Generally Accepted Accounting Principles

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“Generally Accepted Accounting Principles (GAAP) is the methods, rules, practices and other procedures that have evolved to govern the preparation of financial statements” Justify the statement with suitable examples. Accounting is the language of business and it is used to communicate financial information.  In order for that information to make sense, accounting is based on some fundamental concepts.  Transactions are recorded in accounts, following certain fundamentals concepts and conventions, which are called as Generally Accepted Accounting Principles. Accounting principles may be defined as those rules of action or conduct, which are adopted by the accountants, universally, while recording the transactions. By using these concepts as the foundation, readers of financial statements and other accounting information do not need to make assumptions about what the numbers mean. The main objective behind the accounting principles is that the accounting statements should be both reliable and informative. This objective can be achieved when there is certain common agreement and compliance about the accounting principles. Every profession has developed its own terminology and vocabulary. Like all other professions, accounting has also developed its own concepts and conventions. For example, closing stock is valued at cost price or market price, whichever is lower. The effect of the above is that in case, market price comes down, then the‘anticipated loss’ is to be provided for. But, if the market price goes up, then the ‘anticipated profits’ is to be ignored. When lower of the two is taken into account for valuation of closing stock, no anticipated profit is booked, but all possible loss is taken care of. This concept emphasizes that profit should never be overstated or anticipated. This concept is known as conservatism convention. This is also known as ‘Prudence’ convention. Basically, the concept says that whenever there are two equally acceptable methods, the...
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