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Generally Accepted Accounting Principles
Learning outcome: After attempting this activity, students will be able to understand the concept of “Generally Accepted Accounting Principles”.
Background: Generally Accepted Accounting Principles are assumed to be ‘Ground Rules,’ i.e. Principles for preparing financial statements. These principles embody accounting concepts, measurement techniques and standards of presentation of financial statements.
Suppose, you are working as an Account Manager in a company, which is dealing in textile business. The President of the company is a textile engineer and he has a very little knowledge about accounting. Today, he walks into your office along with the quarterly financial statement you prepared and presented to him last week with an argument that the Balance Sheet (BS) and Profit & Loss Statement (P&LS) are incorrect. He points out that the value of the land (purchased last year) has been mentioned as Rs. 100 million (actual cost) in BS while its current market worth is Rs. 120 million and the inflation rate for the year is 8%. He argues that the value of the land mentioned in the balance sheet should either be Rs. 120 million or at least Rs. 108 million.
Further, he highlights that the advance cash received from a customer in the previous month (for which the delivery of the goods is due in next month) has not been recorded as revenue in P&LS. Instead it has been mentioned as a liability (un-earned revenue) in BS.
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1. cost principle ,, according to this principle an asset on the balance sheet is recorded based on its nominal or original cost when acquired by the company.
2. Dosre ka abi baki hai unearned revenue
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