Double Entry System of Accounting is based

on a set of principles which are called GAAP

This principles enable to a certain extent

standardization in recording and reporting of
information

In formulating the GAAP the three conventions

of relevance, objectivity and feasibility are
followed
 Conventions and Concepts
Conventions are based on what is
practicable
Accounting concepts are based on
logical considerations
Accounting concepts are ideas and
assumptions which are fundamental to
accounting practice
 Business Entity Concept:

Ex. If A owns a property of Rs.5 lakhs, out of

which he invests Rs.2 lakhs in business then
Rs.3 lakhs will be his personal property and 2
lakhs will be his business investment
 Going Concern Concept

It implies that the resources of the concern

should be used for that purposes for which they
meant to be used.
 Cost Concept

Ex. If a piece of land is acquired for Rs.3 lakh, it

would continue to be shown in the balance sheet
at Rs.3 lakh, even when the market value of the
land rises to say Rs.5 lakhs
Money Measurement Concept

All transactions are recorded through a

common denominator, namely the
monetary unit
Duality or Dual Entry Concept

Ex. When equipment is purchased for

cash, the new asset comes in (use of fund)
and the cash will decrease (source of fund)
Accounting Period Concept
Under the companies act, a company is
normally not permitted to have the
accounting period extending beyond fifteen
months.
 Matching Concept
In order to determine the profits accrued in
accounting period, the expenses must relate to
the goods sold during the period.

The expenses incurred in the production of

goods should be matched with the revenues
realized from the sale of the goods and services
 Conservatism Concept

Recognition of revenue requires better

evidence than recognition of expenses
 Consistency Concept
For example, if a concern is charging
depreciation by one method it is expected
to follow the same method in the
subsequent years also.
 Materiality Concept
All financial transactions need to be recorded
in the books of accounts. However, there
may be transactions which may be
insignificant and are not shown separately
 Realization Concept
Revenues are recognized only when the
goods and services have been delivered
and there is certainty that the revenue
will be realized.
 Financial Reporting
According to FASB -Main objectives of
financial reporting
- information about enterprise earnings and its
components measured by accrual
accounting
- It provides information about an enterprise’s
economic resources, obligations and owners’
equity, liquidity or solvency etc.,