Accounting Principles

AuthorVern Krishna
Chapter : Accounting Principles
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

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