GAAP and Accounting Concepts :
Generally Accepted Accounting Principles (GAAP) are the set of rules accepted by accounting bodies and finance professionals in order to provide uniformity in the accounting practices and presentation of accounting results all over the world, Generally Accepted Accounting Principles are based on certain accounting concepts and assumptions which help financial statement to become transparent, readable and comparable, These accounting concepts help accountants to adopt consistent and appropriate accounting policies while preparing financial statement.
Following are the important accounting concepts and conventions one must know in order to understand general accounting practices all over the world.
1) Separate Entity Accounting Concepts :
Separate Entity Accounting concepts means that business enterprise is a separate entity with its own identity, apart from its owner. For accounting purpose, Business enterprises and its Owners are not same. Accountants should treat a business as distinct from its owner. Financial transactions which affect the business are recorded in the business books of accounts and should not include owner’s personal transactions in the business books of accounts.
2) Money Measurement Concept :
As per this concept, only those transactions which can be measured in terms of money are recorded in the books of accounts. Since money is the medium of exchange and provides a uniform way to measure the value of goods and services. Transactions that cannot be measured in terms of money are not recorded in the books of account, even if, they affect the results of the business materially.
3) Going Concern Concept :
As per going concern concept it is assumed that the business will keep functioning continuously for indefinite period. While preparing financial statement, It is assumed that Business entity will continue its operation for the foreseeable future.
4) Accounting Periodicity Concept :
This is also called the concept of definite accounting period. As per ‘going concern’ concept it is assumed that the business will keep functioning continuously for indefinite period. If a business lasts for indefinite period, it is not desirable to measure its performance as well as financial position only at the end of its life. As per this concept, A financial statement should be prepared at regular intervals to ascertain performance as well as financial health of business.
5) Accrual Accounting Concepts :
As per this concept, the effects of transactions and other events are recognised on mercantile basis. Mercantile system of accounting recognizes revenues and expenses when they are earned or incurred and not when cash or a cash equivalent is received or paid. Most Business entities maintain books of account on an accrual basis.
6) Matching Concept :
As per this concept, all expenses for an accounting period are matched with the revenue of that period. The result of this matching is net profit or net loss. This concept does not concentrate on actual inflow or outflow of cash.
7) Historical Cost Concept :
Historical cost refers to the cost at the time of acquisition. By this concept, the value of an asset is to be determined on the basis of acquisition cost.
8) Duality Concept :
As per this concept, every transaction which is recorded in the books of account has two sided effect. This concept is the base of double entry accounting system. Every transaction has two aspects:
a) It increases one Asset and decreases other Asset;
b) It increases an Asset and simultaneously increases Liability;
c) It decreases one Asset, increases another Asset;
d) It decreases one Asset, decreases a Liability.
e) It increases one Liability, decreases other Liability;
f) It increases a Liability, increases an Asset;
g) It decreases Liability, increases other Liability;
h) It decreases Liability, decreases an Asset.
9) Realisation Concept :
As per this concept, that no change should be counted unless it has materialised. Any change in value of an asset is to be recorded only when the business actually realises it.
10) Conservatism Concept :
As per this concept, accountant should not anticipate income and should provide for all possible losses. When there are many alternative methods are available for valuation of an asset, an accountant should choose the method which leads to the lesser value.
11) Consistency :
The concept of consistency is needed when alternative methods of accounting are equally acceptable. Example – Methods of depreciation such as written-down-value method, straight-line method, etc or Methods of valuation of inventories such as FIFO,LIFO Average cost etc. Consistency in method of accounting is important for good accounting practices.
12) Materiality :
According to materiality concept, all the items having significant importance on the business entity should be disclosed in the financial statements and any insignificant or irrelevant item should not be disclosed in the financial statements. Whether item is significant or not is a matter of judgement. This concept is an exception of full disclosure principle.
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