Financial Accounting

TOPIC: GAAP
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Accounting:

 The process of recording of business transactions is called

Accounting.
GAAP(Generally accepted
Accounting Principles)
 The rules that govern Accounting are called GAAP(Generally
accepted Accounting Principles).

 The common set of Accounting principles,standards and

procedures.

 Combination of authoritative standards (set by policy boards) and

simply, the commonly accepted ways.
GAAP(Generally Accepted
Accounting Principles)
 Explanation:

 Provides a fair financial image of the company.

 Provides with different Information:
 Revenue Recognition
 Balance sheet item Classification
 Outstanding share Measurements
3 Main categories of GAAP:

 Assets: An asset is an item of value owned by a company.

 Liabilities: In accounting liabilities are obligations of the company ,

to transfer something of value to another party.

 Equity: Equity is the owner’s value in an asset or group of assets.

Nature of Accounting Principles:

 Accounting Principles are general guidelines to establish standards for

sound accounting practices and procedures in recording and reporting
financial performance and status of a business.

 Derived from experience and reason .

 To ensure uniformity and easy understanding of accounting

information.

 These Principles can be classified into two categories :

1. Accounting Concepts
2. Accounting Conventions
Accounting Concepts:

 Accounting concepts are defined as basic assumptions on the basis

of which financial statements of a business entity are prepared.
 They are used as a foundation for formulating various accounting
methods and procedures for recording and presenting the business
transactions.
 An assumption is something which is accepted as true which may
not be true in real life.
Separate Entity Concept:

 It is helpful in keeping the business affairs strictly free from the effect
of the private affairs of the proprietor.

 Amount invested by the proprietor is shown as “capital”.

 Amount paid for the personal expenses of the proprietor are shown
as drawings from the capital of the proprietor.
Money measurement Concept:

 Only the transactions which can be recorded in terms of money are

recorded.

 This is being used so as to provide a common yardstick(i.e.moneyfor

measurement.
Matching Concept:

 It is the basis for recording expenses and includes two steps:

 Identify all the expenses incurred during the accounting period.

 Measure the expenses and the match the expenses against the
revenues earned.

 Revenue-Cost=Net Income or Profit.

Matching Concept:
Going Concern Concept:

 Business would continue to operate indefinitely in the future.Business

will not cease doing business , neither ; it will sell its assets to pay off
its liabilities.
Cost Concept:

 Assets and liabilities should be recorded at the historical cost i.e

costs as on acquisition.
Accounting Period Concept:

 Accounting period is the span of time , at the end of which financial

statements are prepared to throw light on the results of the
operations at the end of a relevant period and the financial position
at the end of a relevant period.
Realization Concept:

 The Revenue principle governs two things:

1. When to record revenue
2. Amount of revenue to report
 To be recognized , revenue must be:
 Earned: Goods are delivered or a service is performed.
 Realized: Cash or claim to cast (credit) is received in exchange for
goods and services rendered.
Accounting Convention:

 An accounting convention is a common practice use as a

guidance when recording a business transaction . It is used when
there is not a definitive guideline in the accounting standards that
govern a specific situation. Thus, accounting conventations serve to
fill in the gaps not yet addressed by accounting standards .
Accounting Conventions:
Two Accounting Conventions Gaap
Principles:
 Full Disclosure

 Financial statements should be honestly prepared and sufficiently ,

disclose information which is of material interest to proprietors,
present and potential creditors and investors.
Materiality:

 Only material and significant details are to be recorded leaving the

insignificant or minute details . This is done to prevent overburdening
of accounts.
The non-Dealth Principle of
Business:
 The accounting principles assumes that business will continue to
function eternally and have no end date as such .