Generally Accepted Accounting

Principles(GAAP)
Dated: 13-7-2020
Accounting Principles(Previously Discussed)

1. Business Entity Concept

2. Going Concern
3. Monetary Unit Concept/Stable Dollar assumption
4. Time period
5. Historical cost Principle
6. Matching Principle
7. Accrual based accounting/Cash based Accounting
8. Revenue Recognition/Revenue Realization
Accounting Principles(Previously Discussed)
1. Business Entity Concept- Business and owner of business is separate entities.
2. Going Concern- business has indefinite life time
3. Monetary Unit Concept/Stable Dollar assumption-
4. Time period/ periodicity - monthly, quarterly, semi annually, yearly
5. Historical cost Principle – assets would be record on its acquisition cost
6. Accrual based accounting- Credit based accounting
7. Matching Principle-expenses should be matched with revenue in the period they
incurred instead of when they are paid.
8. Cash based Accounting – All transaction are done on Cash basis.
9. Revenue Recognition-record revenue when it is earned.
10. Revenue Realization- Cash received against Revenue previously recognized.
 Materiality
• The materiality concept, also called the materiality constraint,
states that financial information is material to the financial
statements if it would change the opinion or view of a
reasonable person.

• The concept of materiality is relative in size and importance

• Think about a small company verses a large company

 Conservatism
• The principle of conservatism gives guidance on how to
record uncertain events and estimates. The principle of
conservatism states that you should always go on the most
conservative side of any transaction

• Most of the time this means minimizing profits by recording

uncertain losses or expenses and not recording uncertain or
estimated gains.

• 80%-20% ratio followed usually.

 Full Disclosure
• The full disclosure principle states that information that would
“make a difference” to financial statement users or would be
useful in decision-making should be disclosed in the financial
statements. 

• This way investors or creditors can see a total picture of the

company before they choose to take any action

• Example, let's say a company is named in a lawsuit that demands a significant

amount of money. When the financial statements are prepared it is not clear
whether the company will be able to defend itself or whether it might lose
the lawsuit. As a result of these conditions and because of the full disclosure
principle the lawsuit will be described in the notes to the financial statements.
 Qualitative Characteristics of Financial
Statements
1. Relevance
2. Reliable
3. Comparable
4. Consistency
 Relevance
• Relevance “To be relevant, accounting information must be
capable of making a difference in a decision”

Example:

A small abnormal expense is a good example of irrelevant

accounting information. If the company suffers a small causality
loss because someone threw a brick through the factory-building
window, an investor will still invest in the company. This is
irrelevant information because it doesn't affect the end user.
 Reliable
Reliability “Means that the numbers and descriptions
match what really existed or happened”

Example:

if a Firm’s income statement reports sales of €60,510

million when it had sales of €40,510 million, then the
statement fails to faithfully represent the proper sales
amount. To be reliable, information must be complete,
neutral, and free of error
 Comparability
Comparability: Information that is measured and reported in a
similar manner for different companies is considered
comparable
 In terms of same monetary units, by using same accounting
standards, by using same reporting style & format.

Example: One Financial statement is illustrated in Japanese Yen

and other financial statement is illustrated in US Dollars.
 Consistency
• The consistency principle states that companies should use
the same accounting treatment for similar events and
transactions over time. In other words, companies shouldn’t
use one accounting method today, use another tomorrow,
and switch back the day after that. 

• Example- Straight line depreciation methods in one year and

Double declining method in second year.
 Reference
• https://www.myaccountingcourse.com/