1. Generally Accepted Accounting Principles

CHAPTER -2

THE THEORY BASE OF ACCOUNTING

Generally Accepted Accounting Principles (GAAP)

In order to maintain uniformity and consistency in accounting records, certain rules or principles have been developed which are generally accepted by the accounting profession. These rules are called by different names such as principles, concepts, conventions, postulates, assumptions and modifying principles. The term ‘principle’ has been defined by AICPA as ‘A general law or rule adopted or professed as a guide to action, a settled ground or basis of conduct or practice’.

The word ‘generally’ means ‘in a general manner’, i.e. pertaining to many persons or cases or occasions. Thus, Generally Accepted Accounting Principles (GAAP) refers to the rules or guidelines adopted for recording and reporting of business transactions, in order to bring uniformity in the preparation and the presentation of financial statements. For example, one of the important rule is to record all transactions on the basis of historical cost, which is verifiable from the documents such as cash receipt for the money paid. This brings in objectivity in the process of recording and makes the accounting statements more acceptable to various users. The Generally Accepted Accounting Principles have evolved over a long period of time on the basis of past experiences, usages or customs, statements by individuals and professional bodies and regulations by government agencies and have general acceptability among most accounting professionals.

However, the principles of accounting are not static in nature. These are constantly influenced by changes in the legal, social and economic environment as well as the needs of the users. These principles are also referred as concepts and conventions. The term concept refers to the necessary assumptions and ideas which are fundamental to accounting practice, and the term convention connotes customs or traditions as a guide to the preparation of accounting statements. In practice, the same rules or guidelines have been described by one author as a concept, by another as a postulate and still by another as convention. This at times becomes confusing to the learners. Instead of going into the semantics of these terms, it is important to concentrate on the practicability of their usage. From the practicability view point, it is observed that the various terms such as principles, postulates, conventions, modifying principles, assumptions, etc. have been used inter- changeably and are referred to as Basic Accounting Concepts in the present chapter.

Generally Accepted Accounting Principles

1.  GAAP is a collection of commonly followed accounting rules and standards in the preparation of financial statements. 
2. GAAPs are generic in nature and every country has its own GAAP, Example UK GAAP, US GAAP.
3.  In India, we have Indian Accounting Standards which are more specific to Indian Accountants.
4. These principles are referred to as concepts or principles.
5. Accountants are prepared on the basis of the principles laid down by IFRS.
6. IFRS helps in Financial statements comparison, uniformity and analysis.
7. The standards are prepared by the Financial Accounting Standards Board (FASB)
8. These principles are constantly changing due to changes in the external environment (legal, social and economic environment)
9. Cost basis principle requires that assets will be shown in the financial statements “on cost” i.e. on the purchase price. This has to be supported with the bill or voucher for correctness and trueness.