11/23/23, 8:53 PM GAAP ( Generally Accepted Accounting Principles )

Products

Business compliance keeping you awake?

Cleartax's wide range of compliance services is here for you

Explore Now

HOME ACCOUNTS AN… ACCOUNTING S… GAAP ( GENERA…

GAAP ( Generally Accepted Accounting

Principles )
Updated on: Mar 27th, 2021 | 7 min read

CONTENTS [ Show ]

Accountancy is often referred to as an art – the art of recording, classifying and

summarizing financial information. As is the case with any form of art, accountancy
also involves the use of one’s creative skills, to maintain a record of financial
transactions. However, if free rein is given on the system of accountancy to be
followed, there will be no limit on the scope of manipulation of accounts.

In an environment where financial statements are presented to external

stakeholders such as investors, banks, stock exchanges, revenue departments,
government, etc., there arises a need for an accounting framework on the basis of
which the financial transactions should be recorded so as to make the resulting
financial statements comparable. This need led to the framing of the Generally
Accepted Accounting Principles (GAAP).

Request a demo
What is GAAP Privacy - Terms

https://cleartax.in/s/gaap-india 1/10
11/23/23, 8:53 PM GAAP ( Generally Accepted Accounting Principles )

Generally Accepted Accounting Principles (GAAP) are basic accounting principles

and guidelines which provide the framework for more detailed and comprehensive
accounting rules, standards and other industry-specific accounting practices. For
example, the Financial Accounting Standards Board (FASB) uses these principles as
a base to frame their own accounting standards. Thus GAAP encompasses:

Basic accounting principles/guidelines

Accounting Standards usually issued by the premier accounting body of the

country

Industry-specific accounting practices to cover unusual scenarios

In India, financial statements are prepared on the basis of accounting standards

issued by the Institute of Chartered Accountants of India (ICAI) and the law laid down in
the respective applicable acts (for example, Schedule III to Companies Act, 2013
should be compulsorily followed by all companies). The ICAI also releases guidance
notes from time to time on various topics to help in the accounting process and
provide clarity. While the basic accounting principles may not directly form part of
the accounting standards and the related laws, they are assumed and expected
to be universally followed.

Generally Accepted Accounting Principles

The following are the general accounting principles as mentioned earlier:

Business Entity Assumption: It states that every business entity should be

treated as an entity that is separate from its owners. Therefore, all financial
transactions should also be distinguished in such a manner. This concept is
especially important while recording financial transactions of a sole proprietor.
When the entire business with its assets and liabilities belong to the proprietor,
the financial transactions need to be distinguished between those related to
the business and those related to the proprietor personally.

https://cleartax.in/s/gaap-india 2/10
11/23/23, 8:53 PM GAAP ( Generally Accepted Accounting Principles )

Monetary Unit Assumption: All the financial transactions of a business should

be capable of being expressed in a monetary unit (Indian Rupees, for
example) and if it is not possible to do so, then it should not be recorded in the
books of accounts of the business.

Accounting Period: This principle entails that the accounting process of a

business should be completed within a certain time period which is usually a
financial year or a calendar year. Thus, every transaction which relates to a
particular accounting period will form a part of the financial statements
prepared for that period.

Historical Cost Concept: As a general rule, when certain economic resources

or assets are acquired by an enterprise, they are recorded as per the cash or
cash equivalent actually spent to acquire that resource or asset on the
transaction date – even if the transaction happened the previous day or ten
years ago. This would result in the value of the remaining asset constant
irrespective of the accounting period. The market value of the asset is not
taken into account unless specifically required by law or an accounting
standard.

Going Concern Assumption: The business entity is assumed to be a going

concern, i.e., it will continue to operate for an indefinite amount of time. This
assumption is important because if the business entity were to liquidate in the
near future, it would have to restate its assets and liabilities in the accordance
with the actual amount that could be realised or payable as the case may be
so as to reflect the true financial position of the entity.

Full Disclosure Principle: An accounting entry may not independently be able

to provide all the relevant information relating to the transaction. Hence the
full disclosure principle requires the entity to disclose all the financial
information relevant to the investor/user to assist him in decision making. At
the transactional level, this is done by recording an adequate narration with
every transaction and at the financial statement level, this is implemented by
providing notes to the accounts.

https://cleartax.in/s/gaap-india 3/10
11/23/23, 8:53 PM GAAP ( Generally Accepted Accounting Principles )

Matching Concept: This concept requires the revenue for a particular period
to be matched with its corresponding expenditure so as to show the true
profit for the period.

Accrual Basis of Accounting: This principle requires all revenue and

expenditure to be recorded in the period it is actually incurred and not when
cash or cash equivalent has been received/spent. The earning of the income
and the incurring of the expenditure is important, irrespective of the
corresponding cash flow.

Consistency: An entity may decide to follow a particular accounting

procedure in relation to a series of transactions. Such accounting procedures
need to be followed consistently over the following accounting periods so as
to facilitate comparison of the results between two periods. For example, an
entity might choose to adopt the straight-line method of depreciation of its
tangible fixed assets. This method needs to be consistently followed even in
the coming years.

Materiality: This accounting principle allows an entity to disregard another

accounting principle if the result of the same does not affect the decision
making of the user of the financial statements. Certain errors or omissions may
also be ignored if their effect is immaterial to the financial statements. For
example, when a fixed asset is purchased, the matching concept requires the
entity to recognise the expenditure over the useful life of the asset. If an entity
purchases a keyboard for Rs. 300 and the turnover of such an entity is in
crores of rupees, it would be immaterial to the user of financial statements
whether such an asset is recognised as an asset or expense. Thus, even if the
computer keyboard is considered as an expense in the year of purchase, it
would not be violating the basic accounting principles since the amount
involved and the impact of the same is immaterial.

Conservatism: In the process of accounting, one might come across various

situations where there are two equally acceptable ways of accounting for a
particular transaction. One might even have to choose between recording a
transaction or not recording the same. In such a situation, a conservative

https://cleartax.in/s/gaap-india 4/10
11/23/23, 8:53 PM GAAP ( Generally Accepted Accounting Principles )

approach should be followed. This means that while accounting for a

particular transaction, all anticipated expenses or losses will need to be
accounted for but all potential income or gains should not be recorded until
actually earned/received. This is why a provision for expenses like bad debts
is made but there is no corresponding record provided for an increase in the
realisable value of an asset.

Get an expert at affordable price

Get an Expert
For ITR, GST returns, Company Registration, Trademark
Registration, GST Registration

BROWSE BY TOPICS

Income Tax e-Filing

Last Date To File ITR For 2022-23

Income Tax Slabs FY 2023-24

Which Is Better: Old vs New Tax Regime For Salaried Employees?

House Property

Business, Professional & Freelance

Which ITR Should I File?

Income Tax Refunds

Paying Tax Due

Salary Income

Capital Gains Income

Other income sources

Advance Tax

NRI

HUF

https://cleartax.in/s/gaap-india 5/10
11/23/23, 8:53 PM GAAP ( Generally Accepted Accounting Principles )

Income Tax Notices

Follow us on C O M PA N Y

About us
Contact us

Have a query? Careers

Media & Press
Support
User reviews
Engineering blog
Clear Library
FinTech glossary
ClearTax Chronicles
GST Product Guides
Trust & Safety
Cleartax(Saudi Arabia)

PRODUCTS

Individuals Income Tax Filing

Income Tax e Filing Income Tax App android

Tax Planning Income Tax
ClearInvestment Secion 80 Deductions
ClearServices Income tax for NRI
Mutual Funds & ITR e-filing App
Mutual funds

ClearGST Enterprises

GST ClearGST
GST Login ClearE-Waybill
GST software e-Invoicing Software
New GST returns ClearTDS

https://cleartax.in/s/gaap-india 6/10
11/23/23, 8:53 PM GAAP ( Generally Accepted Accounting Principles )

e-invoicing eWay Bill Registration

Input tax credit

CAs SMEs

CA partner program ClearGST

ClearGST ClearOne
ClearTDS Billing Software
ClearTaxCloud Invoicing Software
ClearPro App Services for businesses
ClearOne App

ClearServices HSN Lookup

Tax filing for professionals HSN Code Finder

Tax filing for traders Cement HSN Code
Clear Launchpad Transport HSN Code
Trademark Registration Plastic HSN Code
Company Registration Cloth GST Rate
TDS returns Books GST Rate
MSME Registration
RESOURCES & GUIDES

GST Resources ITR Resources

GST Registration Income Tax Slab

GST Returns Form 26AS
GST Procedure What is Form 16
GST News & Announcement Salary Income
GSTR 9 Annual Returns How to File TDS Returns
GST Payments & Refunds New Income Tax Portal
Invoicing Under GST Incometax.gov.in
GSTR-2B Income from Selling Shares
GSTR-3B Income Tax Due Dates

Mutual Fund Resources Business Resources

How to Invest in Mutual Funds Memorandum of Understanding (MoU)

Mutual fund Types Mudra Yojana

https://cleartax.in/s/gaap-india 7/10
11/23/23, 8:53 PM GAAP ( Generally Accepted Accounting Principles )

ELSS Inflation & Deflation

SIP Mutual Funds Loan Agreement
Hedge Funds Succession Certificate
Debt Funds Solvency Certificate
NFO Debt Settlement Agreement
What is AMFI Rental Agreement
What is NAV Letters Of Credit
TO O LS

Income tax calculator PPF Calculator

EMI Calculator GST number search
Mutual fund calculator IFSC Code Search
HSN Code Finder Generate rent receipts
SIP calculator Home Loan EMI Calculator
GST calculator NPS Calculator

HRA calculator Find HSN code

RD Calculator Tax Saving Calculator
FD Calculator Get IT refund status
Gold Rates Today Salary Calculator
Currency Converter EPF Calculator
Compound Interest Calculator GST Number Search by Name

TRENDING MUTUAL FUNDS

ICICI Prudential Technology Fund Direct Plan Growth Tata Digital India Fund Direct Growth

Axis Bluechip Fund Growth ICICI Prudential Technology Fund Growth

Aditya Birla Sun Life Tax Relief 96 Growth

Aditya Birla Sun Life Digital India Fund Direct Plan Growth

Quant Tax Plan Growth Option Direct Plan SBI Technology Opportunities Fund Direct Growth

Axis Long Term Equity Fund Growth

https://cleartax.in/s/gaap-india 8/10
11/23/23, 8:53 PM GAAP ( Generally Accepted Accounting Principles )

TO P A M CS

SBI Mutual Fund Nippon India mutual fund HDFC Mutual Fund UTI mutual fund

Kotak Mahindra Mutual Fund ICICI Prudential Mutual Fund Aditya Birla Mutual Fund

Axis mutual fund

STO CK M A R K E TS

Stock Market Live Yes Bank Share Price SBI Share Price IRCTC Share Price

ITC Share Price TCS Share Price Tata Motors Share Price Infosys Share Price

Idea Share Price HDFC Bank Share Price

BEST FUNDS

Best Mutual Funds Best Tax Savings Mutual Funds Best Index Funds

Best Equity Mutual Funds

Clear offers taxation & financial solutions to individuals, businesses, organizations & chartered accountants in India. Clear
serves 1.5+ Million happy customers, 20000+ CAs & tax experts & 10000+ businesses across India.

Efiling Income Tax Returns(ITR) is made easy with Clear platform. Just upload your form 16, claim your deductions and get
your acknowledgment number online. You can efile income tax return on your income from salary, house property, capital
gains, business & profession and income from other sources. Further you can also file TDS returns, generate Form-16, use our
Tax Calculator software, claim HRA, check refund status and generate rent receipts for Income Tax Filing.

CAs, experts and businesses can get GST ready with Clear GST software & certification course. Our GST Software helps
CAs, tax experts & business to manage returns & invoices in an easy manner. Our Goods & Services Tax course includes
tutorial videos, guides and expert assistance to help you in mastering Goods and Services Tax. Clear can also help you in
getting your business registered for Goods & Services Tax Law.

Save taxes with Clear by investing in tax saving mutual funds (ELSS) online. Our experts suggest the best funds and you can
get high returns by investing directly or through SIP. Download Black by ClearTax App to file returns from your mobile phone.

CLEARTAX IS A PRODUCT BY DEFMACRO SOFTWARE PVT. LTD.

Company Policy Terms of use

ISO 27001
Data Center

https://cleartax.in/s/gaap-india 9/10
11/23/23, 8:53 PM GAAP ( Generally Accepted Accounting Principles )

SSL Certified Site

128-bit encryption

https://cleartax.in/s/gaap-india 10/10