Generally Accepted Accounting Principles (GAAPs)

“A collection of rules and procedures and conventions that define accepted accounting practice; includes broad guidelines as well as detailed procedures.”

1. Money Measurement:
Only those Transactions are recorded which are measured in monetary terms.

2. Going Concern:

It’s an estimation and assumption that the business will proceed till the foreseeable future.

3. Accounting Period:

The time period which is assumed for reporting is called Accounting Period. Usually it’s a 12 month period but it can be any period set by the business.

4. Duality:

The principles of duality describes that every transaction has two aspects of treatment in books of accounts.

5. Evidence:
The written source of document of a transaction is called evidence.

6. Accruals:

It means every aspect of a transaction should be recorded according to GAAP.

7. Matching:
It means the Revenues of current year should be adjusted against the Expense of the same year.

8. Materiality:
The omissions and miss-statements which can influence the decision of the investors are material for the business.

9. Consistency:
Disclosing and presenting criteria must be consistent while presenting Reports.

10. Prudence:
Expected Losses are recorded but expected profits are not.
Assets will not be over stated and Liabilities will not be under stated.

11. Substance over Form:
The control will supersede the ownership.

Keywords of Accounting

Keywords of Accounting

The amount invested by the owner into the business is called Capital.


Economic resources under of the control of the business are Assets.


Present obligations due to past events are Liabilities.


Earnings of a business are Revenues.


Expenditure against which the benefit has been taken is Expense.


Difference between Revenues and Expenditure is Profit/Loss. If the Revenues are greater then it’s Profit otherwise it’s Loss.


Goods which are bought with intention to sell out are Purchases.

Purchase Return:

Goods bought, returned to the supplier are Purchase Return.


Goods or Merchandize sold out are Sales of the business.

Sales Return:

Goods sold, returned by the customer are Sales Return.


Amount de-invested by the owner of the business are Drawings.


The rebate or reduction in price is discount. Discounts are of two types:
Trade Discount: Discount which is not disclosed in the books of Accounts.
Cash Discount: Discount which is disclosed and mentioned in books of Accounts.

Creditors or Accounts Payable:

The suppliers who provide goods on credit are Creditors of the business. Creditors are the Liabilities of the business.

Debtors or Accounts Receivables:
The Customers to whom goods are sold on credit are the Debtors of the business. They are the Assets of the business.

The event which can be expressed in terms of money and can bring changes in the financial position of the business is a Transaction. Transactions are of four types:
Cash Transaction: Immediate receipt and payment of cash.
Credit Transaction: Goods are delivered but payment will be made later.
External Transaction: Transactions with other businesses.
Internal Transaction: Transactions within the business.

Introduction to Accounting

Financial Accounting

– Accounting is the branch of social sciences.
– Accounting is the language of business.

Types of Accounting

1. Financial Accounting
2. Cost Accounting
3. Management Accounting

Financial Accounting:

“The art of presenting the financial position and financial performance of a business by presenting financial statements to its users is financial accounting.”

“Financial Accounting is the process of recording, classifying, summarizing and reporting the results of business transactions to the decision makers for making business decisions.”

Financial Accounting defined by FASB (Financial Accounting Standard Board); “Financial Accounting is a service activity. The basic purpose is to provide qualitative and quantitative information to the decision makers. The information is intended to be useful for quality decision making.”

Business Transaction:
Any financial event occurs in the business that immediately effect the financial position (Balance Sheet) of the business is called a business transaction.

Financial Statements:
Balance Sheet
Income Statement or Trading and Profit and Loss Account
Statement of Cash flows
Statement of Owner’s Equity or Statement of Retained Earnings

1. Income Statement:
The statement that measures the profit of a company at the end of an accounting period is called Income statement.

2. Balance Sheet:
Statement that measures the financial position of the business at any point of time is Balance sheet.

3. Statement of Cash Flows:
The statement that measures the cash position of the business, either cash inflow or outflow at the end of an accounting period.

4. Statement of Owner’s Equity:
The statement that measures owner’s claim over business assets at the end of an accounting period is called statement of owner’s equity or statement of retained earnings.