Question

2) Summary:

Write a one page summary about the following title: " Common standards that indicate how to report economic events(GAAP)".

Answer 1

What is GAAP?

The basic accounting principles and guidelines that provides framework for accounting rules, standards and other accounting practices are known as Generally Accepted Accounting Principles (GAAP). Thus GAAP includes:

• Industry-oriented accounting practices to cover unexpected scenarios.
• Basic accounting guidelines/principles
• Accounting Standards that are issued by premier accounting body of the country

Generally Accepted Accounting Principles

Following are general accounting principles:

1. Business Entity Assumption: This principle states that business entity and its owner are two different entities and thus should be treated separate from its owner. It helps in recording financial transactions as distinguishing between those related to the business and those related to the proprietor personally.

2. Monetary Unit Assumption: ​​​​​​ According to this principle only those transactions should be recorded that are monetary in nature.

3. Accounting Period: It states that the accounting process of a business should end within a certain time period. Usually this time period is either a financial year or a calendar year.

4. Historical Cost Concept: It states that economic recourses or assets purchased by a business should be recorded in the books of accounts as per the cash or cash equivalent actually spent on them at the transaction date. Market value should not be recorded.

5. Going Concern Assumption: According to this, the owner has to assume that his/her business will continue to operate for an indefinite amount of time.

6. Full Disclosure Principle: This principle tells a business to disclose its financial transactions to its accounting users at the end of every accounting period.

7. Matching Concept: This principle requires the revenue to be matched with the expenditure of the current accounting period to calculate the true profit.

8. Accrual Basis Of Accounting: This principle tells that all revenue and expenditure should be recorded in the period the transaction actually happened and not when cash/cash equivalent has been received/spent.

9. Consistency: According to this entity have to follow a particular accounting procedure throughout its span. For example, if an entity is using straight line method of depreciation in 1st year it cannot switch to written down value method of depreciation in the upcoming years.

10. Materiality: This principle tells that certain errors may be ignored if their affect is nil to the financial statements.

11. Conservatism: This states that future losses should be anticipated but not future gains.