General Accepted

Accounting Principles
GAAP

The acronym (ak-ruh-nim) GAAP

Stands for
Generally Accepting Accounting
Principles are rules that accountants
have to follow when preparing financial
statements.
There are many rules, however I will
only be looking at several

The Business Entity assumption:

This means that the activities of the
business must be kept separate of the
activities of the business owner.
For example food, clothing and heat and
light expenses for the business owner
private residence must not be recorded in
the accounts books of the business.

Dual Aspect Concept:

This concept states that each financial transaction affects
two accounts, and should therefore be recorded at two
places.
At least two accounts will be involved in recording a
transaction.
One account will increase and one will decrease.
That is one account should debited and the other credited

Dual Aspect Concept:

Example: A new machine is purchased paying cash.
What the business owns is increasing, and at the same time what the
business owns is decreasing.
Machine is increasing and cash is decreasing
Example two: Cash paid to repay bank loan
What the business owns (cash) is decreasing, so to what the business
owes (bank Loan) is decreasing.

Dual Aspect Concept:

Example Three: Purchased new machine on
credit.
What the business owns (Machine) is increasing
and what the business owes, or what the
business has to repay (creditor) is also
increasing.

Dual Aspect Concept Increasing

Credit Example
Say you obtained An IPad costing $1000 from Courts Store, based on
the trust that you will make the payment at a later date.
So have gained the Ipad, also you are owing Courts $1000.
A week later, Courts Store got a shipment of I phone Seven cost $1600,
and you want one. You decided to borrow the $1600 from your friend.
Now you owned, an IPad and an I Phone, however, you are owing
Courts $1000 plus you are owing your friend $1600. So what you owns
have increased, so too the monies you are owing have increased.

Dual Aspect Concept:

This Dual Aspect Concept is also explained by the accounting
equation as follows: Assets = Capital + Liabilities
The equation can also be written as:
Profit
Assets = liabilities + (Revenue Expenses)
Capital is the money the owner of the business invested (put
into ) the business. Thus the profit that the owner makes is
also consider to be capital. This is because the owner is using
the profit to reinvest (put back into) into the business. Please
note that capital is a liability (what the business owes).

Dual Aspect Concept:

Rearranging the formula, the equation can be written as:
Expenses + Assets = Liabilities +Revenues
Expenses + Assets are on the left side of the equation so you
will debit these when they are increasing. Meanwhile, Liabilities
and Revenues are on the right side of the equation, so you will
credit when they are increasing
All accounts are based on this concept. We you will be
preparing journals, ledgers and trial balances later, so you will
understand it better.

Money Measurement
Concept
Only those transactions that can be expressed in money
terms (financial transactions) are recorded in the
books.
Non-financial transactions are therefore not recorded.
Some strengths or benefits of the business may not be
reflected in the books since they cannot be expressed in
money terms examples are quality of work force

Historical Cost Concept

In your financial statements, particulars are recorded
at their original price.
Assets and expenses are recorded at the actual
amount spent. Revenues are recorded at actual
amount received.
Liabilities are recorded at the actual amount borrowed

Going Concern principle:

This principle states that when preparing
accounting records, the accountant must
assumed that the business will continue to
operate as far as he can predict, that the
business have no intention of closing down.
In other words it assumed that the business will
go on and on, that businesses will have a long life
and not close in the immediate future.

Consistency
An accountant has to be consistence (steady) in the
method of accounting he uses.

He cannot use one method this period and the prior

period used another method. Changing the methods year
after year, he has to be consistence in the method he
uses.
However it does not mean that the business has to follow
the method for years and year, or until it operation

Consistency
He can change the method but he have to make it known to
the users of the information that he has changed the method
he was using.

The concept is to prevents accountants from manipulating the

results of a business by simply changing the accounting
method
For example, the accountant has to use the same method of
depreciation ever accounting period.

Prudence
Also known as the conservatism: This concept
states that An Accountant should not record
anticipate income. However, he must provide for all
anticipated losses.

The business should not inflate his profit and

minimize it losses.

Example: if a business assumed it may earned some

Prudence
However, if the accountant believe that the
business may in the near future, incurs
some losses, the accountant must accounts
for the anticipated losses in his accounting
books.

Likewise the business cannot valued it

assets higher than they are actually are and

Prudence

This is necessary so the financial

statements can show a true
representation of the business
profits or losses or the business
assets and liabilities so it cannot
miss lead users of the information.

Prudence
For example, if a company overstate it
profit, and understate it liabilities, an
investor might think the company is doing
very well and invest in the company, but in
reality the company is losing money, so too
will the investor loose the money he
invested or the returns on his investment
would not be as high as he had anticipated
from the financial statement.

Accruals and Matching Concept

This concept says that Net Profit is the sum of sales less
expenses incurred in generating those revenue.
Net Profit = Revenues - expenses
Net Profit is the money the business made from sales after
the business has paid all expenses it incurred.
What is sales, Revenue is money received when the goods
or services are sold?
What is Revenue, it is money earned
What is an expense, it is money that the business used.

Accruals and Matching Concept

This concept is saying that the revenues for a certain period must
match the expenses the business incurred during that same period to
generate the revenue. That is why this concept is also called the
matching concept.

Because revenues have to match expenses, when the accountant is

writing up his records for the period, he has to also include in his
accounting books, all expenses incurred.

Goods sold must match revenues received. That is why cost of goods
sold is deducted from sales on the profit and loss account

Accruals and Matching Concept

Example you purchased 1000 apples at $2 each,
and you sold 800 apples for $4, What is the
profit?
Apples Sold

800X$4

Cost of Apples sold

3,200

1000x$22000

Less Apples Remaining 200x2 (400) (1,600)

Profit

1,600

Accruals and Matching Concept

There are time with a company will have an expense in
a given period and money is owing on the expense.
The Accruals concept says the accountant also has to
record that expense in his book.

For example you are owing rent for September, you

havent paid for it. Because expenses have to match
revenues, you will have to include it in your September
accounts.

Accruals and Matching Concept

Also that is why when the business buys
goods on credit it is entered into the
accounting books on the date the
transaction occurred.

Example: if you purchase a TV on credit for

$1000 on 16 September from Singer and
paid for it on 20 September.

Accruals and Matching Concept

According to the accrual principle, when should
Singer record it? Singer will record 1000 as
revenue on 16 September, even if they did not
receive the cash.

Expenses such as salaries, rent, insurance are

recognized on the basis of period to which they
relate and not when there are paid.

Accruals and Matching Concept

That is because singer have to record it
when the sale is confirmed even if the
money is received a few weeks later.

If Singer got an electric bill for 2000, and

has not paid it, it will still be recorded as
electricity owing or accrued electricity 2000.