Accounting Concepts and GAP

GAAP (also called as GAP) stands for Generally Accepted Accounting Principles and referr to the standard framework of guidelines for financial accounting used in any given jurisdiction. GAAP includes the concepts, standards (IFRS, SOX etc), conventions, and rules accountants follow in recording and summarizing transactions, and in the preparation of financial statements. It is important to note that the concepts mentioned below are part of the GAAP.

The following are the most important concepts of accounting:

Money Measurement Concept

This is the concept tunes the system of accounting as fruitful in recording the transactions and events of the enterprise only in terms of money. The money is used as well as expressed as a denominator of the business events and transactions. The transactions which are not in the expression of monetary terms cannot be registered in the book of accounts as transactions.

For e.g. 5 machines, 1 ton of raw materials, 6 fork lift trucks, 10 lorries and so on. The early mentioned items are not expressed in terms of money instead they are illustrated only in numbers. The worth of the items are getting differed from one to another. To record the above enlisted items in the book of accounts, all the assets should be converted in to money. For e.g. 5 lathe machines worth Rs 1,00,000; 1 ton of raw materials worth amounted Rs. 15,00,000 and so on.

Business Entity Concept

This concept treats the owner as totally a different entity from the business. To put in to nutshell "Owner is different and Business is different". The capital which is brought inside the firm by the owner, at the commencement of the firm is known as capital. The amount of the capital, which was initially invested should be returned to the owner considered as due to the owner; who was nothing but the contributory of the capital. For e.g. Mr Z has brought a capital of Rs.1 lakh for the commencement of retailing business of refrigerators. The brought capital of Rs. 1 lakh has utilized for the purchase of refrigerators from the Godrej Ltd. He finally bought 10 different sized refrigerators. Out of 10 refrigerators, one was taken away by the owner Mr. Z

Going Concern Concept

The concept deals with the quality of long lasting status of the business enterprise irrespective of the owners' status, whether he is alive or not. This concept is known as concept of long-term assets. The fixed assets are bought in the intention to earn profits during the season of the business. The assets which are idle during the slack season of the business retained for future usage, in spite of that those assets are frequently sold out by the firm immediately after the utility leads to mean that those assets are not fixed assets but tradable assets. The fixed assets are retained by the firm even after the usage is only due to the principle of long lastingness of the business enterprise. If the business disposes the assets immediately after the current usage by not considering the future utility of the assets in the firm which will not distinguish in between the long-term assets and short-term assets known as tradable in categories.

Matching Concept

This concept only makes the entire accounting system as meaningful to determine the volume of earnings or losses of the firm at every level of transaction; which is an outcome of matching in between the revenues and expenses. The worth of the transaction is identified through matching of revenues which are mainly generated from the sales volume and the expenses of the firm at every level. For example, the cost of goods sold and selling price of the pen of ABC Ltd are Rs. 5 and Rs. 10 respectively. The firm produced 100 ball pens during the first shift and out of 100 pens manufactured 20 pens are considered to be damage which cannot be supplied to the customers, rejected by the quality circle department. There was an order from the firm XYZ Ltd., which amounted 80 pens to be supplied immediately.

Accounting Period Concept

Though the life period of the business is longer in span, which is classified into the operating periods which are smaller in duration. The accounting period may be either calendar year of Jan-Dec or fiscal year of April-Mar. The operating periods are not equivalent among the trading firms, which mean that the operating period of one firm Financial Accounting may be shorter than the other one. The ultimate aim of the concept is to nullify the deviations of the operating periods of various traders in the trading practice.

Duality or Double entry accounting concept

It is the only concept which portrays the two sides of a single transaction. The law of entire business revolves around only on mutual agreement sharing policy among the players. How mutual agreement is taking place ? The entire principle of business is mainly conducted on mutual agreement among the parties from one occasion to another. The payment of wages are only made by the firm out of the services of labourers. What kind of mutual agreement in sharing the benefits is taking place? The services of the labourers are availed by the firm through the payment of wages. Like-wise, the labourers are regularly getting wages for their services in the

firm. Payment of Wages = Labourers' service

Cost Concept

It is the concept closely relevant with the going concern concept. Under this concept, the transactions are recorded only in terms of cost rather than in market value. Fixed assets are only entered in terms of the purchase price which is a original cost of the asset at the moment of purchase. The depreciation is deducted from the original value which is the initial purchase price of the asset will highlight the book value of the asset at the end of the accounting period. The marketing value of the asset should not be taken into consideration, Why? The main reason is that the market value of the asset is subject to fluctuations due to demand and supply forces. The entry of market value of the asset will require the frequent update of information to the tune of changes in the market.

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