CHAPTER II

GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
GAAP (GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES)
• GAAP (generally accepted accounting principles)
is a collection of commonly-followed accounting
rules and standards for financial reporting. The
acronym is pronounced "gap.
• There is no universal GAAP standard and the
specifics vary from one geographic location or
industry to another. 
• Generally Accepted Accounting Principles (GAAP) is a term which has sprung up in
recent years and it signifies all the rules, from whatever source, which govern
accounting. In individual countries this is seen normally as a combination of.
1. National corporate law
2.National accounting standards
3.Local stock exchange requirements
• In many countries, like the UK,GAAP does not have any statutory or regulatory
authority or definition, unlike other countries, such as the USA.
• A Conceptual framework in accounting is a statement of generally accepted theoretical
principles and not rules which form the frame of reference for financial reporting. The
financial reporting process is concerned with providing information that is useful in the
business and economic decision making process. As such a conceptual framework will
form the basis for determining which events should be accounted for, how they should
be measured and how they should be communicated to the user. In short a conceptual
framework for financial reporting can be defined as an attempt to codify existing GAAP
in order to reappraise current accounting standards and to produce new standards
ACCRUAL PRINCIPLE
• This is the concept that accounting transactions should be
recorded in the accounting periods when they actually occur,
rather than in the periods when there are cash flows
associated with them. This is the foundation of the accrual
basis of accounting. It is important for the construction of
financial statements that show what actually happened in an
accounting period, rather than being artificially delayed or
accelerated by the associated cash flows. For example, if you
ignored the accrual principle, you would record an expense
only when you paid for it, which might incorporate a lengthy
delay caused by the payment terms for the associated
supplier invoice.
CONSERVATISM PRINCIPLE
• This is the concept that you should record expenses
and liabilities as soon as possible, but to record
revenues and assets only when you are sure that they
will occur. This introduces a conservative slant to the
financial statements that may yield lower reported
profits, since revenue and asset recognition may be
delayed for some time. Conversely, this principle
tends to encourage the recordation of losses earlier,
rather than later. This concept can be taken too far,
where a business persistently misstates its results to
be worse than is realistically the case.
CONSISTENCY PRINCIPLE
• This is the concept that, once you adopt an
accounting principle or method, you should
continue to use it until a demonstrably better
principle or method comes along. Not following
the consistency principle means that a business
could continually jump between different
accounting treatments of its transactions that
makes its long-term financial results extremely
difficult to discern.
COST PRINCIPLE
• This is the concept that a business should only
record its assets, liabilities, and equity
investments at their original purchase costs. This
principle is becoming less valid, as a host of
accounting standards are heading in the
direction of adjusting assets and liabilities to
their fair values.
ECONOMIC ENTITY PRINCIPLE
• This is the concept that the transactions of a
business should be kept separate from those of
its owners and other businesses. This prevents
intermingling of assets and liabilities among
multiple entities, which can cause considerable
difficulties when the financial statements of a
fledgling business are first audited.
FULL DISCLOSURE PRINCIPLE
• This is the concept that you should include in or
alongside the financial statements of a business
all of the information that may impact a reader's
understanding of those statements. The
accounting standards have greatly amplified
upon this concept in specifying an enormous
number of informational disclosures.
GOING CONCERN PRINCIPLE
• This is the concept that a business will remain in
operation for the foreseeable future. This means
that you would be justified in deferring the
recognition of some expenses, such as
depreciation, until later periods. Otherwise, you
would have to recognize all expenses at once and
not defer any of them.
MATCHING PRINCIPLE
• This is the concept that, when you record
revenue, you should record all related expenses
at the same time. Thus, you charge inventory to
the cost of goods sold at the same time that you
record revenue from the sale of those inventory
items. This is a cornerstone of the accrual basis
of accounting. The cash basis of accounting does
not use the matching the principle.
MATERIALITY PRINCIPLE
• This is the concept that you should record a
transaction in the accounting records if not
doing so might have altered the decision making
process of someone reading the company's
financial statements. This is quite a vague
concept that is difficult to quantify, which has
led some of the more picayune controllers to
record even the smallest transactions.
MONETARY UNIT PRINCIPLE
• This is the concept that a business should only
record transactions that can be stated in terms of
a unit of currency. Thus, it is easy enough to
record the purchase of a fixed asset, since it was
bought for a specific price, whereas the value of
the quality control system of a business is not
recorded. This concept keeps a business from
engaging in an excessive level of estimation in
deriving the value of its assets and liabilities.
RELIABILITY PRINCIPLE
• This is the concept that only those transactions
that can be proven should be recorded. For
example, a supplier invoice is solid evidence that
an expense has been recorded. This concept is of
prime interest to auditors, who are constantly in
search of the evidence supporting transactions.
REVENUE RECOGNITION PRINCIPLE
• This is the concept that you should only
recognize revenue when the business has
substantially completed the earnings process. So
many people have skirted around the fringes of
this concept to commit reporting fraud that a
variety of standard-setting bodies have
developed a massive amount of information
about what constitutes proper revenue
recognition.
TIME PERIOD PRINCIPLE
• This is the concept that a business should report
the results of its operations over a standard
period of time. This may qualify as the most
glaringly obvious of all accounting principles,
but is intended to create a standard set of
comparable periods, which is useful for trend
analysis.