Reviewed by Oct 05, 2020| Updated on
Generally Agreed Accounting Principles (GAAP) are general accounting principles and guidelines that provide the basis for more formal and rigorous accounting regulations, standards, and other accounting practices unique to the sector. For example, the Financial Accounting Standards Board (FASB), uses these principles as a framework for defining its own accounting standards.
The following are a few accounting principles:
1. Going Concern Assumption: It is presumed that the business is a going concern, i.e. it will continue to exist for a foreseeable period. That presumption is important because if the business were to liquidate in the near future, by the actual amount that may be realised or payable as the case may be, it would have to restate its assets and liabilities to represent the organisation's true financial status.
2. Matching Principle: This definition demands that the income be compared with its corresponding expenditure for a given period to display the true benefit for that time.
3. Accrual Accounting Basis: This concept demands that both revenue and expenditure be recorded in the actual time incurred, and not when cash or cash equivalent has been received/spent. Irrespective of the subsequent cash flow, earning the income and incurring the expenditure is significant.
4. Accounting Period: This concept means that a company's accounting process will be completed within a certain period that is typically a financial year or a calendar year. Thus, every transaction that relates to a particular period of accounting must form part of the financial statements prepared for that time.
In India, financial statements are prepared based on accounting principles provided by the Institute of Indian Chartered Accountants (ICAI) and the legislation set out in the relevant applicable acts (for example, all companies shall compulsorily follow Schedule III to Companies Act, 2013).
The ICAI also publishes guidance notes on various topics from time to time to assist in the accounting process and provide clarification. Although the basic accounting principles do not explicitly form a part of accounting standards and related rules, they are believed to be generally practised and expected.