ACT 2102 Lecture 1.pptx

ACT 1100/2102- Principles of Accounting 1 Generally Accepted Accounting Principles (GAAP) and Accounting Standards  Generally Accepted Accounting Principles GAAP (Generally Accepted Accounting Principles) is defined as the collection of commonly used and followed accoun...

ACT 1100/2102- Principles of Accounting 1 Generally Accepted Accounting Principles (GAAP) and Accounting Standards  Generally Accepted Accounting Principles GAAP (Generally Accepted Accounting Principles) is defined as the collection of commonly used and followed accounting rules and procedures for the purpose of Financial reporting of a company. GAAP describes to us about the accounting concepts and the principles to be followed while preparing a financial statement of a company or a Firm.  Generally Accepted Accounting Principles GAAP standards change from place to place. For example, in the United States, they follow the Securities and Exchange Commission ( SEC) which mandates the financial reports stick to GAAP requirements. Many countries in the world follow International Financial Reporting Standards (IFRS). IFRS is followed in more than 110 countries. IFRS specifies to prepare and disclose the financial statement of the companies globally.  Why GAAP is necessary? To make transparent and fair of the Accounting and the financial reporting of the company and easily understandable to the common people. The GAAP is necessary for the accounting rules and the standardizing the reporting of financial statements like balance sheets, income statement and the cash flow statement for all the companies. The financial statements prepared under GAAP are intended to show the economic reality.  If GAAP is not available? Without GAAP, there will be many chances of the fraudulent cases in Accounting and financial reporting’s which actually affects the interest of the Investors and the creditors in the market. Without GAAP, companies would be free to decide themselves what financial information to report and how to report it, which will be very difficult for the investors and creditors who have stake or shares in that company. For example, the Punjab National Bank scam (India) happened due to fraudulent financial reporting by the employees, auditors and the customer without practicing any of the accounting rules and standards, because of which the ultimate losers are the Investors who invested in that company.  Advantages of GAAP It promotes the interest of the Investors, Shareholders, and Creditors in the market. By following GAAP procedures, consistency can be maintained and the overall performance can be determined. Identifying the areas that need improvement and required modifications for the better performance of the company. The financial reports which are made using the GAAP help to maintain investors trust and interest in investments of that company.  Advantages of GAAP Complying with GAAP gives the guarantee to anyone whoever wants to invest in that company. With the help of GAAP report, one can easily understand the financial statements and can also compare easily with another. By using GAAP reports it is easy to find out the profit, loss, expenses, investment, income and revenues of the company. GAAP reduces risks and avoids fraud cases by monitoring them properly.  The Basic Principles of Generally Accepted Accounting Principles 1. The Business as a single Entity Principle A business is a separate entity in terms of the law, all its activities are treated separately from that of its owners. In terms of accounting the business is separate and the owners are different. 2. The Specific Currency Principle A currency is specified for the reporting of financial statements. In the United States, they economically deal with the US dollar and their financial reporting’s will be mentioned in USD. The Basic Principles of Generally Accepted Accounting Principles 3. Time period Specific Principle Financial statements should always pertain to a specific period of time. The statements have an end time and start time. Balance sheets are also reported on a certain date. This can be like monthly, quarterly, half yearly, and annually. 4. The Cost Principle In accounting, the term cost refers to the amount spent on obtaining the goods or services in which the purchase happened now or in the past. Hence for this, the amounts shown in the financial statements also referred to as the Historical cost amounts. 5. The full disclosure Principle The full disclosure principle states that a company should disclose all the financial statements fully. It is very important for an investor or the lender to know about the significant accounting policies. A company generally lists its accounting policies as the first note to its financial statements. The Basic Principles of Generally Accepted Accounting Principles 6. The Recognition Principle This revenue recognition principle states that the companies should reveal the income and expenses of the company in that time period where they have occurred. 7. Principle of Continuity This is also called as the Non-death Principle of Business as for accounting there should not be an end as its continuing to operate, until and unless any winding up of the company. 8. Matching Principle This matching principle requires companies to use the accrual basis of accounting. The matching principle requires that expenses should be matched with the revenues. The Basic Principles of Generally Accepted Accounting Principles 9. The Principle of materiality This Principle generally states about the adjustment of the very minute errors, that is while maintaining accounting reports there could be some small errors like $15 error which is not matching, here this can be used and adjusted accordingly. 10. The Principle of Conservative Accounting Conservative Accounting Principle should be adopted by all companies wherein a company should never overstate their assets or revenue and never understate their liabilities or expenses. In addition to all these, the Principle of Honesty to be maintained. End of Lecture