Meaning, Nature, Concepts/Assumptions of Accounting Principles

Accounting Principles are developed to ensure:

• Uniformity and easy understanding of accounting information.

• Maximum profits for the business.

• Compliance with tax regulations.

• Minimization of costs in financial reporting.

GAAP stands for:

• Generally Accounting Practices and Procedures.

• Generally Accepted Accounting Principles.

• Global Accounting Assessment Program.

• Government Accounting and Auditing.

According to the AICPA, a principle is defined as:

• A specific rule adopted for a particular situation.

• A guideline followed by a specific industry.

• A general law or rule adopted as a guide to action.

• A standard set by the Securities and Exchange Commission.

Principles are generally accepted if they are:

• Consistent and conservative.

• Relevant, objective, and feasible.

• Based on historical cost.

• Approved by the International Accounting Standards Board.

The going concern concept assumes that a business:

• Will be liquidated in the near future.

• Will not continue its operations for a long period.

• Will operate indefinitely.

• Will focus on short-term profitability.

The consistency concept requires accounting policies and practices to be:

• Frequently changed to adapt to market conditions.

• Uniformly applied and consistently followed over time.

• Altered based on the personal preference of the accountant.

• Determined by the size of the business.

According to the accrual concept, revenue is recorded when:

• Cash is received from customers.

• The payment for sales is due.

• Sales are made or services are rendered.

• 1. Cash is received from suppliers.

  
  

Expenses are recorded under the accrual concept:

• When cash is paid for them.

• When they are incurred.

• Only if they are significant.

• Based on the availability of funds.

The primary purpose of accounting principles is to:

• Maximize shareholder wealth.

• Simplify tax calculations.

• Ensure consistent and meaningful financial reporting.

• Eliminate the need for external audits.

Accounting principles may take the form of:

• Assumptions and concepts.

• Legal regulations and statutes.

• Financial ratios and calculations.

• Marketing strategies and tactics.