BITS Pilani

presentation
BITS Pilani Suman Gupta
Department of Economics
Pilani Campus
 BITS Pilani
Pilani Campus

MBA ZC415/PDFI ZC415, Financial

and Management Accounting
Lecture 2
GAAP

 GAAP - Generally Accepted Accounting Principles

 GAAP are commonly followed set of rules, guidelines &

procedures.

 According to the American Institute of Certified Public

Accountants (AICPA), the principles which have
substantial authoritative support become a part of
generally accepted accounting principles (Tulsian, 2002)

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Significance of GAAP

 Ease of understanding of Financial Statement

 Easy Comparison of Financial Statements
 Simple reporting technique
 Common format for all
 Bridge the communication gap
 Inter-firm comparison
 Less chance of fraud

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Balance Sheet Principles

 Money Measurement concept: transaction should be

recorded only if it is in terms of money.

 Business Entity Concept: Business and its owner has

distinct identity and existence

 Going Concern Concept: Business will continue for

indefinite period of time to carry out its objectives and
commitments until liquidated in the immediate future.

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Balance Sheet Principles

 Cost Concept: Assets to be recorded at the cash

amount at the time that an asset is purchased.
(Exception: Change in MV of a short-term investment i.e.
stock of a company whose shares are actively traded on
a recognized stock exchange)

 Dual Aspect Concept: Every transactions recorded in

the books affects at least two accounts.

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Income Statement concepts

 Accounting period Concept: Reporting the ongoing

activities of a business in relatively short and distinct
time intervals (e.g. Calendar year, Financial year).

 Conservatism Concept: Make provisions for future

losses but don’t anticipate future gains.

 Realization Concept: Revenues are recognized as

soon as product has been delivered/sold or a service
been rendered regardless of when the money is being
received.

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Income Statement concepts

 Matching Concept: Expenses to be matching with

revenues.

 Consistency Concept: Accountants needs to be

consistent when applying accounting practices,
procedures and principles.

 Materiality Concept: One can ignore an accounting

standard if the net impact of the doing so is so negligible
that it will not misled any stakeholder of the company
(e.g. rounding off the digits, etc).

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Exercise on concepts: 1

The personal assets of the owner are not reflected in the

balance sheet of the company.

 Historical cost concept

 Separate entity concept
 Matching concept

Correct answer is in Bold letters.

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Exercise on concepts: 2

Which concepts states that a company should report its

land at the amount at which it acquires it even if the market
value of that land is much higher.

 Historical cost concept

 Separate entity concept
 Matching concept

Correct answer is in Bold letters.

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Exercise on concepts: 3

Which concepts is associated with the fact that a company

will continue long enough on its commitments and goals?

 Accounting period concept

 Separate entity concept
 Going concern concept

Correct answer is in Bold letters.

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Exercise on concepts: 4

A large company having profit of Rs 12,56,233.45 but

doesn’t report 45 paisa. Which accounting principle justifies
not reporting 45 paisa?

 Accounting period concept

 Materiality concept
 Realization concept

Correct answer is in Bold letters.

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Exercise on concepts: 5

A company has sold goods worth Rs 10,00,000 on 30 days

credit policy at 30th March, 2020. The company has
reported the sale in March itself while does not receive the
payment. This justify which principle?

 Matching concept
 Materiality concept
 Realization concept

Correct answer is in Bold letters.

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Exercise on concepts: 6

A company has sold goods worth Rs 10,00,000 and paid

sales commission. But the sales commission is paid to the
agent in the next financial period. Sales commission should
be reported in the current financial period and not in the
next financial period according to which concept.

 Matching concept
 Materiality concept
 Realization concept

Correct answer is in Bold letters.

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Exercise on concepts: 7

ABC company declared 5% bonus out of revenues to its

employees but it is not paid immediately rather paid when
the financial period is over. It will be reported in the period
when declared as per_________.

 Matching concept
 Materiality concept
 Realization concept

Correct answer is in Bold letters.

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Exercise on concepts: 8

A billion rupees company purchased a small machine of Rs

3000 having a life of 3 years and treated it as expense.
While according to matching concept, the 1000 rupees
should be debited in current year and upcoming two years.
Which accounting principle justify treating it like an expense
of only current year:

 Matching concept
 Materiality concept
 Realization concept

Correct answer is in Bold letters.

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Exercise on concepts: 9

Accountant is using the Straight line method in year 2019

but in the year 2020, he is using written down value method
for the depreciation purpose. He is violating the principle _.

 Materiality concept
 Realization concept
 Consistency concept

Correct answer is in Bold letters.

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Exercise on concepts: 10

The company pays annual insurance premium of Rs

1,20,000 in one payment each March 30. During the year,
the company reports Rs 30,000 as insurance expenses in
its quarterly income statement. This is the example of
which accounting principle:

 Materiality concept
 Matching concept
 Consistency concept

Correct answer is in Bold letters.

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Liabilities

 Liability is the financial obligation of the company or

which the company owes.

 Reported at company’s balance sheet.

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Assets

 Asset is a resource with economic value which a

firm/company owns or controls.

 Reported at company’s balance sheet.

Tangible
Fixed
Assets Intangible
Current
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Balance Sheet: Liabilities Side

Source: Ministry of Corporate Affairs, Schedule III of Companies Act 2013 (Revised)
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Balance Sheet: Asset Side

Source: Ministry of Corporate Affairs, Schedule III of Companies Act 2013 (Revised)
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Thanks

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