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Fundamentals of Financial and Cost Accounting · Accounting Principles, Concepts and Conventions

Accounting Principles and GAAP for CMA Foundation

Updated 10 October 2026 · Fact-checked

Accounting principles are the common rules and guidelines that accountants follow to record transactions and prepare financial statements. Generally Accepted Accounting Principles (GAAP) are the set of such rules accepted in a country. They make accounts consistent, reliable and comparable. To solve questions, identify the rule described and match it to the right term.

Understand Accounting Principles and GAAP

Accounting records money transactions of a business. If every accountant recorded them in a different way, no one could trust or compare the results. Accounting principles solve this problem. They are agreed rules that tell you what to record, how to measure it and how to report it.

Accounting principles are man-made. They are not laws of nature like those in physics. They develop from practice, business experience and the needs of users such as owners, lenders and the tax authorities. Because of this, they can change when business conditions change.

GAAP stands for Generally Accepted Accounting Principles. It is the body of rules, conventions, standards and legal requirements that are accepted for preparing financial statements. 'Generally accepted' means that accountants, regulators and users widely recognise these rules. In India, GAAP draws on accounting standards issued under the Companies Act framework, the Companies Act itself, and accepted practice. Rules differ by country, so GAAP is not one global book.

The usual features of accounting principles are that they are man-made, flexible (they change over time), generally accepted, and guides to action rather than rigid laws. Their aims are to bring uniformity, reliability, comparability and understandability to accounts.

In many textbooks, principles are split into concepts and conventions. Concepts are the basic assumptions on which accounting rests, such as going concern or business entity. Conventions are customs or practices that guide how accounts are presented, such as consistency or conservatism. Exam questions often ask you to tell these apart or to match a statement to a term.

Key formulas to remember

GAAP full form
GAAP = Generally Accepted Accounting Principles
Know the full form and that it means rules widely accepted for recording and reporting.
Concept vs convention
Concepts = basic assumptions; Conventions = customary practices for presenting accounts
Textbooks differ slightly in how they group items. Follow the grouping that the question or your study material uses.
Features of accounting principles
Man-made + Generally accepted + Flexible + Guide to action
Use this as a memory list for 'features' questions.
Purpose of GAAP
Uniformity + Reliability + Comparability + Understandability
These are the benefits users get from following common rules.

How to solve Accounting Principles and GAAP questions

Most questions on this topic are definition or matching MCQs. Use this method for any of them.

  1. 1Read the question and find the key word: principle, GAAP, concept, convention, feature or need.
  2. 2Decide what is being asked: a meaning, a feature, a purpose, or a classification.
  3. 3Recall the core idea: principles are man-made rules; GAAP is the accepted set of them.
  4. 4For a statement-based question, check each option against the definition and cut out the ones that call principles natural laws or fixed forever.
  5. 5For concept vs convention, ask: is it a basic assumption (concept) or a customary practice (convention)?
  6. 6Pick the option that matches exactly. Do not choose an option just because it sounds technical.

Quickest way: Keyword matching

When to use it: Use this for one-line MCQs on meaning, features and need of principles or GAAP.

  1. Link 'GAAP' with 'generally accepted rules for recording and reporting'.
  2. Link 'man-made, flexible, accepted' with features of principles.
  3. Link 'uniformity and comparability' with the need for principles.
  4. Reject any option that says principles are fixed, universal for all countries, or laws of nature.
  5. If two options look right, choose the one that is broader and more general.

Common mistakes in Accounting Principles and GAAP

  • Treating accounting principles as laws of nature that never change.

    Students link 'principle' with science principles.

    Fix: Remember that accounting principles are man-made and change with business needs.

  • Saying GAAP is the same in every country.

    The term sounds like a single global standard.

    Fix: GAAP means the principles accepted in a particular country. Different countries can have different GAAP.

  • Mixing up concepts and conventions.

    Both are called principles and the names sound similar.

    Fix: Concepts are basic assumptions. Conventions are practices that guide presentation. Learn one example of each.

  • Thinking GAAP means only legal rules.

    Students assume 'accepted' means 'enacted by law'.

    Fix: GAAP includes laws, standards and widely accepted practice, so it is broader than statute alone.

  • Confusing accounting principles with accounting standards.

    Both guide how accounts are prepared.

    Fix: Principles are the general guidelines. Standards are detailed, formally issued rules on specific matters.

Worked examples

Example 1

Generally Accepted Accounting Principles (GAAP) are best described as: (A) Rules fixed by nature for all businesses in the world (B) Rules widely accepted for recording transactions and preparing financial statements (C) Rules used only for income tax calculation (D) Rules that apply only to companies

Show the solution
  1. The question asks for the meaning of GAAP.
  2. GAAP means Generally Accepted Accounting Principles, the rules widely accepted for recording and reporting.
  3. Option A is wrong because principles are man-made and not the same in all countries.
  4. Option C is wrong because GAAP is not limited to tax work.
  5. Option D is wrong because the rules guide accounts of businesses generally, not companies alone.
  6. Option B matches the definition.

Answer: (B) Rules widely accepted for recording transactions and preparing financial statements

Example 2

Which of the following is NOT a feature of accounting principles? (A) They are man-made (B) They are generally accepted (C) They are fixed and never change (D) They guide accounting practice

Show the solution
  1. List the known features: man-made, generally accepted, flexible, guide to action.
  2. Option A is a feature.
  3. Option B is a feature.
  4. Option D is a feature.
  5. Option C says they never change. This is wrong, since principles evolve with business conditions.
  6. The question asks for the one that is NOT a feature, so choose C.

Answer: (C) They are fixed and never change

Exam tips

  • Learn the full form of GAAP and the words 'generally accepted' and 'man-made'. Many MCQs test just these.
  • Watch for extreme words like 'always', 'never' and 'only'. They usually make an option wrong here.
  • Prepare one example each of a concept and a convention so you can classify quickly.
  • Use the 'NOT a feature' format to your advantage: find the three true features first, then pick the odd one out.

Practice questions from Accounting Principles, Concepts and Conventions

Accounting Principles and GAAP in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Accounting Principles and GAAP: frequently asked questions

What is GAAP in accounting?

GAAP stands for Generally Accepted Accounting Principles. It is the set of rules, standards and accepted practices used to record transactions and prepare financial statements. It makes accounts consistent and comparable.

What is the difference between accounting concepts and conventions?

Concepts are the basic assumptions on which accounting is built, such as business entity or going concern. Conventions are customary practices that guide how accounts are presented, such as consistency or conservatism.

Are accounting principles the same as accounting standards?

No. Principles are broad guidelines. Accounting standards are formally issued, detailed rules on specific areas. Standards put the principles into practical form.

Why are accounting principles needed?

They bring uniformity and reliability to accounts. They let users compare results across years and across businesses, and they help users understand the statements.