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Financial statements prepared using generally accepted accounting principles? What does this term mean?

Why are these terms necessary?


Definition of accounting principles According to Terminology Committee of ACIPA. The !ord principle is used to mean a general la! rule adopted or preferred as a guide to action" a settled ground or #asis of conduct or practice.$ A.W.%ohnson descri#es accounting principles as &roadly spea'ing( these principles are the assumptions and rules of accounting( the methods and procedure of accounting and the application of these rules( methods and procedures to the actual practice of accounting.$

Accounting principles #asically di)ided into t!o types

Accounting Principles

Accounting Concepts
Accounting Concepts* Business Entity Concept Propriety Concept Fund Concept Going Concern Concept Accounting Period Concept Cost Concept Money Measurement Concept Realization Concept Accrual Concept Matc ing Concept Dual Aspects Concept

Accounting Conventions
Accounting Con)entions* Convention of Conservatism Convention of Disclosure Convention of Consistency Convention of Materiality

* Accounting Concepts*
+. &usiness entity concept! "n accounting #usiness is treated as separate entity from its o$ners% Accounts are prepared to give t e information a#out t e #usiness & not a#out t ose $ o o$n it% "t is necessary to ascertain t e results of #usiness operation%

,-uation* Capital . /ia#ilities 0 Assets


1. Propriety concept* ' e center focus of accounting is t e proprietor $ o o$ns t e #usiness% 2. 3oing concern concept* "t is presumed t at t e concern $ill continue to e(ist indefinitely or at least in t e near future% 4. Accounting period concept* ' e life of t e #usiness is divided into appropriate segments for )udging t e results after t at segment% ' is segment is *no$n as accounting period% ' is period is generally ta*en as + year from +st April to ,+st marc % 5.Cost concept* ' e price $ ic is actually paid is recorded in account #oo*s % if a price of land is purc ased for rs-.... t is amount $ill #e recorded as cost of land even t oug t e person $as $illing to pay rs/-... for t e same piece of land% 6.7oney measurement concept * According to t is concept only t ose transacton is recorded in accounting $ ic can #e e(pressed in terms of money as0 money is accepted as medium of e(c ange of goods & services% 8.9ealisation concept* ' is concept is related to t e ralisation of revenue% ' e revenue is realized eit er from sales of products or from rendering of services% ' e sell of t e products involves a num#er of stages i%e a: Receipt of order #: Production of goods c: Dispatc of goods d: Receipt of payments% ;.Accrual concept * "t is an accounting system $ ic recognized revenues & e(penses as t ey are earned or incurred respectively $it out regard to t e date of receive or payment of cas %

<.7atching concept* E(penses for an accounting period s ould #e matc ed agnaist related revenues rat er t an recognizing revenues as #eing earned at t e time $ en cas is received or recognizing e(penses $ en cas is paid% +=.Dual aspect concept* For every de#it entry t ere must #e a corresponding credit entry%

* Accounting Con)entions *
+. Con)ention of conser)atism* Anticipate no profits #ut provide for all possi#le losses 1. Con)ention of consistency* 1ame accounting met ods & rules s ould #e follo$ed at t e time recoding transaction from one period to anot er period% 2. Con)ention of disclosure* Financial statements s ould #e onest & disclose all information to internal & e(ternal users of accounting% 4.Con)ention of materiality* Materiality means relative importance % an item is recorded only $ en it is considered to #e useful or important to t e user of financial statement

Why Accounting principles necessary?


2ff3course it is re4uisite to *no$ t e accounting principles% For financial analyst it is necessary to *no$ firstly GAAP analysis 5generally accepted accounting principles6%7 ere accounting standards0 rules and regulation are stated in accordance $it t e international accounting standard #oard% 2#viously0 $e ave num#ers of accounting standards "A1 and principles on t e #asis of t is financial analyst ena#le to ma*e decision% "n a nut s ell0 $ en $e ave accounting rules standards and a defined guideline it $ill #e very convenient for financial analyst to ma*e decision%%