GAAP Rules

1. Topic:
GAAP
(Generally Accepted
Accounting Principles)
Prof. Faisal Azam

2.  What is G.A.A.P?
 Why these principles are necessary to
follow?
 Third party satisfaction
 Principles
 Conclusion
Outline

3. What is G.A.A.P?
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.

4. Why these principles are necessary to follow?
These principles are necessary to follow because it helps a lot in
1. making long term decisions
2. financial decisions
3. maintaining records.
4. It makes easy to compare financial statements of different com
panies.

5. Third Party Satisfaction
Third parties like
1. creditors,
2. banks,
3. share holders
must have to rely on reported financial statements so it must be
free of errors, inconsistency and bias .It could only be possible
by following G.A.A.P.

6. 1. 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.

7. 2.Money Measurement Concept
 Only the transactions which can be recorded in ter
ms of money are recorded.
 This is being used so as to provide a common sta
ndard (i.e.money) for measurement.

8. 3.Dual Aspect Concept (IMP)
Every business transaction has adual affect i.e.it affects two
accounts.
This isbased on accounting equation:
Liabilities = Assets.
Owner’s equity + Outsider’s equity = Assets.
This equation can be explained as “forevery debit there is
an equivalent credit”.

9. 4.Going ConcernConcept
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.

10. 5.Cost Concept
The cost concept clarifies that any asset, liability, purchase of go
ods or any other business transaction shall be initially recorded
at the original cost price rather than the market value (if differe
nt) which includes all the costs that incurs while making the ass
et ready to use.

11. 6.Accounting Period Concept
Accounting period is the period of time, at the end of which financial
statements are prepared to throw light on the results of the operations at
the end of arelevant period and the financial position at the end of a
relevant period.

12. 7.Realization Concept
The realization principle is the concept that revenue can only be recognized
once the original goods or services associated with the revenue have been
delivered or rendered, respectively. Thus, revenue can only be recognized
after it has been earned.
A customer pays $1,000 in advance for a custom-designed product. The
seller does not realize the $1,000 of revenue until its work on the product is
complete.

13. Matching Concept8.

15. Accounting Convention

16. What Is an Accounting Convention?
Accounting conventions are guidelines used to help companies determine how
to record certain business transactions that have not yet been fully addressed
by accounting standards. These procedures and principles are not legally
binding but are generally accepted by accounting bodies
In short, accounting conventions serve to fill in the gaps not y
et addressed by accounting standards.

17. Accounting Conventions

18. Prudence / Conservatism
Don’t anticipate a profit . But provide for All P
ossible losses,
In other words , it takes in consideration all pr
ospective losses but not prospective profit.

19. Consistency
A company should apply the same accounting principle
s across different accounting cycles. Once it chooses a
method it is urged to stick with it in the future, unless it
has a good reason to do otherwise. Without this conven
tion, investors' ability to compare and assess how the c
ompany performs from one period to the next is made
much more challenging.

20. 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.

21. Materiality
Only material or significant details are to be recorded
exit the insignificant or small details. This is done
to prevent overburdening of accounts.