Facts about GAAP and Indian Accounting Standards


In the U.S., when a small business grows, claiming the attention of investors or goes public, its accounting departments are required to immediately stick to the Generally Accepted Accounting Principles or GAAP.

Simply put, GAAP is a common, accounting language for companies to record accounting and financial information. The sole objective of GAAP is to enable organizations to have a standardized method of treating financial and accounting data so that the interpretation, analysis, sharing and communication of financial results and reports with the external parties will be easier and made transparent.

 10 Principles of GAAP

GAAP comprises of a number of rules, accounting standards and practices so that those that are externally associated with the company as shareholders, creditors, investors and general public have complete transparency of business’ financial and accounting information.
The GAAP provides all important guidelines for companies to follow a consistent set of rules to organize financial data into accounting records. It also includes mandates based on which the accounting and financial statements involving the treatment of assets, liabilities, equity, revenue, expenses, currencies, lease and other non-monetary transactions.

The GAAP is made of 10 key principles:

  1. Business is a single entity: According to this concept, a company or business has its own identity and can exist even after the owners or promoters are no longer associated to the business.
  2. Principle of Single Currency: All transactions carried out by the company or statements carrying financial data should be expressed in a single currency. In the U.S., all business information is expressed as U.S. dollars and foreign currencies are subject to conversion for the preparation of statements.
  3. Time Line Principle: As per the guidelines all the statements such as income statements and balance sheet have created for a certain period of time. It means the accountants should record all transactions and information that are carried out between the start date and end date.
  4. Principle of Recording Historic Cost: The statements are prepared by taking into consideration the value of assets or items when they were bought and sold. It does not take into accounting the appreciation or depreciation rates for reporting purposes.
  5. Principle of Full Disclosure: Every company should furnish full information pertaining to their financial performance to the public, investors or shareholders to reveal the real financial position.
  6. Principle of Recognition: As per this rule, all companies are supposed to reveal incomes and expenses incurred during a particular accounting period.
  7. Non-death Principle: A company can function longer than its founders, owners, shareholders and has no self-life or a deadline set for its operation.
  8. Double Entry System or Matching Principle: According to this rule, for every debit entry, there has to be a corresponding credit and vice versa.
  9. Materiality or Objectivity Principle: The accounting information shared by the company will be audited and viewed with objectivity by external parties. The entries in the statements can have minor inaccuracies and relies on the accountants’ capabilities to offset those minor differences.
  10. Principle of Conservative Accounting: As per this rule, in a business when there is any expenditure, the information has to be immediately recorded but all incomes that are due and receivables will be considered only after cash is received.


Importance of GAAP

GAAP standardizes the accounting practices, helping companies to provide financial data and reports in a way that the investors are able to understand to facilitate their investment decisions. The financial and accounting reports enable prospective business partners or investors to compare and keep track of profit and loss of the company.

Additionally, the reports created as per the GAAP standards provide a comprehensive view of the way the taxable amount is treated and spent. Above all, the purpose of GAAP is to minimize inaccuracies and discrepancies in accounting information and financial reports.

History of GAAP

Post the Great Depression, the U.S. government passed a bill, directing public companies to follow a standard accounting practice. Since then, Securities Act and Securities Exchange Act made it compulsory for all companies whose shares are traded and listed in the stock exchange to adhere to the GAAP rules.

The GAAP standards are governed by the Financial Accounting Standards Board (FASB). And the Financial Accounting Standards Advisory Council (FASAC) makes recommendation to FASB on matters related to GAAP rules.

Additionally, statutory bodies such as the American Institute of Certified Public Accountants (ACIPA), Institute of Chartered Accountants of India, etc play a huge role in defining accounting practices and principles with international acceptability.

Since, there are no GAAP standards that are common for all nations across the world, each country has its own GAAP.

Indian GAAP and Indian Accounting Standard

In India, most companies follow GAAP standards that may vary according to the regions. Also, India has its own Financial Reporting Standards which is referred as Indian Accounting Standard, issued by the Accounting Standard Board (ASB) during 1977. 

The ASB comes under ICAI whereas, the IFRS serves as the guiding source for Indian businesses to explore global opportunities. For this purpose, all Indian multi-nationals are supposed to adhere to both IFRS and Indian GAAP.

Given below are the important features of Indian GAAP:

  • The Indian GAAP is governed by the Ministry of Corporate Affairs and is applicable throughout the country.
  • Unlike the U.S. GAAP standards, the companies in India are under no compulsion to the system of changing currency of transactions as functional or presentation currency.
  • The historic value of assets like machinery, property, land, etc will be considered for fair revaluation.
  • All repairs and expenditure will be recorded and treated as expenses.
  • Indian GAAP too advocates companies to stick to double entry system where for every debit transaction there is a corresponding credit and vice versa.


New Rules as per Indian Accounting Standards

As per the recent mandates, post April 2016, every company with a net worth of more than 5 billion INR is required to follow Indian AS. The Indian AS is also applicable for listed companies and unlisted companies with less than 2.5 billion INR or more than 5 billion INR as its net worth.

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