Saturday, June 18, 2011

Explain the meaning of generally accepted accounting principles and discuss in brief the accounting concepts that are being followed in your organization. Give your suggestions if any.


Explain the meaning of generally accepted accounting principles and discuss in brief the accounting concepts that are being followed in your organization. Give your suggestions if any.


Ans.        Generally Accepted Accounting Principles are the rules and concepts which have been accepted by accounting community for sound accounting practice.. 
                Their usefulness depends on ‘general acceptability’ rather than ‘individual acceptability’ of accounting concepts.  They (GAAP) have been formalised on the basis of usage, reason and experience.  As stated by the American Institute of certified Public Accountant ( AICPA )-
                “Generally Accepted Accounting Principles incorporate the consensus at any time as to which economic resources and obligations should be recorded as assets and liabilities, which changes in them should recorded; when these changes should be recorded; how the recorded assets and liabilities and changes in them should be measured, what information should disclosed and how they should be disclosed and how they should be disclosed and which formal statements should be prepared.”
                Thus Generally Accepted Accounting Principles (GAAP) comprise a set of rules, concept and guidelines used n preparing financial accounting reports.
Accounting concepts:
                Following is the list of accounting concepts agreed to by the accountants:  
(1)                 Business entity concept
(2)                 Going concern concept
(3)                 Dual aspect concept
(4)                 Money measurement concept
(5)                 Accounting period concept
(6)                 Cost concept
(7)                 Periodic matching of cost and revenue
(8)                 Verifiable objective evidence concept
(9)                 Realization concept
(10)              Disclosure concept
(11)              Materiality concept
(12)              Consistency
(13)              Conservatism concept

Reliance of some of the important

Accounting concept is discussed below:
(1)           Cost concept:
                The underlying idea of cost concept is that:
(i)                   Asset is recorded at the price paid to acquire it-that is, at cost; and
(ii)                 This cost is the basis for all subsequent accounting for the asset
Current market price of the asset is irrelevant for financial accounting unless the management decides to go for revaluation of assets-in which case, a “note the balance sheet” will appear-mentioning about this fact and its impact on the profit or less of the organisation.
Cost concept implies that if nothing has been paid acquiring an asset, it would not be shown in the accounting books as an asset.
(II) Consistency concept:
                This lies down that accounting policies remain the same different years. Any change in accounting policy in a particular year will be reflected as a ‘Note to Balance Sheet’ mentioning about this fact and the effect of such change in the profit/loss of the company
(III) Disclosure Concept:
                This concept implies that all material information must be disclosed in the accounts.  There has to be sufficient disclosure of information, which is of material interest to proprietors, present and potential creditors and investors.  Examples are:
(a)                 Contingent liabilities appearing as a note.
(b)                 Market value of investments appearing as a note
IV) Materiality concept:
                American Accounting Association defines the term materity as under:
                “An item should be regarded as material if there is reason to believe that knowledge of it would influence the decision of informed investor”
Example: Spillage of a can of fuel oil in shop floor in not treated of ‘material’ importance. But accident loss due to fire in the fuel oil storage is to be regarded as of significance and importance and hence material.

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updated till june 2011