1.

Introduction
Generally Accepted Accounting Principles are the basic foundation of accounting structure. These broad guidelines are the accounting standards in the form of rules, procedures, doctrines, tenets, assumptions, postulates, concepts and conventions which bring about uniformity in recording, classifying, summarizing, interpreting and reporting and the presentation of the accounting information.

1. Introduction
There is no specific definition of what constitute GAAPs. Financial Accounting for Management by Gupta Ambrish
(Pg. No.170)

What is meant by Principle?

2. What is Principle?
The term Principle refer to the fundamental belief or a general truth which ones establish does not change. It also means the rule of action or conduct and can be applied to the rules of accounting.

2. What are Accounting Principles?

Accounting principles are a body of doctrines commonly associated with the theory and procedures of accounting, serving as an explanation of current practices and as a guide for selection of conventions or procedures where alternatives exist.

2. Note on Kinds of Accounting Principles

Accounting principles, rules of conduct and action are described various terms such as concepts, conventions, doctrines, tenets, assumptions, axioms, postulates. For our purposes, we shall use all these terms synonymously. A little difference however, has been made between the terms concepts and conventions. - Principles & Practice of Accountancy by R.L Gupta & V.K
Gupta, Sultan Chand & Sons, pg.no.-A-9.

2. Note on Kinds of Accounting Principles

The terms concepts, convention and doctrine are sometimes used interchangeably. Advance Accounts by Grewal, Shukla & Gupta)

3. Accounting Principles (Classified)

Accounting Principles

Accounting Concepts

Accounting Conventions Consistency Materiality

Business Entity Concept

Going Concern Concept Accounting Period Concept Money Measurement Concept Cost Concept Matching Concept Realization Concept

Conservatism
Full Disclosure

3. Accounting Principles (Classified)

Accounting Principles

Accounting Concepts

Accounting Conventions Consistency Materiality

Business Entity Concept

Going Concern Concept Accounting Period Concept Money Measurement Concept Cost Concept Matching Concept Realization Concept

Conservatism
Full Disclosure

A.1 Accounting Concepts/Postulates

Accounting concepts includes those basic assumptions or conditions upon which the science of accounting is based. These concepts are self-evident statements or truths and are fundamental to the accounting practice.

3. Accounting Principles (Classified)

Accounting Principles

Accounting Concepts

Accounting Conventions Consistency Materiality

Business Entity Concept

Going Concern Concept Accounting Period Concept Money Measurement Concept Cost Concept Matching Concept Realization Concept

Conservatism
Full Disclosure

B.1 Accounting Conventions

Accounting conventions include those customs or traditions which guide the accountant while preparing the accounting statements. These are the rules which are referred to for the solution of certain given problem of accounting.

3. Accounting Principles (Classified)

Accounting Principles

Accounting Concepts

Accounting Conventions Consistency Materiality

Business Entity Concept

Going Concern Concept Accounting Period Concept Money Measurement Concept Cost Concept Matching Concept Realization Concept

Conservatism
Full Disclosure

A.1 Accounting Concepts/Postulates A.1.1 Business Entity Concept

From the accounting point of view every business enterprise is an entity separate and distinct from its proprietor(s)/owner(s). The accounting system gives information only about the business and not its owners. In other words we record those transactions in the books of account which relate only to the business. The owner's personal affairs (his expenditure on housing, food, clothing, etc.) will not appear in the books of account of his business.

A.1 Accounting Concepts/Postulates A.1.1 Business Entity Concept

However, when personal expenditure of the owner is met from business funds it shall also be recorded in the business books. It will be recorded as drawings by the proprietor and not as business expenditure. Another implication of business entity concept is that the owner of business is to be treated as a creditor who also has a claim over the assets of the business. As such, the amount invested by him (capital) is regarded as a liability for the business.

3. Accounting Principles (Classified)

Accounting Principles

Accounting Concepts

Accounting Conventions Consistency Materiality

Business Entity Concept

Going Concern Concept Accounting Period Concept Money Measurement Concept Cost Concept Matching Concept Realization Concept

Conservatism
Full Disclosure

A.1 Accounting Concepts/Postulates A.1.2 Going Concern Concept

According to this concept it is assumed that every business would continue for a long period. Keeping this in view, the investors lend money and the creditors supply goods and services to the concern. For all practical purpose the business is normally treated as a going concern unless there is a strong evidence to the contrary.

A.1 Accounting Concepts/Postulates A.1.2 Going Concern Concept

Recording of transactions in accounting is judged whether the benefits from expenses are immediate (short period, say less than one year) or a long term. If the benefits from expenses are immediate it is treated as a revenue or if the benefits are for long term, it is to be treated as capital depending upon the nature of expenses.

3. Accounting Principles (Classified)

Accounting Principles

Accounting Concepts

Accounting Conventions Consistency Materiality

Business Entity Concept

Going Concern Concept Accounting Period Concept Money Measurement Concept Cost Concept Matching Concept Realization Concept

Conservatism
Full Disclosure

A.1 Accounting Concepts/Postulates A.1.3 Accounting Period Concept

You know that the going concern concept assumes that life of the business is indefinite and the preparation of income and positional statements after a long period would not be helpful in taking appropriate steps at the right time. Therefore, it is necessary to prepare the financial statements periodically to find out the profit or loss and financial position of the business.

A.1 Accounting Concepts/Postulates A.1.3 Accounting Period Concept

It also helps the interested parties to make periodical assessment of its performance. Therefore, accountants choose some shorter period to measure the results and one year has been generally accepted as the accounting period.

3. Accounting Principles (Classified)

Accounting Principles

Accounting Concepts

Accounting Conventions Consistency Materiality

Business Entity Concept

Going Concern Concept Accounting Period Concept Money Measurement Concept Cost Concept Matching Concept Realization Concept

Conservatism
Full Disclosure

A.1 Accounting Concepts/Postulates A.1.4 Money Measurement Concept

Usually business deals in a variety of items having different physical units such as kilograms, quintals, tons, metres, liters, etc. If the sales and purchase of different items are recorded in the physical terms, it will pose problems. But if these are recorded in common denomination their total become homogeneous and meaningful. Therefore, we need a common unit of measurement. Money does this function.

3. Accounting Principles (Classified)

Accounting Principles

Accounting Concepts

Accounting Conventions Consistency Materiality

Business Entity Concept

Going Concern Concept Accounting Period Concept Money Measurement Concept Cost Concept Matching Concept Realization Concept

Conservatism
Full Disclosure

A.1 Accounting Concepts/Postulates A.1.5 Cost Concept

The price paid (or agreed to be paid in case of a credit transaction) at the time of purchase is called cost. Under this concept fixed assets are recorded in the books of account at the price at which they are acquired. This cost is the basis for all subsequent accounting for the asset.

3. Accounting Principles (Classified)

Accounting Principles

Accounting Concepts

Accounting Conventions Consistency Materiality

Business Entity Concept

Going Concern Concept Accounting Period Concept Money Measurement Concept Cost Concept Matching Concept Realization Concept

Conservatism
Full Disclosure

A.1 Accounting Concepts/Postulates A.1.6 Matching Concept

The term matching means appropriate association of related revenues and expenses. For this purpose, first we have to recognize the revenues during an accounting period and the costs incurred in securing those revenues. Then the sum of costs should be deducted from the sum of revenues to get the net result of that period. The question when the payment was received or made is irrelevant. In other words, all revenues earned during an accounting period, whether received or not and all costs incurred, whether paid or not have to be taken into account while preparing the final accounts.

3. Accounting Principles (Classified)

Accounting Principles

Accounting Concepts

Accounting Conventions Consistency Materiality

Business Entity Concept

Going Concern Concept Accounting Period Concept Money Measurement Concept Cost Concept Matching Concept Realization Concept

Conservatism
Full Disclosure

A.1 Accounting Concepts/Postulates A.1.7 Realization Concept

According to this concept revenue is recognized when a sale is made. Sale is considered to be made at the point when the property in goods passes to the buyer and he becomes legally liable to pay.

A.1 Accounting Concepts/Postulates A.1.8 Accrual Concept

The Accounting Standard 1 (AS-1) issued by the Accounting Standard Board, the Institute of Chartered Accountants of India mentions about accrual as under: Revenues and costs are accrued, that is, recognized as they are earned or incurred (and not as money is received or paid) and recognized in the financial statement of the periods to which they relate

3. Accounting Principles (Classified)

Accounting Principles

Accounting Concepts

Accounting Conventions Consistency Materiality

Business Entity Concept

Going Concern Concept Accounting Period Concept Money Measurement Concept Cost Concept Matching Concept Realization Concept

Conservatism
Full Disclosure

B.1 Accounting Conventions B.1.1 Conservatism

Conservatism refers to the policy of choosing the procedure that leads to understatement of assets or revenues, and over statement of liabilities or costs. The consequence of an error of understatement is likely to be less serious than that of an error of over statement. On account of this reason, accountants generally follow the rule anticipate no profit but provide for all possible losses. Closing stock valuation Provision for doubtful debts

3. Accounting Principles (Classified)

Accounting Principles

Accounting Concepts

Accounting Conventions Consistency Materiality

Business Entity Concept

Going Concern Concept Accounting Period Concept Money Measurement Concept Cost Concept Matching Concept Realization Concept

Conservatism
Full Disclosure

B.1 Accounting Conventions B.1.2 Full Disclosure

This concept states that the financial statements are to be prepared honestly and all significant information should be incorporated there in because these statements are the basic means of communicating financial information to all interested parties. The Joint Stock Companies Act, 1956 requires that Profit and Loss Account and Balance Sheet of a company must give a true and fair view of the state of affairs of the company and also provided prescribed form in which these statements are to be prepared so that significant information may not be left out.

3. Accounting Principles (Classified)

Accounting Principles

Accounting Concepts

Accounting Conventions Consistency Materiality

Business Entity Concept

Going Concern Concept Accounting Period Concept Money Measurement Concept Cost Concept Matching Concept Realization Concept

Conservatism
Full Disclosure

B.1 Accounting Conventions B.1.3 Consistency

The principle of consistency means that the same accounting principles should be used for preparing financial statement for different periods. It means that there should not be a change in accounting methods from year to year. Consistency eliminates personal bias and helps in achieving comparable results. However, consistency does not prohibit change. When a change is desirable, the change and its affect should be clearly stated in financial accounts.

3. Accounting Principles (Classified)

Accounting Principles

Accounting Concepts

Accounting Conventions Consistency Materiality

Business Entity Concept

Going Concern Concept Accounting Period Concept Money Measurement Concept Cost Concept Matching Concept Realization Concept

Conservatism
Full Disclosure

B.1 Accounting Conventions B.1.4 Materiality

American Accounting Association defines the term materiality as An item should be regarded as material if there is reason to believe that knowledge of it would influence the decisions of informed investor. All material information should be disclosed through the financial statements accompanied by necessary notes.

Thanku..