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The conceptual Framework - Coggle Diagram
The conceptual Framework
A conceptual framework in the context of financial reporting refers to a coherent system of interrelated objectives and fundamentals that guide the development of consistent standards and prescribe the nature, function, and limits of financial accounting and reporting.
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- The structure of an accounting theory
- objectives of financial statements
- statement of the postulates and theoretical concepts of accounting
- statement of the basic accounting principles
- a body of accounting techniques
- formulating the objective
- Objectives: depend on resolving the conflict of interest that exists in the information market
to avoid conflict of interest need to identify the groups involved:
- firms
- users
- accounting profession
- The accounting postulates:
- The entity postulate: is a fundamental assumption that states that a business is a separate entity from its owners and other businesses. It forms the basis for developing accounting standards and financial reporting practices related to the recognition, measurement, and disclosure of business transactions and events.
- The going concern postulate: This postulate assumes that a business will continue to operate indefinitely. It forms the basis for developing accounting standards and financial reporting practices related to the valuation of assets and liabilities.
- The unit of measure postulate: This postulate assumes that financial transactions can be measured in a common unit of measure, such as a currency. It forms the basis for developing accounting standards and financial reporting practices related to the measurement and reporting of financial transactions.
- The accounting period postulate: This postulate assumes that financial reports should be prepared for a specific period, such as a month, quarter, or year. It forms the basis for developing accounting standards and financial reporting practices related to the recognition, measurement, and disclosure of business transactions and events over a specific period.
- Theoretical concepts of accounting: self-evident statements, generally accepted by their conformity to the objectives of financial statements.that portray the
nature of accounting entities operating in a free economy
characterized by private ownership of property.
- The proprietary theory: This theory assumes that the owners of a business have a proprietary interest in the assets of the business. It forms the basis for developing accounting standards and financial reporting practices related to the recognition, measurement, and disclosure of the assets and liabilities of a business.
- The entity theory: This theory assumes that a business is a separate entity from its owners and other businesses. It forms the basis for developing accounting standards and financial reporting practices related to the recognition, measurement, and disclosure of business transactions and events.
- The fund theory: This theory assumes that a business is a collection of funds or resources that are used to achieve specific objectives. It forms the basis for developing accounting standards and financial reporting practices related to the allocation and use of funds within a business.
- Accounting principles: general decision rules, derived from
both the objectives and theoretical concepts of accounting, that govern the development of accounting techniques.
- Cost principle
The cost principle, a fundamental accounting principle, dictates that the acquisition cost or historical cost is the appropriate valuation basis for recognizing the acquisition of all goods and services, expenses, costs, and equities.
- It is justified in terms of its objectivity and the going-concern postulate. The objectivity aspect refers to the fact that acquisition cost is objective and verifiable information.
- Meanwhile, the going-concern postulate asserts that the entity will continue indefinitely, therefore current values or liquidation values for asset valuation are not necessary.
- This principle provides a reliable and verifiable basis for accounting recognition and valuation, ensuring transparency and accuracy in financial reporting.
- The revenue principle
specifies the criteria for recognizing revenue and income in accounting.
- According to the American Accounting Association Committee on Concepts and Standards, revenue must be earned, in distributable form, and the result of a conversion brought about in a transaction. It also encompasses the nature and components of revenue, the measurement of revenue, and the timing of revenue recognition. This principle guides the proper recognition and measurement of revenue in financial reporting, ensuring transparency and accuracy in reporting an organization's financial performance.
- Matching principle
- The matching principle in accounting stipulates that expenses should be recognized in the same period as the associated revenues.
- This principle ensures that the costs incurred in generating revenue are accurately reflected in the same period, thereby providing a clear and accurate representation of an organization's financial performance.
- By aligning expenses with the revenues they generate, the matching principle contributes to the transparency and reliability of financial reporting.
- The objectivity principle
- The objectivity principle in accounting emphasizes that the reliability of financial information depends on the accuracy and unbiased of the measurement procedures used.
- It asserts that financial data should be based on objective and verifiable information and that the measurement process should be free from bias or personal opinions.
- The consistency principle
- The consistency principle in accounting holds that similar economic events should be recorded and reported in a consistent manner from period to period.
- This principle aims to make financial statements more comparable and useful by ensuring that related items are treated uniformly over time within a given firm.
- The full-disclosure principle
- This principle holds that no information of substance or of interest to the average investor will be omitted or concealed
- The conservatism principle
- The conservatism principle in accounting dictates a preference for accounting techniques that have the least favorable impact on shareholders' equity when choosing between two or more acceptable options.
- It emphasizes prudence in financial reporting, ensuring that uncertainties and potential risks are adequately reflected.
- The materiality principle
- The uniformity and comparability