generally accepted accounting principles gaap definition

#GENERALLY ACCEPTED ACCOUNTING PRINCIPLES GAAP DEFINITION FULL#

Accrual Basis of Accounting: This principle requires all revenue and expenditure to be recorded in the period it is actually incurred and not when cash or cash equivalent has been received/spent.

Matching Concept: This concept requires the revenue for a particular period to be matched with its corresponding expenditure so as to show the true profit for the period.

At the transactional level, this is done by recording an adequate narration with every transaction and at the financial statement level, this is implemented by providing notes to the accounts.

#GENERALLY ACCEPTED ACCOUNTING PRINCIPLES GAAP DEFINITION FULL#

Hence the full disclosure principle requires the entity to disclose all the financial information relevant to the investor/user to assist him in decision making. Full Disclosure Principle: An accounting entry may not independently be able to provide all the relevant information relating to the transaction.This assumption is important because if the business entity were to liquidate in the near future, it would have to restate its assets and liabilities in the accordance with the actual amount that could be realised or payable as the case may be so as to reflect the true financial position of the entity. Going Concern Assumption: The business entity is assumed to be a going concern, i.e., it will continue to operate for an indefinite amount of time.The market value of the asset is not taken into account unless specifically required by law or an accounting standard. This would result in the value of the remaining asset constant irrespective of the accounting period. Historical Cost Concept: As a general rule, when certain economic resources or assets are acquired by an enterprise, they are recorded as per the cash or cash equivalent actually spent to acquire that resource or asset on the transaction date – even if the transaction happened the previous day or ten years ago.Thus, every transaction which relates to a particular accounting period will form a part of the financial statements prepared for that period. Accounting Period: This principle entails that the accounting process of a business should be completed within a certain time period which is usually a financial year or a calendar year.Monetary Unit Assumption: All the financial transactions of a business should be capable of being expressed in a monetary unit (Indian Rupees, for example) and if it is not possible to do so, then it should not be recorded in the books of accounts of the business.When the entire business with its assets and liabilities belong to the proprietor, the financial transactions need to be distinguished between those related to the business and those related to the proprietor personally. This concept is especially important while recording financial transactions of a sole proprietor.

Therefore, all financial transactions should also be distinguished in such a manner. Business Entity Assumption: It states that every business entity should be treated as an entity that is separate from its owners.The following are the general accounting principles as mentioned earlier: While the basic accounting principles may not directly form part of the accounting standards and the related laws, they are assumed and expected to be universally followed. The ICAI also releases guidance notes from time to time on various topics to help in the accounting process and provide clarity.

In India, financial statements are prepared on the basis of accounting standards issued by the Institute of Chartered Accountants of India (ICAI) and the law laid down in the respective applicable acts (for example, Schedule III to Companies Act, 2013 should be compulsorily followed by all companies).

Industry-specific accounting practices to cover unusual scenarios.

Accounting Standards usually issued by the premier accounting body of the country.

The Financial Accounting Standards Board (FASB) uses these principlesĪs a base to frame their own accounting standards. Standards and other industry-specific accounting practices.

(GAAP) are basic accounting principles and guidelines which provide theįramework for more detailed and comprehensive accounting rules,

Generally accepted accounting principles gaap definition