What is Accounting Principle or GAAP?

Generally Accepted Accounting Principles may be defined as those rules of action or conduct which are derived from experience, practice and when they prove useful, they become accepted as principles of accounting.


Generally Accepted Accounting Principles may be defined as those rules of action or conduct which are derived from experience, practice and when they prove useful, they become accepted as principles of accounting.

According to the American Institute of Certified Public Accountants (AICPA), the principles which have substantial authoritative support become a part of the generally accepted accounting principles.

The general acceptance of the accounting principles or practices depends on how well they meet the following 3 criteria:-
  1. Relevance - A principle is relevant to the extent it results in information that is meaningful and useful to the user of the accounting information. 
  2. Objectivity- Objectivity connotes reliability and trustworthiness. A principle is objective to the extent the accounting information is not influenced by personal bias or judgement of those who provides it. It also implies verification which means that there is some way of ascertaining the correctness of the information reported. 
  3. Feasibility- A principle is feasible to the extent it can be implemented without much complexity or cost. 
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  • Accounting Entity Principle: According to this principle, a business is treated as a separate entity that is distinct from its owner. All the owner personal transaction will be not recorded in the business transactions. There should be separate account for business and personal uses of owner. For example $1000 is used by owner to purchase furniture for the business but some furniture is used by owner for his/ her household use, so the cost of that particular furniture cannot be treated as business transaction.
  • Money Measurement Principle: According to this principle, only those transactions are recorded which are capable of being expressed in terms of money. For example, there are 10 fans purchased for the business, so in accounting we include the cost that is price of 10 fans in books of accounts. All the value of goods and services will be expressed and measured in terms of money. 
  • Accounting Period Principle: According to this principle, the economic life of an enterprise is artificially split into periodic intervals which are known as accounting periods, at the end of which an income statement and position statement are prepared to show the performance and financial position. It may be noted that the custom of using twelve month period is applied only for external reporting. For internal various accounts are prepared on quarterly or half yearly basis as per the business needs.
  • Going Concern Principle: It is also known as continuity assumption. According to this assumption, the enterprise is normally viewed as going concern. It is assumed that the enterprise has neither the intention nor the necessity of liquidation. It will continue to run smoothly in future. 
  • Accrual Principle: According to Accrual Principle, all revenues and costs are recognised as they are earned or incurred and not as money is received or paid. In business activity we use the term money is earned or expense is incurred in accounting. For a customer, he/she can use the term received or paid for goods and services delivered or purchased by him/her.
  • Consistency Principle: According to this principle, whatever accounting practices are selected for a given category of transactions, they should be followed on a horizontal basis from one accounting period to another to achieve comparability. This principle is applied when alternative methods of accounting are equally acceptable. 
  • Prudence Principle: The prudence principle requires that in the situation of uncertainty and doubt, the business transaction should be recorded in such a manner that the profits and assets are not overstated and the losses and liabilities are not understated. 
  • Full Disclosure Principle: The financial statement must disclose all the relevant and reliable information clearly so that the information may be useful to the users. It should not conceal any facts that are happened and also it should not show or reveal facts that are not happened in the business. 
  • Historical Cost Principle: This principle states that an asset is ordinarily recorded in the accounting records at the price paid to acquire it at the time of its acquisition and the cost becomes the basis for the accounts during the period of acquisition and subsequent accounting periods. 
  • Matching Principle: This principle states that the expenses incurred in an accounting period should be matched with the revenues recognised in that period, that is, if revenue is recognised on all goods sold during a period, the cost of those goods sold should also be charged to that period. 
  • Duality Principle: As the name suggest, the entry made for each transaction is composed of two parts- One for debit and another for Credit. The double entry system may be compared with Newton Third Law of Motion. that is every action has an equal and opposite reaction. In the same way, every debit has equal credit and vice versa.
  • Objectivity Principle: According to this principle, the principle, the accounting data should be definite, verifiable and free from personal bias of the accountant. In other words, this principle requires that each recorded transaction in the books of accounts should have an adequate evidence to support it. 
  • Timeliness Principle: According to this principle, timely information should be made available to decision makers. If there is undue delay in reporting information on a timely basis, it may often be necessary to report before all aspects of the transaction. In India, there is a provision for publishing a half-yearly financial report of the listed companies in stock exchange. This provides timely information to investors to make their investment decision. 
  • Cost-Benefit Principle: The cost of applying an accounting principle should not exceed its benefit. If the cost is more the principle should be modified. 
These were the brief explanation of various accounting principles which are followed worldwide.