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Generally Accepted
Accounting Principles
The Backbone of Accounting Information system,

1.
2.
3.

Accounting Assumptions.
Accounting Concepts/Conventions.
Accounting Standards.

( Accounting Principles are the doctrines

behind the application of accounting
concepts/practices)

FUNDAMENTAL ACCOUNTING
ASSUMPTIONS

Consistency
Accrual
Going concern

Consistency

Meaning : Accounting policy chosen should be

consistently applied

Example : ABC Ltd. uses WDV method of

Depreciation, year after year.

Objective: Comparability, Understandability

Accrual

A Basis of Accounting.

Transactions are recorded as per its

accrual/not on realization.

Expenses are recognized on its

incurrence, not when paid

Incomes are recognized when earned,

not received.

Basis of Accounting
Accrual basis

Cash Basis

Recording in the period of

- Recording in the
period of
transaction accrued (Cash/Credit)
receipt/payment of
Cash
Distinction of Capital/Revenue
- No such distinction
transactions
Capital Transactions (Balance Sheet)
Revenue transactions (P & L A/c)
Eg. P & L A/c,
- Eg. Cash, Bank, Receipts Income
& Expenditure A/c
& Payments A/c

Going Concern

The business will go on forever, It will

never end either intentionally or
unintentionally.
Due to this concept, the
Assets/Liabilities have been divided
into Fixed/Current.

Fundamental Accounting
Assumptions
AS PER ACCOUNTING STANDARD 1
DISCLOSURE OF ACCOUNTING
POLICIES
ACCOUNTING ASSUMPTIONS ARE NOT TO
DISCLOSED (IF FOLLOWED)

Accounting Concepts
Business Entity

Money Measurement

Historical Cost
Matching

Dual Aspect

Conservatism
Periodicity

Materiality
Revenue Recognition

Full Disclosure

Business Entity Concept

Owner & the business Entity are separate
persons
Personal assets/liabilities not included in business
accounting

Personal expenses from business- Drawings

Capital by owner- Liability for business

Historical Cost Conept

Asset/Liability recorded at ORIGINAL COST

Market Value/Time value of money- not

considered.
Original Cost= Purchase Cost + Capital
Expenditure

Money measurement
Concept
Transactions/Events measurable in Money
are only considered
Only Quantitative transactions (No
Qualitative)

Items, not in money terms not a transaction

at all- should not be recorded

Money
A scale/standard of measurement
Limitations:
1. No universal denomination.
2. Not stable in the dimension
3. Not an exact measurement discipline
Elements :
a.

b.
c.

Identification of objects & events to be

measured
Selection of standard or scale to be used.
Evaluation of dimension or measurement
standard or scale.

Valuation Principles
Historical Cost

Realizable value

Current/Replacement Cost
Present Value
(as per time value of money)
Note : Future Value is ignored

Periodicity Concept
Concept of definite accounting period
An accounting period is to be selected (as
business life is indefinite)
Helps in :

Comparison (Intra Firm/Inter Firm)

Uniformity/Consistency
Matching

Matching Concept
The periodical revenues earned &
expenses incurred should be matched.

Helps in compiling P & L A/c

Dual Aspect Concept

Also known as Double Entry System

Every transaction or event has two aspects

(Debit & Credit)
or affect at least two accounts.

For every Debit, there is an equal credit, for every

credit, there is an equal debit.

Verification: Accounting Equation

(Based on Balance Sheet)

Capital + Liabilities = Assets

Conservatism Concept
Prudence Concept

(being Cautious)

Do not anticipate the probable incomes/profits, but

provide for all the probable losses
leads to understatement of assets
(Cost /Market Value, whichever is lower)

Contradicts Cost Concept

Materiality
effects

Items having significant

(relevant for decision makers)

Should be disclosed separately

( highlighted)
exception of the full disclosure concept
Note :
a.
a.
b.
b.

Materiality (both quantitative/qualitative point of view)

Insignificant/Small items may be ignored.

Full Disclosure Concept

every aspect of the accounting should be
shown/disclosed
Nothing should be hidden
Determines the characteristic of
Completeness
Informations are disclosed in Notes to
accounts

REVENUE RECOGNITION
CONCEPT
Also called as Realization concept

Transaction to be recognized when realized

Accounting policies
Specific accounting principles and methods of applying
these principles
Policies vary from concern to concern
areas where different Accounting policies can be used:
a. Methods of depreciation
b. Valuation of inventories
c. Valuation of investments
d. Etc.

Selection of Accounting policies

Basis of selection of Accounting policies

Prudence

Materiality
Substance over form

Note : The characteristics of True & fair view

& Accrual is also considered

Accounting policies
Accounting policies should be consistently
applied
Policy can be changed :
a.
a.
b.
b.
c.
c.

Change is required as per statute/legislature

Change is for compliance of Accounting Standard
For more better/appropriate presentation of
financial statement

Accounting estimates

The judgments/reasonable estimates needed.

Provisions (an accounting estimate)

Change in accounting estimate

difference arises between certain parameters

estimated earlier and re-estimated during the
current period or actual result achieved during
the current period.

MCQs
Q.1. RPC Ltd. follows the written down value
method of depreciating machinery year after
year by applying the principle of

MCQs
Q.2. Business unit is separate & distinct from
the persons who supply capital to it, is
based on

MCQs
Q.3. All of the following are valuation
principles except:

MCQs
Q.4. A businessman purchased goods for `
25,00,000 and sold 80% of such goods during
the accounting year ended 31st March, 2011.
The market value of the remaining goods was
` 4,00,000. He valued the closing Inventory at
cost. He violated the concept of

MCQs
Q.5. Writing of transaction in the ledger is
called :

MCQs
Q.6. The Cost of a Calculator has been
treated as an expense due to which
concept?

MCQs
Q.7. In double entry book keeping system,
every transaction affects at least
______account(s).

MCQs
Q.8. According to which concept, the owner
of an enterprise pays the interest on
drawings?

MCQS
Q.9. Fundamental Accounting Assumptions
are:

MCQs
Q.10. Double entry Principle means: