Escolar Documentos
Profissional Documentos
Cultura Documentos
GAAP
Dr. Rachappa Shette
Session 3: Topics
1. Link between Balance Shee and Income Statement
2. Accounting Period Principle
3. Accounting Methods to measure the performance
4. Measurement Principles of Accrual Accounting
5. Principle of Consistency
6. Principle of Materiality
LiabLiabilities
ilities
LiabLiabilities
ilities
ContriContributed
buted
Capital
Capital
ContriContributed
buted
Capital
Capital
ContriContributed
buted
Capital
Capital
Assets
Assets
Assets
Assets
Assets
Assets
Assets
Assets
LiabLiabilities
ilities
LiabLiabilities
ilities
Shareholders
Shareholders
Equity
Equity
Retained
Retained
Earning
Earning
+
+
Retained
Retained
Earning
Earning
Beginning
Beginning
of
ofPeriod
Period
Retained
Retained
Earning
Earning
Beginning
Beginning
of
ofPeriod
Period
Net
NetIncome
Income
for
forperiod
period
Expenses
Expenses - Dividends
Dividends
-for
period
for
for period
forperiod
period
Revenues
Revenues
for
forperiod
period
Dividends
- Dividends
for
forperiod
period
2. Accounting Period
Financial reports are prepared at the end of time periods
of uniform length, for example, months or quarters or
years.
Uniform time periods facilitate comparisons and
analyses.
Many companies use the end of the financial year as the
end of their accounting period.
4. Measurement Principles of
Accrual Accounting
Measurement involves both the amount and the timing of
the recognition for both revenues and expenses.
(a) Timing of revenue recognition.
(b) Measurement of amount of revenue.
(c) Timing of expense recognition.
(d) Measurement of amount of expenses.
Accounting Principles:
1. Conservatism
2. Realisation
Can it be treated as revenue in the hand of Reddy for the financial year
2006-07?
Rs
110
Rs
220
Rs
230
Rs
Sales Cash
Reven (Recei
ue
pts)
Sales
Reven
ue
Sales Cash
Reven (Recei
ue
pts)
Rs
110
110
110
Rs
220
220
Rs
230
230
Rs
240
230
Sales
Reven
ue
220
240
Amount of Expenses:
Direct matching
Period cost (Indirect cost)
Costs not associated with future revenues
Principle of Matching
When an event affects both revenues and expenses, both the
effects should be recognized in the same accounting period.
Cost incurred
during
2013-14
Ye
s
Ye
s
N
o
Expense of 2013-14
Ex: Cost of goods
sold
Expense of 2013-14
Ex: Administration
expenses
Expense of 2013-14
Ex: Obsolete
inventory
5. Principle of Consistency
Once an accounting method is selected, use the same
method of accounting for all financial statements in
current accounting period as well as in subsequent
accounting periods.
Can change if there is sound reason to change.
Must be disclosed to users.
6. Principle of Materiality
Insignificant events may be disregarded.
Amounts need not be exact as long as inaccuracy would not
affect decisions of users.
Summary
Income statement is part of balance sheet
Cash Accounting Versus Accrual Accounting
Revenue recognition and measurement
Expense recognition and measurement
Accounting principles
Period principle
Conservatism principle
Realization principle
Matching principle
Consistency principle
Materiality principle
Reading
Chapter 3 of the prescribed text book
Solve the problems from 3.1 to 3.8 from chapter 3 of
prescribed text.