“GAAP principles have been developed by the accounting profession over the years to provide a consistent system of financial reporting in a constantly changing environment”

Go through any annual report of a company and evaluate how the companies are applying these GAAP principles (example:- Cost, Double Entry, Stable Monetary, Cash or Accrual, Accounting Period, Conservatism, Business Entity Concept etc.) in preparing their financial statement.

From this annual report I want to find how the company used the principles of accounting in preparing their financial statement.
 
By going through the financial statement I know how they used different kind of principles in different circumstances. This concept will help me a lot in future. As I became familiar with these principles, so I can use these kinds of principles in the financial statement for any company later. Even in future if I start a business then I can apply these principles for the financial statement of my company also.

For doing this job I follow the annual report of Bangladesh Lamps Limited (PHILIPS).

The primary purpose of GAAP is to help accountants provide relevant and comparable information. In other words, financial accounting practices should produce information that is relevant to the decision made by financial statement users. GAAP identify uniform practices that make financial statements more understandable and useful.
  
“The ground rules used by business entities in presenting financial information are called generally accepted accounting principles (GAAP).”  Jack L. Smith.

These principles have been developed by the accounting profession over the years to provide a consistent system of financial reporting in a constantly changing business environment. From the earliest days of accounting up through the first third of the 20th century, GAAP were developed through common usage.

The principles that are used in the following financial reports are as follows:

1.  Business entity concept
2.  Periodicity concept
3.  Going concern concept
4.  Cost principles
5.  Accrual concept
6.  Cash concept
7.  Conservatism concept
8.  Consistency concept
9.  Double entry concept
10. Objectivity principle
11. Stable dollar concept
12. Matching concept

Business Entity Concept : Data gathered in an accounting system relate to a specific business unit of entity. The business entity concept assumes that each business has an existence separate from it’s owners, creditors, employees, customers, other interested parties and other business.

Periodicity Concept : Accounting to periodicity concept or assumption an entity’s life can be meaningful subdivided into time periods (such month or years) for purposes of reporting the results of its economic activities.

Going Concern Concept : Unless strong evidence exists to the contrary, accountants assume that the business entity will continue operations into the indefinite future. Accountants call this assumption the going concern or continuity assumption.

Cost Principle : Assets such as land, buildings, merchandise and equipment are typical of the many economic resources that will be used in producing revenue for the business. The prevailing account is that such assets should be used at their cost.  When we say that an asset is shown in the balance sheet at its historical cost, we mean the original cost of the asset to the business entity; this amount may be very different from the asset’s current market value.

Accrual Concept : Accounting that recognizes revenues and expenses as they occur, even though the cash receipt from the revenue or the cash disbursement related to the expense may occur before or after the event that causes revenue or expense recognition.

Cash Concept :  After accrual transaction when we receive or pay cash in form of revenue or expenses then we record it in our accounting book. It’s not a fact when the transaction has happened but main thing is receiving or paying cash in this concept. 

Conservatism :  Conservatism in accounting relates to making judgments and estimates that result in lower profits and asset valuation estimates rather than higher profits and asset valuation estimates. Accountants try to avoid wishful thinking estimate that could result in overstating profits for a current period.

Double entry Concept :  Double entry concept means each entry has two sides one is debtor and the other is creditor. In this concept only those transactions are recorded which create affect in business directly.
 
Objectivity Concept :  objectivity is the posy entry measurement. That means what is actually happened; take place in the accounting book. We take the information from different documents. For example:- sales document, purchase invoice, property deeds and transfers of title and put that amount in the financial statement. There is no place of subjectivity in our accounting book that means pre-entry measurement.

The stable dollar concept :  Money is the unit of measure employed in recording financial transactions. Knowing the money values  assigned to financial transactions enables the user of financial statements to estimate the profitability of a business enterprise. The dollar is not a precise and unchanging  unit of measure. A dollar of previous is not the same as dollar of today because the effects of inflation. The value of dollar changes over time  but accountants cannot build useful statements  with unstable units of measurement. Therefore a financial statement is prepared on the basis of stable dollar concept.

Consistency Concept : Consistency means in the matter of depreciation if the company uses straight-line method then the company must use this method in each period.
 
Matching concept :  All expense of the accounting period must be matched against the revenue earned in the period. If a benefit has been consumed, the effect must be recorded weather or not documentation has been received. This argument  is referred to as the matching concept.

1. Business Entity : Business entity means every transaction must be related to the business.

By going through this financial statement we find that here every transaction is related to the entity. We don’t find any item, which is related to the owners.

2. Periodicity concept : Periodicity concept means when a company prepares their financial statement they use a limited time or period. This period can be six months, one year, or two year such like that. In this annual report they give ten years review from 1990-1999. Here we see that they prepare their financial statement at the end of each year. It means they divide the period into one year. So, here they use periodicity concept.

3. Going Concern concept : When owner’s start their business, they have to estimate that the company will run for an unlimited time period. In this annual report they give ten years review 1990-1999. From this report we can say that this company will run for an unlimited time period because the company has not disrupted yet.  They do not know when the business will be disrupted. On the basis of this concept they depreciate their fixed assets because every fixed asset has an estimated lifetime but the company hasn’t. We also find that in the P/L account the inappropriate profits of 1998 (tk 7845,806) are brought down in the P/L account of the period 1999. This process will go on until the company will disrupt. This policy is also following the going concern concept.

4. Cost principle  :  In the following financial statement they use cost principle in balance sheet but they show it in different way. For example, In the balance sheet they put the value of machinery 364436116 in  31st  December  1998. In 1999 1st January the value was 157137219. Here we see that the value of 1998 and 1999 is different. Here they get the value of 1999 by adding accumulated depreciation of previous years and the value of machinery of 1998. So here the historical cost of machinery remains same. By this way they use cost principle.

5. Accrual concept : Accrual concept means transaction has happened  but the delivery of  cash has not happened yet.

Here in this financial statement, in the balance sheet they use accrual concept. For example:- accrued expense, proposed dividend, provision for taxation etc. are followed the accrual concept.

Accrued expense means the company takes services from others but has not paid the charge yet. Proposed dividend means they might give dividend to the shareholder but has not paid yet. Provision for taxation means the company made a deal with the government that they will give tax but has not paid  yet.

6. Cash concept : Cash concept means receiving and paying cash in the purpose of revenue  or expense.

In the following financial statement, the cash flow statement is prepared on the basis of cash concept. Here every transaction is following these rules. For example:- payment to supplies, income tax payment, payment to services, dividend to shareholders etc.

7. Conservatism concept : conservatism concept means to record the inventories in lower price, comparing the market price and actual cost.

In the term of inventories first they add all types of inventories (raw materials on hand, raw materials in transit, work in process, finished goods, spare part and spare parts in transit) and put it in the balance sheet. Although we don’t know the market price of those inventories but we can estimate that the actual price is lower than the market price, so they record it.

8. Consistency concept : In this financial statement  in case of depreciation, they use straight-line method.

In this report they give ten years review at the very beginning. By going through this review we find that in each  period they depreciate their fixed asset on the basis of straight-line method. It means they follow the consistency policy. Firstly they estimate the life time  of their particular fixed asset  and then depreciate fixed asset by dividing with the life time of the particular asset.

9. Double-Entry concept : in this financial statement every item is taken from the adjusted trial balance, which is prepared  on the basis of  double entry concept. Though they doesn’t mentioned that they use double entry concept but we know that when transaction occur, we record it first in journal, then ledger and finally in trial balance. All of these accounts are prepare on the basis of double entry concept. For accrual concept some items left at the end of the period. To add those transactions with previous record book we prepare journal, ledger and adjusted trial balance. And finally from this adjusted trial balance we take the items and prepare cash flow statement, profit and loss account, and balance sheet.

10. Objectivity principle : Objectivity means the post entry measurement. In the financial statements the amount we put of different transactions take from the different documents. For example, the amount that we put against payment to suppliers is taken from the purchase invoice. They don’t assume this amount by comparing the market because they follow the objectivity principle.

11. Stable dollar concept :   In the purpose of  purchasing spare parts they use stable dollar concept. They import 79.54% from abroad and paid in dollar. Rest of 20.46% procured from local source and paid in taka. As the company is in our country, so they prepare their financial statement on the basis of taka. For this they convert the dollar into taka to maintain the base of money which they use in their financial statement. 

12. Matching concept : In the profit and loss account they put 258,162,317 tk  against sales. But here they don’t consider that the amount they have got or not. The transaction happened and they record it. When they receive money from the debtor they put the amount 249,240,140 in cash flow statement. Here we see that the transaction of sales recorded in two accounts but the amount are not same because the amount of sales and the amount of collection are not equal. In this term they follow the matching concept to match the sales.

Conclusion

From the following financial statement I describe about twelve principals which are used to prepare this statement. There are still some principals, which are used but not described because they are not much important. To prepare this assignment I face many problems but I have tried to make it better. At last I can say that the man who wants to continue his study in B.B.A must know about these principals because it is very important for his future career.