Accounting Concepts, Principles, Bases and Policies

Generally Accepted Accounting Principles (GAAP)

Accounting principles are basic rules of action, which are adopted by the accountants while recording transactions and preparing and presenting financial statements. These are the doctrines associated with theory and current practices of accounting.

GAAP are accepted universally and consists of :

• Accounting Concepts : basic assumptions or conditions guiding the accountants while preparing accounting statements. There are five basic concepts of accounting :

1. Business entity concept states that the business is a separate entity and it is different from the owners or proprietors. This has legal as well as accounting implications. The business transactions of the company can be segregated from those of the owners.
2. Going concern concept states that the business is assumed to continue fairly for a long period of time and that there is no need to shut it down.
3. Money measurement concept : All transactions of a business are recorded in terms of money. Some transaction like cost of input or profit are already in terms of money, but some that cannot be monetized are ignored like brand value of a company.
4. Periodicity concept : as per going concern, a business is meant to be ongoing. But to look back on performance, take corrective actions the operating period is split into regular intervals called accounting periods.
5. Accrual concept states that expenses incurred and income earned for an accounting period must be recorded in the same period whether expenses are paid and income is actually received or not.

• Accounting Conventions : customs and traditions that guide the accountants while preparing accounting statements. There are ten types of accounting conventions :

1. Convention of income recognition : revenue is considered as being earned on the date on which it is realized, that is the date on which goods and services are transferred to customers for cash or on promise.
2. Convention of matching cost and revenue : revenue earned during a period is compared with the expenses incurred to earn that income, irrespective of whether the expense was paid or not.
3. Convention of historic cost : says that all transactions are recorded at the value at which they were incurred and all assets are recorded at the value of acquisition irrespective of market value etc. Such a value is called Historical Cost and this principle is called convention of 'Cost'.
4. Convention of full disclosure : requires a business to disclose :
1. All accounting policies adopted in preparing and presenting the financial statements.
2. Any change in accounting policies and the reasons thereof.
3. The implication(in terms of money) of the change in policies.
5. Convention of double aspect : states that every transaction has two aspects. One is the receiving aspect and the other one is the giving aspect, debit and credit.
6. Convention of modifying
7. Convention of materiality : states that the benefit derived from measuring, recording and processing a transaction must justify the cost of doing it.
8. Convention of consistency : requires that the accounting policies be same from year-to-year. This helps in easy comparison of financial data with previous data. The accounting policy can only be changes when :
1. It is justified by law
2. the new policy better reflects the financial standing or position
9. Convention of conservatism : accountants follow the rule "anticipate no profits but provide for all anticipated losses". When a loos is anticipated, sufficient provision must be made. IF a profit is anticipated, it should not be recorded until it is actually realized.

Accounting Policies : are specific accounting principles and methods of accounting adopted by a business while preparing and presenting the financial statements. Major considerations in the selection and application of accounting principles :

• Prudence
• Substance over form
• Materiality

Change in accounting policy : is recommended only if

1. If it is required by statute for compliance with an accounting standard.
2. If it is considered that the change would results in a more appropriate presentation of statements

Disclosure in case of change in accounting policies : must be done irrespective of whether the change has material effect in current period and irrespective of whether the effect of change is ascertainable.

Mandatory and Voluntary disclosures : 

The minimum disclosure a business must and should give as required by government, statutory or accounting bodies is called mandatory disclosure.

The company may decide to disclose additional information over and above the mandatory disclosure which is known as voluntary disclosure.

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