Accounting GAAP rules
- 1. Topic: GAAP (Generally Accepted Accounting Principles) Prof. Faisal Azam
- 2. What is G.A.A.P? Why these principles are necessary to follow? Third party satisfaction Principles Conclusion Outline
- 3. What is G.A.A.P? 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.
- 4. Why these principles are necessary to follow? These principles are necessary to follow because it helps a lot in 1. making long term decisions 2. financial decisions 3. maintaining records. 4. It makes easy to compare financial statements of different com panies.
- 5. Third Party Satisfaction Third parties like 1. creditors, 2. banks, 3. share holders must have to rely on reported financial statements so it must be free of errors, inconsistency and bias .It could only be possible by following G.A.A.P.
- 6. 1. 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.
- 7. 2.Money Measurement Concept Only the transactions which can be recorded in ter ms of money are recorded. This is being used so as to provide a common sta ndard (i.e.money) for measurement.
- 8. 3.Dual Aspect Concept (IMP) Every business transaction has adual affect i.e.it affects two accounts. This isbased on accounting equation: Liabilities = Assets. Owner’s equity + Outsider’s equity = Assets. This equation can be explained as “forevery debit there is an equivalent credit”.
- 9. 4.Going ConcernConcept 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.
- 10. 5.Cost Concept The cost concept clarifies that any asset, liability, purchase of go ods or any other business transaction shall be initially recorded at the original cost price rather than the market value (if differe nt) which includes all the costs that incurs while making the ass et ready to use.
- 11. 6.Accounting Period Concept Accounting period is the period of time, at the end of which financial statements are prepared to throw light on the results of the operations at the end of arelevant period and the financial position at the end of a relevant period.
- 12. 7.Realization Concept The realization principle is the concept that revenue can only be recognized once the original goods or services associated with the revenue have been delivered or rendered, respectively. Thus, revenue can only be recognized after it has been earned. A customer pays $1,000 in advance for a custom-designed product. The seller does not realize the $1,000 of revenue until its work on the product is complete.
- 16. What Is an Accounting Convention? Accounting conventions are guidelines used to help companies determine how to record certain business transactions that have not yet been fully addressed by accounting standards. These procedures and principles are not legally binding but are generally accepted by accounting bodies In short, accounting conventions serve to fill in the gaps not y et addressed by accounting standards.
- 18. Prudence / Conservatism Don’t anticipate a profit . But provide for All P ossible losses, In other words , it takes in consideration all pr ospective losses but not prospective profit.
- 19. Consistency A company should apply the same accounting principle s across different accounting cycles. Once it chooses a method it is urged to stick with it in the future, unless it has a good reason to do otherwise. Without this conven tion, investors' ability to compare and assess how the c ompany performs from one period to the next is made much more challenging.
- 20. 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.
- 21. Materiality Only material or significant details are to be recorded exit the insignificant or small details. This is done to prevent overburdening of accounts.