Generally Accepted Accounting Principles (GAAP)

Generally accepted accounting principles (GAAP) refer to a common set of accounting rules,
standards, and procedures issued by the Financial Accounting Standards Board (FASB). Public
companies in the U.S. must follow GAAP when their accountants compile their financial
statements.
GAAP is guided by ten key tenets and is a rules-based set of standards. It is often compared
with the International Financial Reporting Standards (IFRS), which is considered more of a
principles-based standard. IFRS is a more international standard, and there have been recent
efforts to transition GAAP reporting to IFRS.
GAAP helps govern the world of accounting according to general rules and guidelines. It
attempts to standardize and regulate the definitions, assumptions, and methods used in
accounting across all industries. GAAP covers such topics as revenue recognition, balance
sheet classification, and materiality.
The ultimate goal of GAAP is to ensure a company's financial statements are complete,
consistent, and comparable. This makes it easier for investors to analyze and extract useful
information from the company's financial statements, including trend data over a period of
time. It also facilitates the comparison of financial information across different companies.
The 10 Key Principles of GAAP
1. Principle of Regularity
The accountant has adhered to GAAP rules and regulations as a standard.
2. Principle of Consistency
Accountants commit to applying the same standards throughout the reporting process, from
one period to the next, to ensure financial comparability between periods. Accountants are
expected to fully disclose and explain the reasons behind any changed or updated standards in
the footnotes to the financial statements.
3. Principle of Sincerity
The accountant strives to provide an accurate and impartial depiction of a company’s financial
situation.
4. Principle of Permanence of Methods
The procedures used in financial reporting should be consistent, allowing a comparison of the
company's financial information.
5. Principle of Non-Compensation
Both negatives and positives should be reported with full transparency and without the
expectation of debt compensation.
6. Principle of Prudence
This refers to emphasizing fact-based financial data representation that is not clouded by
speculation.
7. Principle of Continuity
While valuing assets, it should be assumed the business will continue to operate.
8. Principle of Periodicity
Entries should be distributed across the appropriate periods of time. For example, revenue
should be reported in its relevant accounting period.
9. Principle of Materiality
Accountants must strive to fully disclose all financial data and accounting information in
financial reports.
10. Principle of Utmost Good Faith
Derived from the Latin phrase uberrimae fidei used within the insurance industry. It
presupposes that parties remain honest in all transactions.
Limitations of GAAP
While GAAP accounting strives to alleviate incidents of inaccurate reporting, it is by no means
comprehensive. Companies can still suffer from issues beyond the scope of GAAP depending
on their size, business categorization, location, and global presence.
Diverse Types of Companies
GAAP may seem to take a "one-size-fits-all" approach to financial reporting that does not
adequately address issues faced by distinct industries. For example, state and local
governments may struggle with implementing GAAP due to their unique environments. New
GAAP hierarchy proposals may better accommodate these government entities.
Small businesses may also struggle with implementing GAAP. These standards may be too
complex for their accounting needs, and hiring personnel to create GAAP definition reports
can be expensive. As a result, the FASB works with the Private Company Council to update
GAAP with private company exceptions and alternatives.
Timeframe
Due to the thorough standards-setting process of the GAAP policy boards, it can take months
or even years to finalize a new standard. These wait times may not work to the advantage of
companies complying with GAAP, as pending decisions can affect their reports.
Global vs. Domestic
GAAP is not the international accounting standard, which is a developing challenge as
businesses become more globalized. The International Financial Reporting Standards (IFRS)
is the most common set of principles outside the United States. IFRS is used in the European
Union, Australia, Canada, Japan, India, and Singapore.
Indian and International Accounting Standards:
IFRS stands for International Financial Reporting Standards, it is prepared by the IASB
(International Accounting Standards Board). It is used in around 144 countries and is regarded
as one of the most popular accounting standards.
IND AS is also known as Indian Accounting Standards or Indian version of IFRS. Indian AS
or IND AS is used in the context of Indian companies.
Let us look at some of the points of difference between the IFRS and IND AS.

IFRS IND AS

Definition

IFRS stands for International Financial IND AS stands for Indian Accounting
Reporting Standards, it is an Standards; it is also known as India
internationally recognised accounting specific version of IFRS
standard

Developed by

IASB (International Accounting Standards MCA (Ministry of Corporate Affairs)

Board)

Followed by

144 countries across the world Followed only in India

Disclosure

Companies complying with IFRS have to Such a disclosure is not mandatory for
disclose as a note that the financial companies complying with Indian
statements comply with IFRS Accounting Standards or IND AS

Financial Statement Components

It includes the following It includes the following:

1. Statement of financial position 1. Balance Sheet
2. Statement of profit and loss 2. Profit and loss account
3. Statement of changes in equity for the 3. Cash flow statement
period 4. Statement of changes in equity
4. Statement of cash flows for the period 5. Notes to financial statements
6. Disclosure of accounting policies

Balance Sheet Format

Companies complying with IFRS need Companies complying with IND AS need
have specific guidelines for preparing have no such requirements for balance
balance sheet with assets and liabilities to sheet format, but the guidelines are
be classified as current and non-current defined for presenting balance sheet
Approaches to the formulation of accounting theory:
Regulatory approaches
Numerous would regard this as the approach we presently have to accounting theory. They grip
this view because to them it does not look that standards, even those of the IASB, are based on
broad, related theories but are developed as solutions to current consists that arise in our
attempts to provide beneficial information to manipulators. Certainly, they might argue that
new standards are only developed when a specific manipulator complains about
misrepresentation or non-information. But there are questions to consider if we do adopt this
approach to the development of accounting theory. In the main these queries centre on whether
we should accept a free market approach to the regulation, a private sector regulatory approach
or public sector regulatory approach.
Behavioral approach
The behavioral approach attempts to take into account human behavior as it narrates to decision
making in accounting. Devine (1960) stated the following:
On balance it seems fair to conclude that accountants seem to have waded through their
relationships to the intricate psychological network of human activity with a heavy-handed
crudity that is beyond belief. Some degree of crudity may be excused in a new discipline, but
failure to recognize that much of what passes as accounting theory is hopelessly entwined with
unsupported behavior assumptions is unforgivable.
This to us seems fair remark. Given that financial reporting is about communicating
information to users to permit them to make decisions, a lack of attention of how that
information instances their behavior is certainly unforgivable. Studies in this area have tended
to concentrate on:
The adequacy of disclosure
Usefulness of financial statement data
Attitudes about corporate reporting practices
Materiality judgements
Decision effects of alternative accounting practices
In one of these areas, materiality, it was discovered that manipulators assessment of materiality
was individualistic and that the provider of the information was not in the finest position to
determine materiality for a manipulator. There is much work still to do within the behavioral
approach.
Futures and need of GST in India:
It has been long pending issue to streamline all the different types of indirect taxes and
implement a “single taxation” system. This system is called as GST (GST is the abbreviated
form of Goods & Services Tax). The main expectation from this system is to abolish all indirect
taxes and only GST would be levied. As the name suggests, the GST will be levied both on
Goods and Services.
GST was first introduced during 2007-08 budget session. On 17th December 2014, the current
Union Cabinet ministry approved the proposal for introduction GST Constitutional
Amendment Bill. On 19th of December 2014, the bill was presented on GST in Loksabha. The
Bill will be tabled and taken up for discussion during the coming Budget session. The current
central government is very determined to implement GST Constitutional Amendment Bill.
GST is a tax that we need to pay on supply of goods & services. Any person, who is providing
or supplying goods and services is liable to charge GST.
Futures of GST:
SINGLE INDIRECT TAX IN GST
GST has been introduced as a single, unified tax reform. It has eliminated many existing
indirect centre and state taxes like Central Value Added Tax, Special Additional Duty of
Customs, Service Tax, and VAT and converted them into a single tax. The elimination of these
indirect taxes has not only made tax compliance easier for businesses but has also helped in
making many of the goods and services more affordable for the consumers.
INPUT TAX CREDIT SYSTEM IN GST
One of the most prominent GST features in India is the input tax credit. If a manufacturer or
service provider has already paid input tax on a purchase, the same can be deducted from their
total output tax liability. The input and output invoices need to match to take advantage of the
tax credit. This helps in removing the cascading tax effect or the traditional ‘tax-on-tax’ regime.
Moreover, it also helps in reducing tax evasion.
GST COMPOSITION SCHEME
SMEs with an annual turnover of up to Rs. 1 crore or Rs. 75 lakhs in specified states can also
voluntarily opt for the composition scheme. With this scheme, the businesses can pay a fixed
GST rate of 1% on their turnover. However, such businesses can then not use the input tax
credit benefit. A business needs to select between whether they want to use the composition
scheme or the input tax credit feature.
FOUR-TIER TAX STRUCTURE IN GST
GST has a 4-tier tax structure of 5%, 12%, 18%, and 28%. All the goods and services can only
be taxed as per this tax structure. Many of the essential commodities such as food items do not
have any GST. Improved transparency and cheaper goods and services are two of the biggest
advantages of this 4-tier structure.
A four-tier GST tax slabs have been decided by the Finance ministry. Below are the details;
Zero Tax rate: There won’t be any tax on almost 50 % of items in the Consumer Price Index
basket, including grains used by the common man.
5% Tax slab: This is applicable on items of mass consumption used by common people.
There would be two standard rates of 12% and 18% under the GST regime.
All the items (especially luxury items) which are now taxed at around 30% will fall under 28%
GST rate slab.
An additional cess would also be levied on luxury cars, tobacco products & aerated drinks
besides the highest tax rate (28%).
The tax rate proposal will now be placed in Parliament for its approval.

Benefits of GST Bill implementation

The tax structure will be made lean and simple
The entire Indian market will be a unified market which may translate into lower business
costs. It can facilitate seamless movement of goods across states and reduce the transaction
costs of businesses.
It is good for export-oriented businesses. Because it is not applied for goods/services which are
exported out of India.
In the long run, the lower tax burden could translate into lower prices on goods for consumers.
The Suppliers, manufacturers, wholesalers and retailers are able to recover GST incurred on
input costs as tax credits. This reduces the cost of doing business, thus enabling fairer prices
for consumers.
It can bring more transparency and better compliance.
Number of departments (tax departments) will reduce which in turn may lead to less corruption
More business entities will come under the tax system thus widening the tax base. This may
lead to better and more tax revenue collections.
Companies which are under unorganized sector will come under tax regime.
Environmental Accounting:
Environmental accounting is increasingly being used to support the development and analysis
of government policy. Environmental accounting shows how different sectors of the economy
affect the environment and vice versa. As the understanding of environment-economy
interactions increases, the appropriate policy and business responses should become clearer.
This professional development short course is designed to support those in government,
business or NGOs interested in developing, implementing or using environmental accounts.
The course has been designed to assist with the implementation of the World Bank’s Wealth
Accounting and Valuation of Ecosystem Services (WAVES) as well as the System of
Environmental-Economic Accounting (SEEA).
Necessity of Environmental Accounting
The quantitative management of environmental conservation activities is an effective way of
achieving and maintaining sound business management. In other words, in carrying out
environmental conservation activities, a company or other organizations can accurately
identify and measure investments and costs related to environmental conservation activities,
and can prepare and analyze this data. By having better insight into the potential benefit of
these investments and costs, the company can not only improve the efficiency of its activities,
but environmental accounting also plays a very important role in supporting rational decision-
making.
In addition, companies and other organizations are required to have accountability to
stakeholders, such as consumers, business partners, investors and employees, when utilizing
environmental resources, i.e., public goods, for their business activities. Disclosure of
environmental accounting information is a key process in performing accountability.
Consequently, environmental accounting helps companies and other organizations boost their
public trust and confidence and are associated with receiving a fair assessment.
Functions and Roles of Environmental Accounting
Internal Functions
As one step of a company’s environmental information system, internal function makes it
possible to manage environmental conservation cost and analyze the cost of environmental
conservation activities versus the benefit obtained, and promotes effective and efficient
environmental conservation activities through suitable decision-making.
External Functions
By disclosing the quantitatively measured results of its environmental conservation activities,
external functions allow a company to influence the decision-making of stakeholders, such as
consumers, investors, and local residents.
Need of Environmental Accounting at Corporate Level:
It helps to know whether corporation has been discharging its responsibilities towards
environment or not. Basically, a company has to fulfill following environmental
responsibilities.
a) Regulatory Requirements: Meeting regulatory requirements or exceeding that expectation.
b) Cleaning up Pollution: Cleaning up pollution that already exists and properly disposing of
the hazardous material.
c) Information: Disclosing to the investors both potential and current, the amount and nature
of the preventative measures taken by the management (disclosure required if the estimated
liability is greater than a certain percent say 10 per cent of the company’s net worth).
d) Operation: Operating in a way that those environmental damages do not occur.
e) Promotion: Promoting a company having wide environmental attitude.
f) Control Over Efficiency Gains: Control over operational and material efficiency gains driven
by the competitive global market.
g) Control Over Cost Increases: Control over increases in costs for raw materials, waste
management and potential liability.

Scope of Environmental Accounting:

The scope of Environmental Accounting is very wide. It includes corporate level. national and
international level. The following aspects are included in environmental accounting
1) Internal Point of View: From Internal point of view investment made by the corporate
sector for minimization of losses to environment. It includes investment made into the
environment saving equipment/ devices. This type of accounting is easy as money
measurement is possible.
2) External Point of View:
i) Degradation and destruction like soil erosion, loss of bio diversity, air pollution, water
pollution, voice pollution, problem of solid waste, coastal and marine pollution.
ii) Depletion of non-renewable natural resources i.e., loss emerged due to Over
exploitation of non-renewable natural resources like minerals, water, gas, etc.
iii) Deforestation and Land uses: This type of accounting is not easy, as losses to
environment cannot be measured exactly in monetary value. Further, it is very hard to
decide that how much loss was caused to the environment due to a particular industry.
For this purpose approximate idea can be given or other measurement or loss like
quantity of non-renewable natural resources used, how much Sq meter area deforested
and total area used for business purpose including residential quarters area for
employees etc., how much solid waste produced by the factory, how much wasteful air
pass through chimney in air and what types of elements are included in a standard
quantity of wasteful air, type and degree of noise made by the factory, etc. can be used.
Social Responsibility Accounting:
The main emphasis for evaluation of a business unit was on commercial aspects i.e.,
profitability; the social aspect has so far been ignored. No doubt earning profit is necessary for
the survival and growth of business. But should business units have no consideration for the
people from whom the profits emerge?
Many rules, regulations and laws relating to social responsibilities of the business have been
framed by the government. As a result, people have become conscious of their rights and cannot
tolerate the socially irresponsible behavior of business units.
To maintain a balance between the economy and the ecosystems.
Are concerned with how business operations affect employees, customers, the community and
the natural environment.
Social Responsibility Accounting seeks to quantify and report on this information.
Definition of Social Accounting
“The measurement and reporting, internal and external, of information concerning the impact
of an entity and its activities on society."
Needs of Social Accounting
It improves the image of the firm.
It helps in marketing through greater customer support.
It acts as evidence of social commitment.
A firm fulfils its social obligations and informs its members, the govt. and the general public
to enable everybody to form a correct opinion.
It counters the adverse publicity or criticism by hostile media.
Objectives of Social Accounting
To identify and measure the contribution of a firm towards the society.
To determine if the firm’s strategies are consistent with social priorities.
To make available, relevant information about the firm's goals, programmes, performances,
use of scare resources.
To Quantify and properly present the social costs and benefits of an enterprise.
Social Accounting Approaches
1. Classical Approach: Introduced by Milton Friedman – There is one and only one social
responsibility of business to use its resources and engage in activities designed to
increase its profits, as long as it stays within the rules of the game. Engage in free and
open competition without deception or fraud.
2. Descriptive Approach: Social Activities of a business are presented along with financial
statements in a narrative form
3. Integral Welfare Theoretical Approach: This approach advocates the preparation of a
social report comprising social benefits and social costs.
 4. Social Indicator (Brummet Approach): This approach involves different areas of social
contribution to be undertaken by the business.
Total Performance = Net Income + Human resource Contribution + Public Contribution
+ Environmental Contribution + Product/Service Contribution.
5. Linowes Operating Statement Approach: (D.F.Linowes ) advocates preparation of a
SEOS (Socio Economic Operating Statement). It includes tabulation of Firm’s
expenditures for social benefits and estimated social costs of various programs and
hence calculating the Social Contribution = Social Benefits – Social Costs.

Methods/Criteria of Social Cost – Benefit

1. Capital Output Ratio: It gives an idea of the expected output in relation to the capital invested
in a project. As per this method, the project giving higher output per unit of capital employed
is to be given preference over any other project.
2. Value Added Method:
Sales value – cost of bought-out inputs (i.e., raw materials, components etc.)
It takes into consideration the net contribution made by the business to the nation’s economy.
The project having higher value addition is preferred over other projects.
3. Employment Potential: higher employment potential is to be preferred over the project
having a lower potential for employment.
4. Saving in Foreign Exchange: higher potential in terms of foreign exchange benefit will get
priority over project having lower foreign exchange benefit.
5. Social Cost Benefit Ratio: the lower the social cost the better it

Applicability
The following companies are required to constitute CSR committee –
Companies with net worth of Rs. 500 crores or more, or
Companies with turnover of Rs. 1000 crores or more, or
Companies with net profit of Rs. 5 crores or more.