3. Accounting
• The process of recording of business
transactions is called accounting.
OR
• The action or process of keeping
financial accounts is called
accounting.
4. GAAP (Generally Accepted Accounting
Principles):
The rules that govern accounting
are called GAAP (Generally
Accepted Accounting Principles).
5. 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.
6. 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.
7. 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.
8. 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.
9. 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.
10. 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.
11. 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”.
12. 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.
13. 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.
15. 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.
16. Realization Concept
The Revenue principle governs two things:
1. When to record revenue
2. 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.
17. 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.
