Accounting principles are the basic guidelines, which ensures the correctness of the entry of business transactions in the

books of accounts.
Accounting principles are based on the combination of the following (a) Accounting Concepts and (b) Accounting Conventions. Accounting Concepts + Accounting Conventions = Accounting Principles. Accounting principles are also called as GAAP i.e., Generally Accepted Accounting Principles.
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Business Entity Concept

Going Concern Concept Money Measurement Concept

Cost Concept
Duality Concept Accounting Period Concept

Matching Concept
Realization & Recognition Concept
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Convention of Disclosure
Convention of Consistency

Convention of Conservatism
Convention of Materiality

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Accounting Standards AS 1 AS 2

Details Disclosure of accounting policies Valuation of inventories

AS 3
AS 4 AS 5 AS 6 AS 7 AS 9 AS 10 AS 11

Cash flow statement

Contingencies & events occurring after the balance sheet date Net profit or net loss for the period, prior period change in accounting Depreciation accounting Construction contracts Revenue recognition Accounting for fixed assets Changes in foreign exchange rates
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Accounting Standards AS 12 AS 13 AS 14 AS 15 AS 16 AS 17 AS 18 AS 19 AS 20

Details Accounting for Government grants Accounting for investment Accounting for amalgamation Employee benefit Borrowing cost Segment reporting Related party disclosure Accounting for leases Earnings per share

AS 21
AS 22

Consolidated financial statement

Accounting for taxes & income
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Accounting Standards AS 23 AS 24 AS 25 AS 26 AS 27 AS 28 AS 29

Details Accounting for investment in associates in consolidated financial statements Discontinuing operations Interim financial reporting Accounting for intangible assets Financial reporting of interests in joint ventures Impairment of assets Provisions, contingent liabilities and contingent assets
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Underlying assumptions:

Under Indian GAAP, Financial statements are prepared in accordance with the principle of conservatism which basically means Anticipate no profits and provide for all possible losses.

Under US GAAP conservatism is not considered, if it leads to deliberate and consistent understatements.

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Prudence vs. Rules:

The Institute of Chartered Accountants of India (ICAI) has been structuring Accounting Standards based on the International Accounting Standards ( IAS) , which employ concepts and `prudence as the principle in contrast to the US GAAP, which are "rule oriented",

detailed and complex.

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Format/ Presentation of financial statements

Under Indian GAAP, financial statements are prepared in accordance with the presentation requirements of Schedule VI to the Companies Act, 1956.

On the other hand , financial statements prepared as per US GAAP are not required to be prepared under any specific format as long as they comply with the
disclosure requirements of US GAAP.

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Cash flow statement:

Under Indian GAAP (AS 3) , inclusion of Cash Flow statement in financial statements is mandatory only for companies whose share are listed on recognized stock exchanges and Certain enterprises whose turnover for the accounting period exceeds Rs. 50 crore. Thus , unlisted companies escape the burden of providing cash flow statements as part of their financial statements.

On the other hand, US GAAP (SFAS 95) mandates furnishing of cash flow statements for 3 years current year and 2 immediate preceding years irrespective of whether the company is listed or not .

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Depreciation:

Under the Indian GAAP, depreciation is provided based on rates prescribed by the Companies Act, 1956. Higher depreciation provision based on estimated useful life of the assets is permitted, but must be disclosed in Notes to Accounts.( Guidance note no 49) . Depreciation cannot be provided at a rate lower than prescribed in any circumstance. Contrary to this, under the US GAAP , depreciation has to be provided over the estimated useful life of the asset, thus making the Accounting more realistic and providing sufficient funds for replacement when the asset becomes obsolete and fully worn out.

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Capital issue expenses:

Under the US GAAP, capital issue expenses are required to be written off when incurred against proceeds of capital Whereas under Indian GAAP , capital issue expense can be amortized or written off against reserves

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Long term Debts: Under US GAAP , the current portion of long term debt is classified as current liability.

Whereas under the Indian GAAP, there is no such requirement and hence the interest accrued on such long term debt in not taken as current liability.

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What is cash basis accounting?

Most small businesses use the cash basis method of accounting, which is based on real-time cash flow. In cash method, you report an expense when it is paid and record income when it is received. So, the day you receive a cheque, it becomes a cash receipt. And you record your expenses when you pay your bills, not when the bill is received. By the way, the word "cash" is not meant literallyit also covers payments by cheque, credit card, barter, etc. In most cases, small businesses that primarily sell services will choose the cash basis method of accounting because it is easier to track and account for.

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What is the accrual method of accounting?

With accrual accounting, you record income when it is earned, not when it is paid. Similarly, you record your expenses when the obligation arises, not when you pay it. If you sell a product to a customer and he doesn't pay you for 30 days, the sale is recorded in the books on the day that you made the sale. When the money comes in the "accounts receivable" is then turned into cash. The same with expenses: if you incur an expense on one month but don't pay until the next month, the expense will be recognized in the month in which you incurred the expense. It is not necessary for cash to change-hands. For example, say your business completes a job on December 15, but you haven't been paid for it. You recognize all expenses in relation to that contract when they were incurred, regardless of whether you've been paid yet or not. Both the income and expenses are recorded for the current tax year, even if payment is received and bills are paid the following February.

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