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Definition: Generally Accepted Accounting Principles - GAAP
GAAP is a set of accounting principles, rules and standards according to which financial statements are reported by the firms. These standards were framed General accounting standard board which was set up in 1984.
However with more than 100 countries joining in support of the International Financial reporting standards in London US has agreed to adopt theses standards by 2014.
The basic principles, assumptions and constraints in GAAP
Going Concern Concept -It is assumed that business as an entity will run infinitely long time.
Accounting Principle- It treats the business and individual as separate entities Hence the personal expenses and business should be maintained separately. For eg If the owner runs his business in his house. It contains 3 rooms out of which 1 room is for personal use and 2 rooms for official purpose. The rent for electricity during a certain month is Rs 3000. The expenses shown in the balance sheet must be Rs 2000 as our business has consumed it.
Historical matching concept – It states that the accounting should be done on actual basis and not on market biased or a fair price basis
Revenue recognition model – It states that the revenues should be recorded at the instance of sales taking place and not in advance .It is also known as accrual system of accounting.
Objectivity principle states there should be no subjectivity in reporting of financial statements.
Materiality –Significance of an item should be reported when it affects the decision taken by an individual
Conservatism states that in case of two different values of assets the one which is greater should be accepted.
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