GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

A widely accepted set of rules, conventions, standards, and procedures for reporting financial
information, as established by the Financial Accounting Standards Board are called Generally
Accepted Accounting Principles (GAAP). These are the common set of accounting principles,
standards and procedures that companies use to compile their financial statements. GAAP are a
combination of standards (set by policy boards) and simply the commonly accepted ways of
recording and reporting accounting information.
GAAP is to be followed by companies so that investors have optimum level of consistency in the
financial statements they use when analyzing companies for investment purposes. GAAP cover
such aspects like revenue recognition, balance sheet item classification and outstanding share
measurements.

ACCOUNTING CONCEPTS AND CONVENTIONS

As seen earlier, the accounting information is published in the form of financial statements. The
three basic financial statements are
(i) The Profit & Loss Account that shows net business result i.e. profit or loss for a certain
periods
(ii) The Balance Sheet that exhibits the financial strength of the business as on a particular dates
(iii) The Cash Flow Statement that describes the movement of cash from one date to the other.
As these statements are meant to be used by different stakeholders, it is necessary that the
information contained therein is based on definite principles, concrete concepts and well
accepted convention.
Accounting principles are basic guidelines that provide standards for scientific
accounting practices and procedures. They guide as to how the transactions are to be recorded
and reported. They assure uniformity and understandability. Accounting concepts lay down the
foundation for accounting principles.