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Prudence is one of the Accounting Concepts that is included in Generally Accepted Accounting Principles (GAAP). We already discussed it in our previous article Generally Accepted Accounting Principles Prudence Concept , but here we discuss this accounting concept with reference to Revenues, Profits, Expenses and Losses. Under this Principle, revenues and profits should be treated as different from expenses and losses for the company businesses. All losses and Expenses of the entrepreneur must be recorded in the books of accounts as soon they are known to the entrepreneur while all the profits and revenues will never record in the books of accounts unless these actually earned by the entrepreneur during the accounting period. For Example, if there is an estimation that amounts due from the customer of the entrepreneur may become Bad Debts , then the Adjusting Entry is accounted for this amount due from the customers of entrepreneur. But in case of...

Consistency Principle is one of the Accounting Concepts and it is included in Generally Accepted Accounting Principles (GAAP). Here we study this accounting concept with the help of examples. This principle states that similar items should be regarded as same accounting treatment within one set of accounts or from one accounting period to another accounting period of time. For Example, in case of valuation of Inventory, it is better to adopt consistency in the valuation of inventory. If we change our valuation method  i.e., from FIFO to Weighted Average Method, within an accounting period, then in the next year it is very difficult for the company businesses to calculate the value of inventory and net income may be distorted. It does not mean that we can not change the accounting policies but when we apply this principle then accounting treatment must be same from one accounting period to another then we can change our accounting policy. F...

Here we define Accrual Concept with example that is a very important concept of Accounting Concepts and it is named as Accrual Concept Accounting and this concept is also laid down under the Generally Accepted Accounting Principles (GAAP). It states that in calculating or computing Accounting Profit, revenue earned must be matched against all the expenses incurred in earning that revenue. For Example all of the cost of sales incurred to generate sales must be matched with that sales revenue of the goods sold eventhough we have unsold goods at the end of the period. You can Lean this example in a better way in this Accruals Vs Cash Basis of Accounting . We account for all those Business Transactions that are either accrued or prepaid, either these types of transactions paid in advance or these are outstanding at the end of Accounting Period of the company businesses. We are not considered the Cash Basis of Accounting where business transactions are r...

Here we study about Material Immaterial Accounting Concepts that are the principles of Generally Accepted Accounting Principles (GAAP). Previously, we have discussed about Materiality Concept Accounting Example . If you do not read this article, then kindly read it so that you can better learn this topic. Materiality is the concept which states that information that can influence the economic decisions of the users of financial statements. An Immaterial is the concept in which an item is insignificant to affect the economic decisions of the users of financial statements of the company businesses. The question about as to whether an information or item is material or immaterial depends on the nature of the item or information and to include it into your financial statement section “Notes to the Accounts”. Following are the Factors upon which Materiality may depend: Ø If the treatment of an item changes the trends or turns the...

Here we discuss about Generally Accepted Accou nting Principle s (GAAP) Prudence Concept. What Does Prudence Mean This Accounting Concept states that anticipate no profit but provide for all possible losses or in other words we can say that where alternative procedures or valuations are possible, then entrepreneur must choose those alternatives that give the most cautious presentation of the financial performance and financial position of the company businesses. The Entrepreneur should be more cautious and anticipate loss first but no profit because when we make an estimate that profit will be made in future and if not made, then, we are not ready to meet the loss before its happening. So be careful and operate safely to maintain the stability of the company businesses. Stock Valuation is a good example of this concept. We always record value of Stock or Inventory at lower of cost or Net Realizable Value (NRP). If we value the Stock ...

Here we study Generally Accepted Accounting Principles (GAAP) Matching Principle. According to this Accounting Concept , Revenues for the accounting period must be matched with the expenses incurred in earning that revenue. For Example, salaries paid to employees for the month must be matched with the revenue earned this month for the company businesses by the employees. All the services rendered by the employees during the Accounting Period . All Outstanding Salaries must be recorded in Income Statement and Balance Sheet of company businesses. Let us see another example in which, the amount of Cost of Sales must be matched with all the units of goods sold. In Accounting Language we can see this example as: Units Sold = Units Sold X Per Unit Price For Selling Goods to Customers = 60 X 20  = 1200 Cost of Sales = Units purchased X Per Unit Price For Purchasing Goods From Suppliers  = 80 X 10 = 800 Unsold Units = 20...

Revenue Recognition is the principle included in GAAP (General Accepted Accounting Principles). Revenue from the sale of goods should be recognized when all the conditions are fulfilled and if any one of them is failed, then it can not be considered as revenue for the company's businesses. ü   The entrepreneur transfers the risks and rewards of ownership to  the buyer. ü   The entrepreneur can not retain the managerial power relating to ownership of goods and also, he / she should not have effective control over the goods sold to buyers. ü   The amount or price of revenue can be measured reliably. ü   The economic benefits associated with the   Business Transactions   should flow to the entrepreneur or enterprise. ü     The amount of cost can be measured reliably. However, it is to be noted that the seller can retain the ownership of goods d...