GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

Generally Accepted Accounting Principles (GAAP) is a set of

globally accepted principles of accounting. GAAP prescribes certain
specified accounting principles, definitions, treatment of confusing
entries, and industry-specific rules which ensure a consistency in the
financial and accounting statements of all organizations.

Important points about GAAP-

GAAP allows external readers of financial statements to

understand the accounts of a business easily.
GAAP also aims at ensuring accurate and honest representation
of financial statements.
The principles of GAAP make sure that accounts are not
manipulated by business managements as per their
requirements.
GAAP can however not be said to be a universal code of
accounting, as such a thing does not exist as of yet.
Specifications and details of GAAP may differ based on the
business’ geographic location, accounting body, industry, etc.
 Accounting Principles

Description of accounting Fundamentals-

Separate Entity- It states that every business entity should be treated as an
entity that is separate from its owners. Therefore, all financial transactions
should also be distinguished in such a manner.
Money Measurement- All the financial transactions of a business should
be capable of being expressed in a monetary unit (Indian Rupees, for
example) and if it is not possible to do so, then it should not be recorded in
the books of accounts of the business.
Going Concern- The business entity is assumed to be a going concern,
i.e., it will continue to operate for an indefinite amount of time.
Dual Aspect- The dual aspect concept states that every business
transaction requires recordation in two different accounts. This concept is
the basis of double entry accounting
Realisation Concept- The concept of realisation states that revenue is
realized at the time when goods or services are actually delivered.
Cost Concept- The cost concept of accounting states that all acquisitions
of items (e.g., assets or items needed for expending) should be recorded
and retained in books at cost.
 Accounting Period Concept- This principle entails that the accounting
process of a business should be completed within a certain time period
which is usually a financial year or a calendar year.
Matching Concept- This concept requires the revenue for a particular
period to be matched with its corresponding expenditure so as to show the
true profit for the period.

Description Of Accounting Convention

Conservatism- In the process of accounting, one might come across
various situations where there are two equally acceptable ways of
accounting for a particular transaction. One might even have to choose
between recording a transaction or not recording the same. In such a
situation, a conservative approach should be followed.
Consistency-An entity may decide to follow a particular accounting
procedure in relation to a series of transactions. Such accounting procedures
need to be followed consistently over the following accounting periods so as
to facilitate comparison of the results between two periods.
Full Disclosure-An accounting entry may not independently be able to
provide all the relevant information relating to the transaction. Hence the
full disclosure principle requires the entity to disclose all the financial
information relevant to the investor/user to assist him in decision making.
Materiality- This accounting principle allows an entity to disregard another
accounting principle if the result of the same does not affect the decision
making of the user of the financial statements. Certain errors or omissions
may also be ignored if their effect is immaterial to the financial statements.

Overview of Indian GAAP

Indian GAAP primarily comprises 18 accounting standards (AS)
issued by the Institute of Chartered Accountants of India (ICAI). To
aid interpretation, the ICAI has also issued guidance notes and 'expert
opinions' on specific queries raised by companies and accountants. Of
the three, however, only the standards are mandatory in application.
In addition, the Indian Companies Act 1956 and various other
industry-specific statutes prescribe certain minimum disclosures in the
financial statements. Companies listed on the stock exchanges also
need to comply with a few other accounting rules such as preparing
cash flow statements and accounting for stock-based compensation.

While the basic accounting principles may not directly form part of
the accounting standards and the related laws, they are assumed and
expected to be universally followed.
Phases of Indian Accounting

Importance of Indian GAAP

Attains Uniformity in Accounting
Improves Reliability of Financial Statements
Prevents Frauds and Accounting Manipulations
Determines Managerial Accountability
 10 GAAP Principles
Principle of Regularity: GAAP-compliant accountants strictly adhere to established rules
and regulations.

Principle of Consistency: Consistent standards are applied throughout the financial

reporting process.

Principle of Sincerity: GAAP-compliant accountants are committed to accuracy and

impartiality.

Principle of Permanence of Methods: Consistent procedures are used in the preparation of

all financial reports.

Principle of Non-Compensation: All aspects of an organization’s performance, whether

positive or negative, are fully reported with no prospect of debt compensation.

Principle of Prudence: Speculation does not influence the reporting of financial data.

Principle of Continuity: Asset valuations assume the organization’s operations will

continue.

Principle of Periodicity: Reporting of revenues is divided by standard accounting periods,

such as fiscal quarters or fiscal years.

Principle of Materiality: Financial reports fully disclose the organization’s monetary

situation.

Principle of Utmost Good Faith: All involved parties are assumed to be acting honestly.

Overview of US GAAP
Generally Accepted Accounting Principles or GAAP is also known as US
GAAP as it is in use in the US. These are the set of rules in place meant for
governing corporate accounting and financial reporting in the United States. It
was the Financial Accounting Standards Board (FASB) that laid the foundation
of GAAP by designing a comprehensive list of methods and practices that the
companies operating in the US must follow. GAAP way of reporting is
mandatory for all public companies in the United States. As per the law,
companies that trade on stock exchanges and indices must follow GAAP’s
method of accounting.

Reason Behind The Existence Of US GAAP

The US GAAP is the oldest among the accounting principles prevalent today.
The US GAAP is quite comprehensive and extensive.
The stock market collapse of 1929 followed by the Great Depression led to a
demand for transparency and accounting standards to restore public confidence,
the United States government looked for ways to regulate the practices of public
companies. The Securities and Exchange Commission (SEC) was given the
authority to set accounting standards. SEC, in turn, delegated this responsibility
to the private sector auditing company – the American Institute of Accountants.

As a result, the Committee on Accounting Procedure (CAP) came into being.

After 20 years, CAP was replaced by the Accounting Principal Board (APB)

Motive of APB- To release the opinion on significant accounting topics that

were later converted into law (if deemed fit) for the public companies by the
SEC.

Importance of US GAAP
 Companies have various stakeholders, both in the form of people and
organizations. Also, a major portion of the capital for public companies
comes from the equity shareholders
it is the obligation of the companies to accurately disclose all financial
transactions to these stakeholders since they hold ownership in the company.
GAAP standards make financial reporting transparent and uniform.
guidelines make it easier for companies to report their financial numbers.
And, make it simpler for the shareholders to understand these financial
numbers.
Generally Accepted Accounting Principles ensures a uniform presentation
across industries, and let companies disclose all required financial
information to the stakeholders without fail.

US GAAP Principles

Principle of Consistency – One of the most important aspects of GAAP is that all the
companies should follow a consistent standard while reporting.
Principle of Permanence of Methods – This principle states that a company must use
consistent procedures in the preparation of all financial reports.
Principle of Sincerity – Companies and accountants who follow US GAAP should have the
utmost commitment to the accuracy. Also, they must be unbiased towards reporting the
numbers in the financial statement.
Principle of non-compensation – A company should report the entire performance of the
organization irrespective of it being positive or negative.
Principle of Regularity – US GAAP compliant accountant should follow the rules and
regulations without fail.
Principle of Prudence – US GAAP following companies should know that speculation does
not affect the reporting of financial data.
Principle of Continuity – While valuing the assets, an accountant should assume that the
operations of the organization will continue.
Principle of Materiality – Financial reports should and continuously disclose the monetary
health of the organization.
Principle of Utmost Good Faith – All companies and stakeholders are expected to act in good
faith with no malicious intent.
Principle of Periodicity – This standard says that the company must divide revenues by
standard accounting time periods, such as fiscal quarters or fiscal years.

Comparative Study of Indian And US GAAP

Particulars India GAAP US GAAP

Accounting absence of both In international GAAP, there

consolidation and is a business combination
equity accounting in which can lead to different
Indian GAAP. results.

Revaluation the Indian GAAP also US GAAP does not allow any
allows the revaluation revaluation of property, plant
of assets of property, plant and and equipment.
equipment.

Foreign The resultant the International GAAP does

significant foreign not allow such foreign
currency exchange differences currency transaction
transaction that are expensed differences to be capitalised.
differences under international
GAAP are capitalised
under Indian GAAP.

Pension/ Required to be To be provided for and

mandatorily provided funded based on actuarial
Retirement based on either valuation.
benefits actual evaluation or
contribution to a
defined plan. Significant disclosure
requirements exists.

Conceptua They are generally

rule based and are
At various stages IFRS
provides scope of judgement
l less flexible in and requires information to
Difference comparison with
IFRS.
be presented on the basis of
substance rather than rules.

Introduction to IFRS
International Financial Reporting Standards (IFRS) are a set of accounting rules
for the financial statements of public companies that are intended to make them
consistent, transparent, and easily comparable around the world. IFRS currently
has complete profiles for 166 jurisdictions. including those in the European
Union.1  The United States uses a different system, the Generally Accepted
Accounting Principles (GAAP).

The IFRS are issued by the International Accounting Standards Board (IASB).

The IFRS system is sometimes confused with International Accounting

Standards (IAS), which are the older standards that IFRS replaced in 2001.

Standard IFRS Requirements

IFRS covers a wide range of accounting activities. There are certain aspects of
business practice for which IFRS set mandatory rules.

 Statement of Financial Position: This is the balance sheet. IFRS influences

the ways in which the components of a balance sheet are reported.
 Statement of Comprehensive Income: This can take the form of one
statement or be separated into a profit and loss statement and a statement of
other income, including property and equipment.
 Statement of Changes in Equity: Also known as a statement of retained
earnings, this documents the company's change in earnings or profit for the
given financial period.
 Statement of Cash Flows: This report summarizes the company's financial
transactions in the given period, separating cash flow into operations, investing,
and financing.

Importance of IFRS
IFRS fosters transparency and trust in the global financial markets and
the companies that list their shares on them. 
IFRS helps investors analyse companies by making it easier to perform
“apples to apples” comparisons between one company and another and
for fundamental analysis of a company's performance.
 IFRS Standards contribute to economic efficiency by helping investors to
identify opportunities and risks across the world, thus improving capital
allocation.
IFRS specifies how businesses need to maintain and report their
accounts. 

Features Of IFRS
Relevance: So that it makes a difference to the decisions about a
company made by users of the statements.
Faithful representation: Financial statements are complete and free from
bias and error.
Comparability: You can compare financial statements from one period to
the next or for two companies in the same industry so that you can make
informed decisions about the companies.
Verifiability: Different people could reach the same decision based on the
information, but not necessarily reach complete agreement.
Timeliness: You make information available to users in good time.
Historical information quickly becomes out of date.
Understandability: You present and classify information clearly and
concisely to make it understandable to users.
 GAAP IFRS
Accountants following the IFRS may Accountants following the IFRS may interpret
interpret the standards differently, the standards differently, leading to added
leading to added explanatory explanatory documents.
documents. GAAP prioritizes rules and
detailed guidelines, while the IFRS
provides general principles to follow.

GAAP is a rules-based system used IFRS was designed as is a standards-

primarily in the U.S. based approach that could be used
internationally.

IFRS was designed as is a standards- LIFO, however, is banned under IFRS.

based approach that could be used
internationally.

A balance sheet using this system IFRS is not as strict in defining revenue and
might show a higher stream of allows companies to report revenue sooner.
revenue than a GAAP version of the
same balance sheet.