BASIC ACCOUNTING CONCEPTS AND CONVENTIONS

GAAP(Generally Accepted Accounting Principles)

GAAP(Generally Accepted Accounting Principles)

What is GAAP?

A set of standards generally accepted and universally practiced by accountants

1. Indicates how economic events are reported

2. Generated by the Financial Accounting Standards Board (FASB) and Securities & Exchange Commission (SEC)

FUNDAMENTAL ACCOUNTING CONCEPTS AND ASSUMPTIONSExternally communicated accounting information

must be prepared in accordance with accounting standards that are understood by both the senders and the users of the information. These standards are known as Generally Accepted Accounting Principles (GAAP), and provide the general framework for determining what information is included in the financial statements and how this information is to be presented. Since accounting is a service activity, these principles reflect the needs of the society and not those of the accountants or any other single constituency. These are the guidelines for measurement and presentation of accounting information and are used by professional accountants in preparing accounting information and reports

There are 12 general accounting principles: The Money Measurement Entity Going concern Cost Dual aspect Accounting period Conservatism Realization Matching Consistency Materiality Objectivity

The Money Measurement Concept:

Record should be made of that information that can be expressed in monetary terms

Although the business may own seven buildings, five boilers, fifty cars, thirty trucks, you cannot add them together simply like that and get to know what the business is worth.

Expressing these items in monetary terms by saying that one has buildings worthRs15 crores, boilers worth Rs 50 lac, cars worth Rs 1 crore and trucks worth’s 2 crores would make it easier for one to add up these items by adding their monetary values. We may not be able to add apples and oranges directly but we can add them easily by expressing them in their monetary terms.

So the money provides a common denominator by which the resources and other factors about the business entity can be expressed and valued. Expressing in monetary terms also helps in understanding the changes their impact on the value of the resources.

As you see this concept imposes a severe limitation on the scope of accounting. It is impossible for the accounting to record or report the health of the key people in the organization or the plant that is not working or the labor is going on strike or that the key people are leaving the organization and other important factors that may have a direct bearing on the future of the organization.

Entity Concept:

Accounts can only be kept for entities which are different from the persons who are associated with these entities.

The Going Concern Concept:

Accounting records, events and transactions on the assumption that the entity will continue to operate for an indefinitely long period of time.

The Cost Concept:

Assets are always shown at their cost price rather than their market price

Every transaction must be recorded at its acquisition price.

This does not mean that the asset will always be shown at the cost price. It means that the asset is recorded at its cost price and is systematically reduced or increases in value by charging depreciation/appreciation.

This is applicable to fixed assets and not the current assets.

Dual Aspect Concept

The value of the assets owned by the company is equal to the claims on these assets.

This is the basic concept of accounting.

Every Dr entry has its corresponding Cr entry.

This concept can be expressed as

ASSETS = CAPITAL + LIABILITIES

Accounting Period Concept

Accounting measures activity for a specified interval of time, usually a year.

At the end of each period an income statement and balance sheet are prepared for finding the profit and loss and financial position of the business as on the last day of the accounting period.

Matching Concept

Matching means appropriate association of related revenues and expenses.

The profit of the business is ascertained only when the revenue earned during a particular period is compared with the expenditure incurred for earning that particular revenue.

Realization Concept

The sale is considered to have taken place only when either the cash is received or some third party becomes legally liable to pay the amount .

According to this concept only those transactions are recorded in accounting which have actually taken place and not the ones that will take place in the future.

ACCOUNTING CONVENTIONSConservatismConsistencyMaterialityFull Disclosure

Conservatism

Anticipate the profits but provide for all losses.

The idea behind this concept is that the

-recognize revenues only when they are reasonably certain

- Recognize expenses as soon as they are reasonably possible

Consistency

According to this convention whatever principle or method is adopted for recording in the books should remain unchanged from one period to another.

Materiality

Insignificant events would not be recorded if the benefit of recording them does not justify the cost.

Full Disclosures

According to this concept ,the accounts should be prepared honestly all the relevant information should be disclosed

ACCOUNTING STANDARDS

The purpose of accounting standards is to prescribe a standard solution or reduce the alternative permissible solutions to such accounting issues. Accounting standards attempt to harmonize diverse accounting treatments.

Accounting standards codify (that is, set out systematically) the generally accepted accounting principles

ACCOUNTING STANDARDS

There are four accounting standards

- Measurement Standard

- Policy Standard

- Disclosure Standard

- Concept Standard

MEASUREMENT STANDARDThis standard provides guidance

for accounting valuation.For example , how an asset or a

liability be valued.

POLICY STANDARD

This standard prescribes the accounting treatment of an accounting issue.

For example ,an accounting treatment for research and development

DISCLOSURE STANDARD

Disclosure means providing supplementary information to make the financial statements more meaning ful.

For example, segmental reporting and related party disclosures.

CONCEPT STANDARDS

This type standard of standard does not address any specific accounting policy.

For example, standard about fundamental accounting assumptions or the criteria for choice of accounting policies.

Contd.

The above mentioned principles, practices, modifying principles, policies and standards are regularly followed while preparing the income statements.

Accounting Standards Until the Central Government prescribes accounting standards,

accounting standards issued by the ICAI shall be deemed to be the accounting standards.

Accounting Standards Issued by ICAI: The Accounting Standards issued by the Council of the Institute of Chartered Accountants of India (lCAI) up to January 2004 are listed below:

Number of the Accounting Standards Title of the Accounting

Standards AS1 Disclosure of

accounting policies AS2 (Revised) Valuation of Inventories AS3(Revised) Cash Flow Statements AS4(Revised) Contingencies and

events occurring after the balance Sheet date. AS5(Revised) Net Profit and loss for

the period, prior period items And changes in

accounting policies. AS6(Revised) Depreciation accounting AS 7 Accounting for

construction contracts.

AS 8 Accounting for research and development

AS 9 Revenue Recognition AS 10 Accounting for fixed

assets AS11 Accounting for effects in

changes in Foreign Exchange rates. AS 12 Accounting for

government grants AS 13 Accounting for

investments AS 14 Accounting for

Amalgamations AS 15 Accounting for

Retirement Benefits in the financial Statements of

Employees AS 16 Borrowing costs

Accounting Standards AS 17 Segment Reporting AS 18 Related party disclosures Impairment of ASSETS AS 29 AS 19 Leases AS 20 Earnings per share AS 21 Consolidated Financial

Statements AS 22 Accounting for taxes on

income AS 23 Accounting for Investment

in Associates in Consolidated Financial Statements. AS 24 Discontinuing operations AS 25 Interim Financial Reporting AS 26 Intangible assets AS 27 Financial Reporting of

Interest in joint ventures AS 28 Assets