BASIC ACCOUNTING

CONCEPTS AND
CONVENTIONS

GAAP
GAAP

((Generally
GenerallyAccepted
AcceptedAccounting
AccountingPrinciples
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 ASSUMPTIONS
Externally 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
worths 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 CONVENTIONS
Conservatism
Consistency
Materiality
Full 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 STANDARD
This 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 full.
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.

 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
development
AS 9
AS 10
AS11
Foreign

AS 12
AS 13
AS 14
AS 15
the financial

AS 16

Accounting for research and

Revenue Recognition
Accounting for fixed assets
Accounting for effects in changes in
Exchange rates.
Accounting for government grants
Accounting for investments
Accounting for Amalgamations
Accounting for Retirement Benefits in
Statements of Employees
Borrowing costs

Accounting Standards

AS 17
AS 18
Impairment of ASSETS
AS 29 AS 19
AS 20
AS 21
AS 22
AS 23
in Consolidated

AS 24
AS 25
AS 26
AS 27
ventures
AS 28 Assets

Segment Reporting
Related party disclosures
Leases
Earnings per share
Consolidated Financial Statements
Accounting for taxes on income
Accounting for Investment in Associates
Financial Statements.
Discontinuing operations
Interim Financial Reporting
Intangible assets
Financial Reporting of Interest in joint