Chapter – 2, Accounting Principles and Standards

Chapter – 2, Accounting Principles and Standards
Accounting principles, concepts and convention are known as generally accepted accounting principles (GAAP). These principles are the base of accounting. Generally accepted accounting principles (GAAP) refers to the rules or guidelines adopted for recording and reporting of business transactions, in order to bring uniformity and consistency in the preparation and the presentation of financial statements.

These principles have evolved over a long period of time on the basis of experiences of the accountants, customs, legal decisions etc., and which are generally accepted by the accounting professionals.

 Fundamental accounting assumptions

1. Going concern assumption: This concept assumes that an enterprise has an indefinite life or existence. It is assumed that the business has neither intention to liquidate nor to scale down its operations significantly.

Relevance:
a) Distinction is made between capital expenditure and revenue expenditure

b) Classification of assets and liabilities into currert and non-current.

C) Depreciation is charged on fixed assets, and fixed assets appear in the balance sheet at book value without having reference to their market value.

2.Consistency Assumption, According to this assumption , accounting practices once selected and adopted, should be applied consistently year after year. This will ensure a meaningful study of the performance of the business for a number of years.

Consistency assumption does not means that particular practice, once adopted, cannot be changed. The only requirement is that when a change is desirable, it should be fully disclosed in the financial statements along with its effect on income statement and balance sheet.

Any accounting practice may be changer if the law or accounting standard requires so, to make the financial information more meaningful and transparent.

Relevance: It helps the management in decision- making by utilizing the comparable financial information.

3) Accrual assumption: Accrual concept applies equally to revenue and expenses. As per this assumption, all revenue and cost are recognized when they are earned or incurred.

It is immaterial, whether the cash is receive or paid at the time of transaction or later date e.g., if a credit sale (credit for two months) for Rs. 15,000 is made on 15th feb .2016, then the revenue earned is to be recorded on 15th feb 2016 not on the date of cash realized, i.e., after two months. In case of expenses, if at the end of the year the two months salary is due but not paid, the expenses of salary will be recorded in the current year in which salary is due, not in the next year in which it will be paid.

Relevance: Earning of a revenue and consumption of a resource (expenses) can be accurately matched to a particular accounting period.