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Financial Accounting · Introduction to Accounting Standards (GAAP, AS and Convergence to Ind AS)

Generally Accepted Accounting Principles (GAAP) for CMA Inter

Updated 10 October 2026 · Fact-checked

GAAP (Generally Accepted Accounting Principles) is the set of rules, concepts, conventions and standards that businesses follow while recording transactions and preparing financial statements. In India its sources include the Companies Act, Accounting Standards or Ind AS, SEBI rules, ICAI pronouncements and accepted accounting practice. To answer questions, define GAAP, name its sources, then link each concept to its effect.

Understand Generally Accepted Accounting Principles (GAAP)

Accounting is a language. Like any language, it needs common rules so that everyone reads the same statement the same way. GAAP is that common rulebook. It tells accountants what to record, when to record it, how to measure it and how to present it.

GAAP is not a single document. It is a body of rules built from law, standards and long-accepted practice. The word generally accepted means the rules have either been laid down by an authority or have gained wide acceptance through use. Because of this, GAAP changes over time as business and law change.

In India, the main sources of GAAP are:

  • The Companies Act, 2013 and the rules under it, including Schedule III for the form of company financial statements.
  • Accounting Standards (AS) and Indian Accounting Standards (Ind AS) notified under the Companies Act.
  • Guidance Notes, announcements and pronouncements of ICAI.
  • Requirements of SEBI and other regulators for listed entities.
  • Other statutes that affect accounts, such as tax laws.
  • Established accounting practice, conventions and judicial decisions.

Under GAAP sit the concepts, principles and conventions. Concepts are the basic assumptions, such as business entity, going concern, money measurement, accounting period, cost, dual aspect, accrual, matching and realisation. Conventions are customs followed for practical guidance, such as consistency, conservatism, materiality and full disclosure.

The features of GAAP are that it is accepted by users and regulators, it promotes comparability and reliability, it is flexible enough to evolve, and it is not identical in every country. That last point is why India moved towards Ind AS, which converge with international standards.

Key rules to remember

Meaning of GAAP
GAAP = Laws + Accounting Standards + Regulator rules + Professional guidance + Accepted practice
Use this as a memory line for the sources in an answer.
Dual aspect concept
Assets = Capital + Liabilities
Every transaction has two equal effects, which is why the books balance.
Business entity concept
Owner and business are separate for accounting
Owner's drawings are not business expenses.
Matching concept
Profit = Revenue of the period − Expenses of the same period
Expenses are matched to the revenue they helped earn, not to cash paid.
Conservatism
Provide for all expected losses; do not anticipate profits
A prudence convention, for example stock at lower of cost and net realisable value.
Consistency
Same policy from period to period unless a change is justified
A change should be disclosed with its effect.
Materiality
Disclose and treat separately only items that could influence a user's decision
Small amounts may be treated simply, such as expensing a low-value item.

How to solve Generally Accepted Accounting Principles (GAAP) questions

Use this method for any theory, short note or scenario question on GAAP.

  1. 1Read the question and decide if it asks for a definition, sources, features, or a scenario needing a concept.
  2. 2Start with a one-line definition of GAAP in your own words.
  3. 3List the Indian sources in a short bulleted list, naming the Companies Act, AS or Ind AS, SEBI and ICAI.
  4. 4For a scenario, identify the facts and name the concept or convention involved, such as accrual, matching, prudence or consistency.
  5. 5State the rule in one sentence and apply it to the numbers or facts given.
  6. 6Give the accounting effect, for example which account changes or which amount is excluded.
  7. 7Close with the purpose: reliability, comparability or true and fair view.

Quickest way: Concept-tagging in 60 seconds

When to use it: Use for MCQs and scenario questions that ask which concept or convention applies.

  1. Underline the key trigger word: owner, continue, cash, period, cost, loss, change, small amount.
  2. Match the trigger: owner means business entity; continue means going concern; period means accounting period; cost means cost concept; loss means conservatism; change means consistency; small amount means materiality.
  3. Check the options and eliminate those that match a different trigger.
  4. Pick the option that explains the treatment, not just names a term.

Common mistakes in Generally Accepted Accounting Principles (GAAP)

  • Treating GAAP as a single book or one Act.

    The word 'generally accepted' is read as 'one fixed code'.

    Fix: Say GAAP is a combination of law, standards, regulator rules, guidance and accepted practice.

  • Confusing concepts with conventions.

    Both are lists of principles with similar names.

    Fix: Remember that concepts are basic assumptions of recording, while conventions are practical customs like consistency, conservatism, materiality and full disclosure.

  • Mixing up matching and cash basis.

    Students link expense to payment date.

    Fix: Under accrual and matching, record expense in the period it helped earn revenue, whether or not paid.

  • Applying conservatism to create hidden reserves.

    Prudence is taken as 'always understate profit'.

    Fix: Conservatism means recognise expected losses, not anticipate gains. Deliberate understatement is not allowed.

  • Treating owner's personal expenses as business expenses.

    The business entity concept is forgotten in small proprietary examples.

    Fix: Treat them as drawings and reduce capital, not as expenses.

  • Writing only definitions without applying them in scenario questions.

    Theory is memorised without practice.

    Fix: In every answer, link the concept to the specific facts and state the accounting effect.

Worked examples

Example 1

Ravi Traders, a sole proprietor in Pune, paid ₹12,000 from the business bank account for his son's school fees. State the concept involved and the accounting treatment.

Show the solution
  1. The owner and the business are separate for accounting. This is the business entity concept.
  2. The school fees are a personal expense of the owner, not an expense to earn business revenue.
  3. So the payment is not charged to the Profit and Loss Account.
  4. It is treated as drawings: debit Drawings A/c ₹12,000, credit Bank A/c ₹12,000.
  5. At the year end, drawings reduce the owner's capital.

Answer: Business entity concept applies. The ₹12,000 is drawings and is deducted from capital, not charged as an expense.

Example 2

Sharma Ltd. had closing stock costing ₹4,80,000 at year end. Its net realisable value is ₹4,50,000. In the previous year, the same type of stock was valued at cost. Which convention applies and at what value should stock be shown?

Show the solution
  1. Expected loss exists because net realisable value is below cost.
  2. The convention of conservatism (prudence) says provide for expected losses.
  3. Stock is valued at the lower of cost and net realisable value.
  4. Lower of ₹4,80,000 and ₹4,50,000 is ₹4,50,000.
  5. The write-down is ₹4,80,000 − ₹4,50,000 = ₹30,000, which reduces profit for the year.
  6. Applying the lower-of-cost-and-NRV rule consistently each year satisfies consistency, so the policy itself has not changed.

Answer: Conservatism applies. Show stock at ₹4,50,000 and charge ₹30,000 as a reduction in profit.

Exam tips

  • For 'what is GAAP' questions, always list sources; this earns separate marks.
  • In MCQs, spot the trigger word and match it to one concept or convention.
  • Do not confuse GAAP with Ind AS; Ind AS is one source within the Indian GAAP framework.
  • In a short note, use bullet points with one line of explanation each and add a small example.
  • Attempt scenario questions by naming the concept first and then stating the amount effect.

Practice questions from Introduction to Accounting Standards (GAAP, AS and Convergence to Ind AS)

Generally Accepted Accounting Principles (GAAP) in other exams

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

Generally Accepted Accounting Principles (GAAP): frequently asked questions

What is GAAP in accounting?

GAAP stands for Generally Accepted Accounting Principles. It is the set of rules, concepts, conventions and standards followed to record transactions and prepare financial statements. Its aim is reliable and comparable reporting.

What are the sources of GAAP in India?

The main sources are the Companies Act, 2013 and its rules, Accounting Standards and Ind AS, SEBI requirements, ICAI pronouncements and Guidance Notes, and accepted accounting practice. Other laws affecting accounts also play a role.

What is the difference between accounting concepts and conventions?

Concepts are the basic assumptions on which accounting records are made, such as business entity and going concern. Conventions are customary practices that guide presentation and judgment, such as consistency, conservatism and materiality.

Is GAAP the same in every country?

No. Each country has its own GAAP shaped by its laws and practice. This is why India has moved towards Ind AS, which converge with international standards, to improve comparability.