Accounting• The process of recording of business transactions is called accounting. OR• The action or process of keeping financial accounts is called accounting.
GAAP (Generally Accepted AccountingPrinciples):The rules that govern accountingare called GAAP (GenerallyAccepted Accounting Principles).
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 owners value in an asset or group of assets.
The GAAP principles are divided into two categories:1. Accounting Concepts: Accounting Concepts are basic assumptions or conditions upon which science of accounting is based.2. Accounting Conventions: Accounting Conventions include those customs and traditions which are followed up by an accountant while preparing a financial statement.
Accounting Concepts Accounting Concept Includes: Separate Entity Concept It is helpful in keeping the business affairs strictly free from the effect of the private affairs of the proprietor(s). Amount invested by the proprietor is shown as “ Liability”. Amount paid for the personal expenses of the proprietor are shown as drawings from the capital of the proprietor.
ACCOUNTING CONCEPTS 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. money) for measurement.
ACCOUNTING CONCEPTS Dual Aspect Concept (IMP) Every business transaction has a dual affect i.e. it affects two accounts. This is based on accounting equation: Liabilities = Assets. Owner’s equity + Outsider’s equity = Assets. This equation can be explained as “for every debit there is an equivalent credit”.
ACCOUNTING CONCEPTS Matching Concept It is the basis for recording expenses and includes two steps:1. Identify all the expenses incurred during the accounting period.2. Measure the expenses and the match the expenses against the revenues earned. Revenues – Cost = Net income or Profit.
Accounting Concepts 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.
Accounting Concepts Cost Concept Assets and liabilities should be recorded at the historical cost i.e. costs as on acquisition.
Accounting Concepts Accounting Period ConceptAccounting period is the span of time, at the end of which financial statements are prepared to throw light on theresults of the operations at the end of a relevant period and the financial position at the end of a relevant period.
Realization ConceptThe Revenue principle governs two things: 1. When to record revenue 2. Amount of revenue to recordTo 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 Conventions Full DisclosureFinancial statements should be honestly prepared and sufficiently, disclose information which is of material interest to proprietors, present and potential creditors and investors.
Accounting Conventions MaterialityOnly material or significant details are to be recorded leaving the insignificant or minute details. This is done to prevent overburdening of accounts.