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Accounting Fundamentals - Coggle Diagram
Accounting Fundamentals
Four Frameworks of Accounting
Introduction
Frameworks Definition
Definition (per Collins Dictionary):
A "framework" is a structure that supports or frames something.
In the context of a system, it refers to a set of rules, ideas, or beliefs used to address problems or make decisions
Accounting Frameworks
Accounting Frameworks:
Accounting relies on four foundational pillars: Conceptual, Legal, Institutional, and Regulatory.
These frameworks provide structure to financial reporting, ensure consistency, and enhance the quality of accounting processes and reports.
II. The Four Frameworks of Accounting
A. Conceptual Framework
Definition:
A body of interrelated objectives and fundamentals guiding financial reporting.
Purpose:
Establishes goals and purposes of general-purpose financial reporting.
Provides underlying concepts to achieve these objectives.
Key Components:
Objectives:
Define the purpose of financial reporting (e.g., providing useful information to stakeholders).
Fundamentals:
Concepts that guide:
Selection of transactions, events, and circumstances to be accounted for.
Recognition and measurement of these items.
Summarization and reporting of financial information.
Qualitative Characteristics:
Specifies qualities financial statements must possess, such as:
Relevance
Reliability
Comparability
Understandability
Role and Importance:
Assists in developing consistent accounting policies when:
No accounting standard applies to a transaction or event.
A standard allows a choice of accounting policy.
Supports the development of the Institutional Framework by providing a theoretical foundation.
Enhances comparability and consistency in financial reporting.
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B. Legal Framework
Definition:
Comprises statutes and rules that govern the formation, operation, and accounting practices of businesses.
Purpose:
Provides legal guidelines for maintaining books of accounts, resource utilization, financing, and treatment of specific transactions.
Key Statutes in India:
Partnership Organisations:
Indian Partnership Act, 1932
Limited Liability Partnership Act, 2008
Co-operatives:
Co-operative Societies Act, 1912
Companies:
Companies Act, 2013
Companies (Accounts) Rules, 2014
Companies (Corporate Social Responsibility) Rules, 2014
Banks:
Banking Regulation Act, 1949
Insurance Companies:
Insurance Act, 1938
Electricity Companies:
Central Electricity Act, 2003
Key Provisions:
Companies Act, 2013 and Related Rules:
Guidelines on:
Maintenance of accounting records.
Accounting for issue and redemption of securities.
Investments.
Consolidation of financial statements.
Winding up of companies.
CSR Rules:
Accounting for Corporate Social Responsibility (CSR) expenses.
Rules for carrying forward or setting off excess CSR spending.
Schedules of the Companies Act:
Specify the form and content of financial statements.
Role and Importance:
Ensures compliance with legal requirements.
Provides a structured approach to accounting and financial reporting.
Influences the administrative and financial operations of organizations.
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C. Institutional Framework
Definition:
Guidelines and pronouncements issued by institutions authorized to oversee accounting standards.
Key Institution in India:
Institute of Chartered Accountants of India (ICAI):
Entrusted to develop accounting standards for comparability and consistency.
Indian Accounting Standard Board (of ICAI):
Develops high-quality accounting standards for various accounting areas.
Accounting Standards in India:
Accounting Standards (AS):
Governed by Companies (Accounting Standards) Rules, 2021.
Indian Accounting Standards (Ind AS):
Governed by Companies (Indian Accounting Standards) Rules, 2015.
Cost Accounting Standards (CAS):
Developed by the Cost Accounting Standards Board (CASB) of the Institute of Cost Accountants of India.
24 standards issued to facilitate cost accounting and reporting.
Role and Importance:
Ensures uniformity and consistency in financial reporting across organizations.
Supports the preparation of reliable and comparable financial statements.
Bridges gaps in accounting practices by providing authoritative guidance.
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D. Regulatory Framework
Definition:
Regulations imposed by various regulatory authorities that influence accounting and reporting practices.
Key Regulatory Authorities in India:
Reserve Bank of India (RBI):
Regulates money market operations and banking.
Securities and Exchange Board of India (SEBI):
Oversees capital market operations.
Insurance Regulatory and Development Authority of India (IRDAI):
Governs the insurance sector.
Pension Fund Regulatory and Development Authority (PFRDA):
Regulates pension funds.
Telecom Regulatory Authority of India (TRAI):
Oversees telecommunications.
Competition Commission of India:
Ensures fair competition.
Central Electricity Regulatory Commission (CERC):
Regulates electricity tariffs and accounting.
Impact on Accounting:
SEBI:
Shapes accounting and reporting for listed companies (e.g., disclosure requirements).
IRDAI:
Influences accounting and reporting in insurance companies.
RBI:
Determines accounting for Non-Performing Assets (NPAs) through BASEL Norms and other guidelines.
CERC:
Affects tariff determination and accounting in electricity companies via Terms and Conditions of Tariff Regulations, 2009.
Role and Importance:
Ensures sector-specific compliance with regulatory standards.
Enhances the reliability and transparency of financial reporting.
Aligns accounting practices with industry-specific requirements.
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