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C H A P T E R

Generally Accepted Accounting

Principles (GAAP) and Basic

Accounting Concepts

MEANING OF KEY TERMS USED IN THE CHAPTER

1. Generally Accepted Generally Accepted Accounting Principles are basic or fundamental
Accounting Principles propositions based on which transactions and events are recorded
(GAAP) in the books of account and financial statements are prepared.
2. Fundamental Accounting
Assumptions
(i) Going Concern Under this assumption, it is presumed that the business will continue
Assumption for a foreseeable future and there is no intention to close down the
business or scale down its operations significantly.
(ii) Accrual Assumption Under this assumption, a transaction is accounted at the time when it is
entered into and not when settlement takes place.
(iii) Consistency Under this assumption, accounting practices once adopted should
Assumption be applied consistently year after year. They may be changed under
following three conditions:
(a) If law requires the change,
(b) If Accounting Standard requires the change, or
(c) If it results in more fair presentation of financial affairs of the business.

CHAPTER SUMMARY

• Accounting Principles. Accounting is the language of business and every language has certain rules of
grammar. Similarly, in order to understand accounting information and for maintaining uniformity and
consistency, certain principles are needed in accounting.
Accounting Principles are the norms or rules which are to be followed in treating various items of assets,
liabilities, expenses, incomes, etc.
• Generally Accepted Accounting Principles (GAAP) refers to the rules or guidelines adopted for recording
and reporting business transactions, in order to bring uniformity and consistency in the preparation and
presentation of financial statements.
• Accounting Concepts
(i) Going Concern Concept. The business will continue for an indefinite period and there is no intention
to close the business or reduce its size of operations significantly.
(ii) Accounting (Business) Entity Concept. Business is treated as a separate entity distinct from its owners.
(iii) Money Measurement Concept. Transactions and events that can be expressed in money or in money
terms are recorded in the books of account.