Generally Accepted Accounting Principles - GAAP
GAAP is a set of accounting principles, rules and standards according to which financial
statements are reported by the firms. These standards were framed General accounting
standard board which was set up in 1984.
However with more than 100 countries joining in support of the International Financial
reporting standards in London US has agreed to adopt theses standards by 2014.
The basic principles, assumptions and constraints in GAAP
Assumptions
- Going Concern Concept -It is assumed that business as an entity will run infinitely long
time.
- Accounting Principle- It treats the business and individual as separate entities Hence the
personal expenses and business should be maintained separately. For eg If the owner runs
his business in his house. It contains 3 rooms out of which 1 room is for personal use and 2
rooms for official purpose. The rent for electricity during a certain month is Rs 3000. The
expenses shown in the balance sheet must be Rs 2000 as our business has consumed it.
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Generally Accepted Accounting Principles - GAAP
Principles
- Historical matching concept – It states that the accounting should be done on actual basis
and not on market biased or a fair price basis
- Revenue recognition model – It states that the revenues should be recorded at the
instance of sales taking place and not in advance .It is also known as accrual system of
accounting.
Constrains
- Objectivity principle states there should be no subjectivity in reporting of financial
statements.
- Materiality –Significance of an item should be reported when it affects the decision taken
by an individual
- Conservatism states that in case of two different values of assets the one which is greater
should be accepted.
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