Principles of Accounting
B.Sc. (A&F) – 1st Semester
Generally
Accepted
Accounting
Principles
(GAAP)
Presented By:
Hassan Javed
Lecturer, BBA Department
National University of Modern
Languages, Rawalpindi
GAAP (GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES)
 The
common set of accounting principles, standards and
procedures.
 These provide a fair financial image of the company.
 These provide information about:
Revenue recognition
Balance sheet item classification
CLASSES OF GAAP
Accounting
Concepts:
These
are
the
certain
basic
assumptions upon which science of accounting is based.
Accounting Conventions: These are customs and traditions
which are followed by an accountant while preparing a financial
statement.
ACCOUNTING CONCEPTS
1. Business Entity Concept
2. Going Concern Concept
3. Dual Aspect Concept
4. Cost Concept
5. Money Measurement Concept
6. Accounting Period Concept
7. Realisation concept
8. Matching Concept
ACCOUNTING CONCEPTS
Business Entity Concept:
According to this concept;
 The business is treated as a unit or entity separate from its
owners.
 Amount invested by proprietor is shown as liability.
 Amount paid for personal expenses of proprietor are shown as
drawings from capital of proprietor.
ACCOUNTING CONCEPTS
Going Concern Concept:
 Business concern will continue for an indefinite period.
 Enterprise will not cease doing business; it will not sell off its
assets nor look for liquidation.
ACCOUNTING CONCEPTS
Dual Aspect Concept:
Under this concept for every debit, there is a credit.
Briefly the dual aspect concept can be expressed as under:
Capital + Liabilities = Assets
ACCOUNTING CONCEPTS
Cost Concept:
 Fixed assets are recorded at cost price and are systematically
reduced by the process called depreciation.
 These assets will disappear from balance sheet at the end of their
economic life when they have been fully depreciated and sold as
scrap.
ACCOUNTING CONCEPTS
Money Measurement Concept:
 Only those transactions are recorded which can be expressed in
monetary terms.
 For Example: an efficient dedicated manager is definitely an asset
to the business, but since the monetary measurement is not
possible so it is not shown in books.
ACCOUNTING CONCEPTS
Accounting Period Concept:
 It is necessary to know at frequent intervals “how things are
going”.
 Twelve month period is usually adopted for this purpose. This
time period is called Accounting Period.
ACCOUNTING CONCEPTS
Realisation Concept:
 Revenue is considered earned on the day
 Transfer goods to customer in exchange of valuable consideration
 This is of great importance in stopping business from inflating
their profit
 The accountant usually use dates
ACCOUNTING CONCEPTS
Matching Concept:
 Profit is most important factor for the proprietor to keep the
business activities
 Revenue and their related expense in the same accounting period
 Purpose of matching concept is to ovoid misstating earning for a
period
ACCOUNTING CONVENTIONS
1. Convention of Consistency
2. Convention of Full Disclosure
3. Convention of Conservatism
4. Convention of Materiality
ACCOUNTING CONVENTIONS
Convention of Consistency:
 Accounting method and policies remain same from one period to
another
 Circumstance changes become necessary so the change should be
stated clearly
ACCOUNTING CONVENTIONS
Convention of Full Disclosure:
 Financial
statements
and
their
notes
should
information that is relevant and material
understanding of the statement.
to
present
all
the users
ACCOUNTING CONVENTIONS
Convention of Conservatism:
 Losses are recorded when they are expected to occur
 Gains are only recognized once they are certain to happen (i.e.
they have earned)
This is done to:
 Assets and revenue are not overstated
 liabilities and expenses are not understated
ACCOUNTING CONVENTIONS
Convention of Conservatism:
 Example applying Conservatism
Losses
A business owns inventory that was bought for $12000.
It has gone down in value and is now worth just $8000.
ACCOUNTING CONVENTIONS
Convention of Conservatism:
 Example applying Conservatism
Gains
A business owns a building that originally cost
$500,000. But growth in the property market means
the building is now valued at $600000 if were to be sold.
ACCOUNTING CONVENTIONS
Convention of Materiality:
 Only those transactions, important facts and items are shown
which are useful and material for the business.
 The firm need not record immaterial and insignificant Items
EXAMPLE
 Company XYZ Ltd. Bought 6 months supplies of stationery worth
$600. This amount is so small or immaterial, it can be expensed
off in a next month instead of expensing it in the next 6th month.
ANY
QUESTIONS