Generally Accepted Accounting Principles (GAAP)

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GAAP means Generally Accepted Accounting Principles. It is the set of rules, concepts, conventions, and guidelines used for recording, interpreting, and reporting business transactions. Its purpose is…

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Accounting principles are needed to make financial statements meaningful, reliable, and comparable. They help in comparing one firm with another and also comparing the same firm across different years…

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The general acceptance of an accounting principle depends on three criteria: relevance, objectivity, and feasibility. Relevance means the information is useful. Objectivity means it is free from perso…

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The going concern concept assumes that a business will continue for a long time in the future and will not be closed immediately. Because of this assumption, fixed assets are valued at cost, not at fo…

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Under the going concern concept, fixed assets are valued at cost and not at forced-sale value or market value. This is because the business is assumed to continue operating, so assets are meant to be …

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The consistency concept means that once a method is chosen for accounting, it should be used uniformly year after year so that financial statements remain comparable. For example, the same method of d…

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Consistency is important because it allows comparison of results from one year to another and also between different businesses in the same field. If methods keep changing, the profit and loss account…

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The accrual concept means that revenue is recorded when sales are made or services are rendered, and expenses are recorded when they become due, not when cash is received or paid. It gives a better me…