GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN INDIA

MEANING OF GAAP-( GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN INDIA)

The various factors that have led to difference in accounting practices comprise widely of the culture,

traditions, economic development, economic growth mode, inflation, legal system etc.

The diversity demands unification to the extent possible to develop Generally Accepted Accounting

Practices (GAAP). GAAP are the common set of accounting principles, standards and procedures that are

used by accountants to prepare the financial statements. They are derived from practice, and on being

useful get accepted into the accounting system. These principles are developed by the professional

accounting bodies of different countries of the world, with the aim of attaining uniformity in accounting

practiced by the entities of the respective countries. As such different GAAP have developed in different

countries of the world.

Indian GAAP comprises of a set of pronouncements issued by various regulatory authorities mostly in

consultation with the ICAI. The Accounting Standards and the Indian Accounting Standards i.e. Indian

GAAP is supplemented by Guidance notes, Interpretation, General Clarification and/or revision from

time to time.

The Accounting Standards(AS) and the Indian Accounting Standards (Ind AS) will apply to “General

Purpose Financial statement” e.g. Balance Sheet, Statement of Profit & Loss, Schedules and Notes

forming Integral part, issued for use by the Shareholders, Members, Creditors, Employees, and Public at

large.

Generally Accepted Accounting Principles (GAAP) refers to accounting policies and procedures that are

widely used in practice. It incorporates the body of principles that governs the accounting for financial

transactions underlying the preparation of a set of financial statements.

GAAP includes principles on:

• Recognition: It deals with the items which should be recognized in the financial statements (e.g.

assets, liabilities, revenues, and expenses).

• Measurement: It determines the amounts which should be reported for each of the elements included

in financial statements.

• Presentation: It states regarding the line items, subtotals and totals should be displayed in the

financial statements and how might items be aggregated within the financial statements.

• Disclosure: It states about the specific information that is most important to the users of the financial

statements.

ACCOUNTING PRINCIPLES Accounting Principle is the ‘grammar’ of accounting language. It refers to

those rules of action which are universally adopted by the accountants for recording accounting

transactions. They act as the guidelines for recording and reporting transactions. These have evolved out

of assumptions made and conventions followed in accounting. These provide explanations to the

current accounting practices. Accounting Principles can be classified into two categories: (a) Accounting

Concepts; and (b) Accounting Conventions.

(a) ACCOUNTING CONCEPTS Accounting Concepts refers to the assumptions on the basis of which the

transactions are recorded in the books of accounts and financial statements are drafted. They are

perceived, presumed and accepted in accounting to provide a unifying structure and internal logic to the

accounting process. They are also referred to as Accounting Postulates. These are the necessary

assumptions and ideas which are fundamental to accounting practice. These are the ideas which have

been accepted universally. E.g. Entity concept, Going concern concept, Money measurement concept

etc.

(b) ACCOUNTING CONVENTIONS Accounting conventions are the traditions or customs that are

observed by the accountants for preparation of financial statements. They have evolved out the

different accounting practices followed by different entities over a period of time. They have been

developed over a period of time by the accountants by usage and practice. E.g. convention of

conservatism, convention of consistency, convention of materiality etc.

It should be noted that the terms ‘Concepts’ and ‘Conventions’ are usually used interchangeably.

However, the basic difference between them is that ‘Concepts’ are primarily concerned with

maintenance of books of accounts, while ‘Conventions’ are applied for preparation of financial

statements.

NEED FOR GAAP FOR FINANCIAL REPORTING The accounting standards developed and established by

the standard-setting bodies determine how those financial statements are prepared. The standards are

known collectively as Generally Accepted Accounting Principles or GAAP.

GAAP is based on established concepts, objectives, standards and conventions that have evolved over

time to guide how financial statements are prepared and presented. GAAP is set with the objective of

providing information that is useful to investors, lenders, or others that provide or may potentially

provide resources to a profit-seeking concern or not-for-profit organization. Investors, lenders, and

other users of financial information rely on financial reporting based on GAAP to make decisions about

how to allocate their capital and to help financial markets operate as efficiently as possible.

While establishing GAAP, the standard setting bodies are mainly concerned about the end users of

financial statements. End users include people like investors, banks, lenders who use third party

financial statements to evaluate business decisions. For instance, an investor will look at a company’s

financial statements in order to decide whether to invest. The standard setting bodies wants to make

consistent standards that help end users understand and use the company’s financial data. GAAP’s

primary intent is not to help businesses. It is intended to help the end users. All of the objectives that

MCA and the prior accounting standard setting body (ICAI) wanted to accomplish can be simplified to

one main objective: to make financial statements universally understandable and usable for all of their

users.