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Generally Accepted Accounting Principles

The Backbone of Accounting Information system,

1. Accounting Assumptions.2. Accounting Concepts/Conventions.3. Accounting Standards.

( Accounting Principles are the doctrines behind the application of accounting concepts/practices)

Consistency

Accrual

Going concern

FUNDAMENTAL ACCOUNTING ASSUMPTIONS

Meaning : Accounting policy chosen should be consistently applied

Example : ABC Ltd. uses WDV method of Depreciation, year after year.

Objective: Comparability, Understandability

Consistency

- 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.

Accrual

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 distinctiontransactions- 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

-

Basis of Accounting

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.

Going Concern

AS PER ACCOUNTING STANDARD 1

“ DISCLOSURE OF ACCOUNTING POLICIES”

ACCOUNTING ASSUMPTIONS ARE NOT TO DISCLOSED (IF FOLLOWED)

Fundamental Accounting Assumptions

Business Entity Money Measurement Dual Aspect

Historical Cost

Conservatism

Matching Periodicity Materiality Full

Disclosure

Revenue Recognition

Accounting Concepts

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

Business Entity Concept

Asset/Liability – recorded at ORIGINAL COST

Market Value/Time value of money- not considered.

Original Cost= Purchase Cost + Capital Expenditure

Historical Cost Conept

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 measurement Concept

A scale/standard of measurement Limitations:

1. No universal denomination.2. Not stable in the dimension3. Not an exact measurement discipline

Elements :

a. Identification of objects & events to be measured

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

standard or scale.

Money

Historical Cost Realizable value

Current/Replacement Cost

Present Value (as per time value of money)

Note : Future Value is ignored

Valuation Principles

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

Periodicity Concept

The periodical revenues earned & expenses incurred should be matched.

Helps in compiling P & L A/c

Matching 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”

Dual Aspect 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

Conservatism Concept

Items having significant effects

(relevant for decision makers)

Should be disclosed separately ( highlighted)

exception of the full disclosure conceptNote :a. Materiality (both quantitative/qualitative point of view)b. Insignificant/Small items may be ignored.

Materiality

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”

Full Disclosure Concept

Also called as “Realization concept”

Transaction to be recognized when “realized”

REVENUE RECOGNITION CONCEPT

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 depreciationb. Valuation of inventoriesc. Valuation of investmentsd. Etc.

Accounting policies

Basis of selection of Accounting policies

Prudence Materiality

Substance over form

Note : The characteristics of True & fair view & Accrual is also considered

Selection of Accounting policies

Accounting policies should be consistently applied

Policy can be changed :

a. Change is required as per statute/legislatureb. Change is for compliance of Accounting Standardc. For more better/appropriate presentation of

financial statement

Accounting policies

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.

Accounting estimates

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

MCQs

Comparability

Convenience

Consistency

All of the above

C

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

MCQs

Money Measurement Concept

Going concern Concept

Business Entity Concept

Dual Aspect Concept

c

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

MCQs

Historical Cost

Present Value

Future Value

Net Realizable Value

c

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

Money measurement

Conservatism

Cost

Periodicity

b

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

MCQs

Posting

Journalizing

Balancing

Casting

a

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

MCQs

Prudence

Substance over Form

Materiality

All of These

c

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

MCQs

One

Two

Three

Four

b

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

MCQs

Accrual concept

Conservatism concept

Dual aspect concept

Entity concept

d

Q.9. Fundamental Accounting Assumptions are:

MCQS

Going Concern, Conservation, Accrual

Going Concern, matching, consistency

Going concern, Consistency, Accrual

Going concern, entity, Periodicity

c

Q.10. Double entry Principle means:

MCQs

Writing twice the same entry

Writing all the entries twice in the book

Having debit for every credit and credit for each debit

All of the above

c