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Conceptual Framework

Chapter- 02
Conceptual Framework of Accounting

 Cohesive set of interrelated objectives


and fundamentals for external financial
reporting
 Consists of-
 Objectives of financial reporting
 Qualitative characteristics of accounting
information
 Financial statement elements
 Recognition criteria for financial statement
items
Objectives of Financial Reporting

 Focus on the users of financial


statements and financial
information
Basic Objectives of Financial Reporting

 According to the Statement of Financial


Accounting Concept (SFAC) No.1,
financial reporting should provide useful
information-
 For making investment, credit and similar
decisions
 For Judging the amounts, timing, and certainty
of future cash flows
 About the resources of the business, the claims
of the resources, and the changes in the
resources during an accounting period
Qualitative characteristics of accounting
information

 Helps to examine what qualities make


accounting information useful
 Two types of qualities-
 Primary Qualities
 Relevance-Information is relevant when it
can influence the users decision and posses
the predictive value and confirmative value.
 Relevance
 Timeliness

 Predictive Value

 Feedback Value
Reliability- Information is reliable when
it has the objectivity.

Reliability-
oVerifiability
oRepresentational Faithfulness
o Neutrality
Secondary Qualities

 Comparability- accounting
information should be comparable
with other enterprises
 Consistency- means that company
should use the same accounting
principles and methods from year to
year
Financial statement elements

 Assets
 Liabilities
 Equity
 Revenues
 Expenses
Recognition criteria for financial
statement items

 Accounting Assumptions
 Accounting Principles
 Constraints or modifying
conventions
Accounting Assumptions
 Business Entity-Every business to accounted
separately and distinctly from its owner or owners.

 Going concern-Entity is assumed to be formed for


indefinite life and there is no possibility of liquidation
in foreseeable future.

 Periodicity-The accounting report should be done


periodically.

 Monetary Unit-Financial information should be


measured and accounted for in the basic monetary
unit of the country in which it operates its business.
Accounting Principles
 Historical cost principle- Assets should be recorded
at its acquisition price.

 Matching principle-All expenses related to a given


revenue are matched with and deducted from that
revenue for the determination of periodic income.

 Revenue recognition principle-With certain


exceptions revenue is recognized at the point if
sales.

 Objectivity principle-Accounting information should


have the objective evidence rather than subjective
judgment.

 Full-disclosure principle-Financial statements should


reports all relevant information related with the
entity.
Constraints or modifying conventions
 Cost benefit-Benefits of accounting information
cannot exceed cost of information.

 Materiality-Information is considered as material


when its misstatement or error can influence the
decision of the users.

 Industry peculiarities-Financial statement should


be prepared according to industry practice of
related companies.

 Conservatism-Aims of conservatism principle is to


avoid favorable exaggeration in accounting
reports.