Accounting Principles

• Author: Vern Krishna
• Pages: 87-101

87

Chapter : Accounting Principles

A. OVERVIEW

Accounting is the language of the world of commerce, law, nance,

and taxation. As with all languages, there are certain rules and con-

ventions that we follow to make the language universally understand-

able and acceptable. We refer to these rules as concepts and principles,

which also provide the foundation for calculations of taxable income

under the Income Tax Act. In this chapter we commence with general

principles. In subsequent chapters, we will examine specic tax rules

of accounting (see Chapter , Law and Accounting).

When accounting rules are generally accepted by business and

the appropriate authorities, we refer to them as “generally accepted

accounting principles” (GAAP), which are essentially the “rules”

within which accountants are supposed to operate. GAAP comprise

assumptions, principles, standards, rules and conventions for prepar-

ing and presenting nancial statements. However, GAAP is not rigid

and allows choices between permissible alternatives, which can pro-

duce varied results. As with all languages, there can be misinterpreta-

tions and distortions, whether accidental or deliberate. Hence, there

is no shortage of accounting scandals in the world of business and

securities markets (see Chapter , Accounting and the Law).

Professionals rely upon accountants to explain the technical

details of particular principles. For example, in a lawsuit involving