Accounting is the language of business.

In order to make this language intelligible and commonly

understood by all, it is necessary that it should be based on certain uniform scientifically laid down
standards. These standards are termed as accounting principles.

Accounting Principles may be defined as those rules of action or conduct which are adopted by the
accountants universally while recording accounting transaction. These are body of doctrines commonly
associated with the theory and procedures of accounting serving as an explanation of current practices
and as a guide for selection of conventions or procedures where alternatives exist

GAAP stands for "Generally Accepted Accounting Principles," a collection of commonly followed
accounting rules and standards for financial reporting.

GAAP specifications include definitions of concepts and principles, as well as industry-specific rules.
The purpose of GAAP is to ensure that financial reporting is transparent and consistent from one
organization to another.

There is no universal GAAP standard and the specifics vary from one geographic location or industry to
another. In the United States, the Securities and Exchange Commission (SEC) mandates that financial
reports adhere to GAAP requirements. The Financial Accounting Standards Board (FASB) stipulates
GAAP overall and the Governmental Accounting Standards Board (GASB) stipulates GAAP for state and
local government. Publicly traded companies must comply with both SEC and GAAP requirements.

Many countries around the world have adopted the International Financial Reporting Standards (IFRS).
The SEC has released a proposed roadmap for conversion from GAAP to IFRS by 2014.

These principles can be classified in to two categories.

Accounting Concepts and Accounting Conventions

Accounting Concepts include those basic assumptions or conditions upon which the science of
accounting is based. The Institute of Chartered Accountants of India in its Accounting Standard-I (AS-I)
has stated that going concern, accrual and consistency are fundamental accounting assumptions. For the
sake of convenience all accounting concepts are discussed under two headings:

• Basic accounting concepts

• Accounting concepts related to income measurement

Basic Accounting Concepts are:

• Entity Concept • Money Measurement Concept

• Going Concern Concept • Cost Concept

• Dual Aspect Concept • Full Disclosure Concept

• Objectivity Concept • Accrual Concept

Accounting concepts related to income measurement are:

• The Time Period Concept (Periodicity Concept) • The Revenue Recognition (Realisation) Concept

• The Matching Concept • The Materiality Concept

• The Consistency Concept • The Conservatism (Prudence) Concept

Conventions are the customs and traditions that act as a guide to the preparation
of the financial statements. Following these conventions leads to clear and
meaningful financial statements. The conventions followed to
prepare accounting statements are the :

Convention of Full Disclosure

Convention of Materiality

Convention of Consistency

Convention of Conservatism

Convention of Full Disclosure

The accounting convention of full disclosure implies that accounts should make a
full disclosure of all monetary or financial information that can impact decision
making of different parties. This accounting information is of interest to the
management, current and potential investors and current and potential creditors of
the business.

Convention of Materiality

The convention of materiality proposes that while accounting for various

transactions, only those transactions should be considered which have material
impact on the profitability or the financial status of the organization. For example,
for a business that buys and sells stationery items, the pens lying unsold at the end
of the accounting period are material items for the business. These will be recorded
in the books of account. On the other hand, for a business that manufactures cars,
the unused pens are not material items and will not be recorded in the books of
account. Similarly, insignificant transactions or items, such as postage stamps lying
unused, at the end of the accounting period will be ignored. Material information is
the information that enables any prudent person to arrive at a decision.

Convention of Consistency

To build business strategies the management of a company needs to arrive at

important conclusions and take important decisions from the financial statements
over a period of years. The convention of consistency specifies that the accounting
practices and methods used by an organization should remain consistent over the
years.

Consistency should be maintained within the inter-related financial statement for

the same date. The performance of the company in one year with the performance
in the next year or another year should be such that it can be compared. This is
referred to as Horizontal Consistency.

The comparison of the performance of one company with that of another company
in the same industry can also be done. This is often referred to as Third
Dimensional.

Convention of Conservatism

The convention of conservatism follows the policy of cautiously creating financial

statements in a conservative manner. This principle considers all prospective losses
and ignores all perspective gains. It is defined as a guideline that chooses between
acceptable accounting alternatives for recording events or transactions so that the
least favorable immediate effect on assets, income and owners equity is reported in
the accounting period.