Topic: GAAP (Generally Accepted Accounting Principles)

Presented by: M.Nauman Sher

Accounting

• The process of recording of business transactions is called accounting.OR

• The action or process of keeping financial accounts is called accounting.

GAAP (Generally Accepted Accounting Principles):

The rules that govern accounting are called GAAP (Generally Accepted Accounting Principles).

GAAP (Generally Accepted Accounting Principles):

• The common set of accounting principles, standards and procedures.

• Combination of authoritative standards (set by policy boards) and simply, the commonly accepted ways.

GAAP (Generally Accepted Accounting Principles):

Explanation:• Provides a fair financial image of the company.• Provides with different Information:– Revenue recognition.– Balance sheet item classification.– Outstanding share measurements.

3 Main Categories of GAAP:• Assets: An asset is an item of value

owned by a company.• Liabilities: In

accounting, liabilities are obligations of the company, to transfer something of value to another party.

• Equity: Equity is the owner's value in an asset or group of assets.

The GAAP principles are divided into two categories:

1. Accounting Concepts: Accounting Concepts are basic assumptions or conditions upon which science of accounting is based.

2. Accounting Conventions: Accounting Conventions include those customs and traditions which are followed up by an accountant while preparing a financial statement.

GAAP Principles:

Accounting Concepts

Accounting Concept Includes:

Separate Entity Concept

It is helpful in keeping the business affairs strictly free from the effect of the private affairs of the proprietor(s).

Amount invested by the proprietor is shown as “ Liability”.

Amount paid for the personal expenses of the proprietor are shown as drawings from the capital of the proprietor.

ACCOUNTING CONCEPTS

Money Measurement Concept

Only the transactions which can be recorded in terms of money are recorded.

This is being used so as to provide a common

yardstick (i.e. money) for measurement.

ACCOUNTING CONCEPTS

Dual Aspect Concept (IMP)

Every business transaction has a dual affect i.e. it affects two accounts.

This is based on accounting equation:Liabilities = Assets.

Owner’s equity + Outsider’s equity = Assets.

This equation can be explained as “for every debit there is an equivalent credit”.

ACCOUNTING CONCEPTS

Matching Concept

It is the basis for recording expenses and includes two steps:

1. Identify all the expenses incurred during the accounting period.

2. Measure the expenses and the match the expenses against the revenues earned.

Revenues – Cost = Net income or Profit.

Accounting Concepts

Going Concern Concept

Business would continue to operate indefinitely in the future. Business

will not cease doing business, neither; it will sell its assets to pay

off its liabilities.

Accounting Concepts

Cost Concept

Assets and liabilities should be recorded at the historical cost i.e. costs as on

acquisition.

Accounting Concepts

Accounting Period Concept

Accounting period is the span of time, at the end of which financial statements are

prepared to throw light on the results of the operations at the end of a relevant period and the financial position at the end of a relevant

period.

Realization Concept

The Revenue principle governs two things:

1. When to record revenue2. Amount of revenue to record

To be recognized, revenue must be:

Earned: Goods are delivered or a service is performed.

Realized: Cash or claim to cast (credit) is received in exchange for goods and services rendered.

Accounting Concepts

Accounting Conventions

Full Disclosure

Financial statements should be honestly prepared and sufficiently, disclose information

which is of material interest to proprietors, present and potential creditors and investors.

Accounting Conventions

Materiality

Only material or significant details are to be recorded leaving the insignificant or minute

details. This is done to prevent overburdening of accounts.

that’s All for the Presentation.