees cannot be attributed an objective monetary value and therefore should not be recorded in the balance sheet. Cost concept The cost principle states that the accounting purchases must be at their cost price . There are times when the above type of objective evidence is not available. For example, a building could be received as a gift. In such a case, the transaction would be recorded at fair market value which must be determined by some independent means. Matching Principle - Matching Principle requires that expenses incurred by an organization must be charged to the income statement in the accounting period in which the revenue, to which those expenses relate, is earned. Prior to the application of the matching principle, expenses were charged to the income statement in the accounting period in which they were paid irrespective of whether they relate to the revenue earned during that period. This resulted in non recognition of expenses incurred but not paid for during an accounting period (i.e. accrued expenses) and the charge to income statement of expenses paid in respect of future periods (i.e. prepaid expenses). Application of matching principle results in the deferral of prepaid expenses in order to match them with the revenue earned in future periods. Similarly, accrued expenses are charged in the income statement in which they are incurred to match them with the current period's revenue. A major development from the application of matching principle is the use of depreciation in the accounting for non-current assets. Depreciation results in a systematic charge of the cost of a fixed asset to the income statement over several accounting periods spanning the asset's useful life during which it is expected to generate economic benefits for the entity. Depreciation ensures that the cost of fixed assets is not charged to the profit & loss at once but is 'matched' against economic benefits (revenue or cost savings) earned from the asset's use over several accounting periods. Matching principle therefore results in the presentation of a more balanced and consistent view of the financial performance of an organization than would result from the use of cash basis of accounting. The consistency Principle - The consistency principle requires accountants to apply the same methods and procedures from period to period. When they change a method from one period to another they must explain the change clearly on the financial statements. The readers of financial statements have the right to assume that consistency has been applied if there is no statement to the contrary. The consistency principle prevents people from changing methods for the sole purpose of manipulating figures on the financial statements.

The Materiality Concept - The materiality principle requires accountants to use generally accepted accounting principles except when to do so would be expensive or difficult, and where it makes no real difference if the rules are ignored. If a rule is temporarily ignored, the net income of the company must not be significantly affected, nor should the reader's ability to judge the financial statements be impaired. The Full Disclosure Principle - The full disclosure principle states that any and all information that affects the full understanding of a company's financial statements must be include with the financial statements. Some items may not affect the ledger accounts directly. These would be included in the form of accompanying notes. Examples of such items are outstanding lawsuits, tax disputes, and company takeovers. The Principle of Conservatism - The principle of conservatism provides that accounting for a business should be fair and reasonable. Accountants are required in their work to make evaluations and estimates, to deliver opinions, and to select procedures. They should do so in a way that neither overstates nor understates the affairs of the business or the results of operation. The Objectivity Principle - The objectivity principle states that accounting will be recorded on the basis of objective evidence. Objective evidence means that different people looking at the evidence will arrive at the same values for the transaction. Simply put, this means that accounting entries will be based on fact and not on personal opinion or feelings. The source document for a transaction is almost always the best objective evidence available. The source document shows the amount agreed to by the buyer and the seller, who are usually independent and unrelated to each other. The Time Period Concept - The time period concept provides that accounting take place over specific time periods known as fiscal periods. These fiscal periods are of equal length, and are used when measuring the financial progress of a business. The Revenue Recognition Convention - The revenue recognition convention provides that revenue be taken into the accounts (recognized) at the time the transaction is completed. Usually, this just means recording revenue when the bill for it is sent to the customer. If it is a cash transaction, the revenue is recorded when the sale is completed and the cash received.

It is not always quite so simple. Think of the building of a large project such as a dam. It takes a construction company a number of years to complete such a project. The company does not wait until the project is entirely completed before it sends its bill. Periodically, it bills for the amount of work completed and receives payments as the work progresses. Revenue is taken into the accounts on this periodic basis. It is important to take revenue into the accounts properly. If this is not done, the earnings statements of the company will be incorrect and the readers of the financial statement misinformed. Accruals Concept - Financial statements are prepared under the Accruals Concept of accounting which requires that income and expense must be recognized in the accounting periods to which they relate rather than on cash basis. An exception to this general rule is the cash flow statement whose main purpose is to present the cash flow effects of transaction during an accounting period. Under Accruals basis of accounting, income must be recorded in the accounting period in which it is earned. Therefore, accrued income must be recognized in the accounting period in which it arises rather than in the subsequent period in which it will be received. Conversely, prepaid income must be not be shown as income in the accounting period in which it is received but instead it must be presented as such in the subsequent accounting periods in which the services or obligations in respect of the prepaid income have been performed. Expenses, on the other hand, must be recorded in the accounting period in which they are incurred. Therefore, accrued expense must be recognized in the accounting period in which it occurs rather than in the following period in which it will be paid. Conversely, prepaid expense must be not be shown as expense in the accounting period in which it is paid but instead it must be presented as such in the subsequent accounting periods in which the services in respect of the prepaid expense have been performed. Accruals basis of accounting ensures that expenses are "matched" with the revenue earned in an accounting period. Accruals concept is therefore very similar to the matching principle.