The Importance of the Conceptual Framework for Accounting.
|✅ Paper Type: Free Essay||✅ Subject: Accounting|
|✅ Wordcount: 2724 words||✅ Published: 10th Aug 2021|
An accounting framework is a coherent system of inter-related objectives and fundamentals that should lead to consistent standards that prescribe the nature, function and limits of financial accounting and financial statements. The main reason for developing a conceptual framework are that gives a framework for setting accounting standards, a basis for resolving accounting disputes and fundamental principles which then do not have to be repeated in accounting standards. Furthermore, Conceptual Framework can be categorized in terms of the distinctive function of management accounting within the management process in organizations. Moreover, the way in which the utility of the outcomes of the management accounting process can be tested. Conceptual Framework is a criteria which can be used to assess the value of the processes and work technologies used in management accounting and capabilities necessarily associated with the effectiveness of the management accounting function overall.
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Conceptual Framework plays an important role in accounting. It is because, Conceptual Framework helps a better understanding of accounting information, for example general purpose financial reports and, in turn, their confidence in IFIs. Furthermore, Conceptual Framework promotes harmonization by giving a basis for selecting the most appropriate accounting treatment permitted by financial accounting standards. It is also assists in dealing with events, transactions, conditions or circumstances does not deal with any financial accounting standard developed by AAOIFI. This framework helps users of financial reports in understanding the information enclosed in financial statements prepared in conformity with financial accounting standards.
Conceptual Framework also direct to development of future financial accounting standards and regulator of subjective judgment made by management while preparing financial statements and another financial reports. Moreover, it’s helps national standard set a bodies in increasing national accounting standards. In additional, it’s gives who is interested in work of AAOIFI with information about its approach to formulating the financial accounting standard. “In my view, the conceptual framework is absolutely an important document for the Board as well as constituents. I believe the primary use of the framework is to make sure that the FASB does not issue standards in a random fashion. The framework provides a necessary common conceptual underpinning that helps the Board resolve issues,” by Jeannot Blanchet.
Conceptual Framework is an essential for investors. This is because it provides the risk capital to the investor and the adviser is concerned with the risk inherent from their investment. The information is needed to help them to determine whether they should sell, buy or hold the shares. Information which enables assess to the ability of the enterprise to pay dividend is interested by the shareholders. Employees and their representative groups are also interested in the stability and profitability of their employees and the information that enables them to assess the ability of the company to give retirement benefits, employment opportunities and remuneration.
In addition, it enables lenders to make sure that their loans and interest will be paid when due. Next, the information of the amount of money borrowed out by the suppliers and other trade creditors is important for them because it may determine whether the money will be paid when due. Trade creditors have an interest towards an enterprise over a short-term than lenders unless they are needy on the continuation of the enterprise as a major customer. Moreover, customers are also interested in the information about the continuance of an enterprise, especially during the long term involvement of the enterprise. Finally, allocation of resources and the activities of the enterprise is important to government and their agencies. Information enables them to determine taxation policies, as the basis for national income, determine taxation policies and similar statistics.
Ways of modern day bookkeeping and the double entry system evolved and the importance of it.
The recording of financial transactions undertaken by an individual or an organization defined Bookkeeping. The organization could be an enterprise, a charitable organization or even a local sports club. The necessary support for such accounting function is provided by bookkeeping as the preparation of cost reports, financial statements, and tax returns. Making entries to specific accounts with debit and credit system and keeping track of a business’s financial transactions is involved.
Bookkeeping has evolved through the years from clay tablets, to paper ledgers, and now computerized systems. Even for now, bookkeeping fundamentals have not been changed through the ages. And chances are the future societies will not be able to exist without a formal system of financial recording keeping. In short, some of the same problems that plagued ancient bookkeepers still exist even with modern advancement.
The process of bookkeeping is always considered to be as vital importance to categorize and record financial data. Each transaction or activity must be posted to the proper general ledger account. The general ledger is used to prepare Profit & Loss statements which tell you if you are making or losing money in a certain accounting period. The general ledger also produces the Balance Sheet which shows the company’s assets, liabilities and equity. The general ledger also produces cash flow statements which is analysed by management and used as a gauge in making important decisions. These three financial reports are supposed to show the true financial condition of the company. Extremely important decisions are made by management from these financial statements and they must be accurate. The bookkeeping process allows all data to be transferred to complicated financial statements for informational purposes. The integrity and accuracy of bookkeeping procedures affect the outcome of the financial statements. Bookkeeping is the crucial reporting that major decisions are later made from. It must be done correctly.
At least two changes in the balance sheet are caused by every business transaction. Therefore, the books of account must record the two changes. Otherwise, completion of the books of accounts would not be done and therefore the accuracy of the result will be low. For example, we buy equipment for RM 15,000. This transaction involves two changes, equipment increases by RM 15, 000 and cash reduce by an equal amount. While this transaction is recorded in accounting, to record the both changes is a must. “A debit change” & “a credit change” is the term of these two changes in accounting language. Consequently, we know that every transaction involves two entries, which are debit entry and credit entry. There will be a relevant credit entry of a same amount for each debit. In turn, for the credit entry there will be a corresponding debit entry of a same amount. Thus, the double entry system is which both the changes which occur under a transaction are recorded together; one change is debited, when another change is credited with an equal amount.
Double entry system could help an account to double check while doing the accounting; a mistake would be discovered if the two totals are not equal. After that, an accountant could double check and make correction on the figure in order to balance.
A double-entry system of books would be kept by an accountant for his or her own accounts. The accountants have their record and the bank has their own and. When the two are unable to achieve the agreement then a missing charge will happen which refer to a mistake, a service charge, a bad check, or a case of identity theft. If the accountant realize a charge that he or she is unable to account for then he or she can easily track it down because they have to have a one to one correspondence between the two sets of records.
Advantages and disadvantages of regulating accounting information through accounting standards.
The advantages of regulating accounting information through accounting standard are protecting invertors. Accounting standards will increase the confidence of investors to invest the business. It is because investors interest to realize that their money will finally earn and go back to them. In additional, investors’ interests are ensured as the documents they review are definitely correct and authentic. Thus, it is very important accounting information for investors.
Next, understandability is an advantage of regulating accounting information through accounting standard. FASB published the accounting standards to represent the required processes for businesses to succeed. As creating financial statements, users expect companies to follow the published accounting standards. In additional, interpreting the results reported when these users depend the assumptions set forth in the accounting standards. Same of assumptions is used by the users interpret the financial statements of different companies. Once the users realize these assumptions, they use this knowledge when learning any financial statement.
Besides that, the guidance is other advantages of regulating accounting information through accounting standard. Using accounting standards concerns that accountants are provided by the guidance. The accountant may refer to the published accounting standard to determine how to record the event when financial reporting issues arise. . These issues include new accounting transactions deriving from technology, such as Internet sales, or new operation incorporated by the corporation, similarly changes in pension plans. When creating accounting standards, the FASB incorporates the needs of financial statement users likewise company feedback. This process allows the accountant to believe that the guidance contribute the accounting standard passed the rigidity process of establishing that it matches everyone’s needs.
Lastly, the advantages of regulating accounting information through accounting standard is flexible. Flexibility is one of the main principles-based accounting method. As the financial world becomes more complicated, it becomes progressively problem to create standardized regulations for the whole economy. Principles-based accounting provides companies to arrange their financial statements as they see best to guard accurate disclosure of their current position. The harsh format of rules-based accounting made disclosure more work and at times less informative. For example, the company would not have the proficiency to list industry specific data in the manner it thought best.
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The disadvantage of regulating accounting information through accounting standards is cost to comply. Using the accounting standard considers the costs for the company to comply with the standard. The company needs to change their procedures, which requires a large financial investment that includes employee labor costs, system upgrades and employee training. For example, the company needs to have someone to monitor people are correctly applying the standards and have to train people to adopt the standard. In these circumstances, it requires time and money. Thus, the cost of the company will increase.
In addition, we can see that the accounting standards involve trial balance, income statement and balance sheet. The accountants compel to follow each step continuously to prepare the financial statement. This will make the restriction for the accountants. The accountants cannot do financial report in their own ways.
Lastly, following the accounting standards to prepare the financial report, it requires a lot of steps to prepare. For example, record all amount into journal then record it to ledger. After that we get the balance from ledger and record to the trial balance. The trial balance was prepared then we can proceed to our income statement and balance sheet. All the procedure may take a long time to prepare it. If the company has many branches, the accountants will take few months to prepare the financial report.
The merit and shortcomings of the historical cost accounting concept.
The historical cost is the cost at date of acquisition and when they incurred. The historical cost accounting concept requiring amount of all financial items recorded based upon original cost, even the items has increased in value due to inflation. It is the most commonly and widely used basis of financial reporting. While current value or fair value accounting concept is the concept that financial items be recorded at the realistic value at which they could be sold or settled as of the current date.
There are several merits or advantages of historical cost accounting concept. Firstly, it is easy to use and simple to apply as it is not required to reference to market values. Therefore, users no need to do market research to get the current price or market value of the financial items as the historical cost is not subjected to any future changes. They can just record down the original cost of the financial items in financial reports. Thus, the financial reports can certainly be prepared more speedily and easily than using other bases of measurement, which are current replacement cost, current market value and net realizable value, so it can contributes to cost savings and time savings.
Secondly, Historical cost accounting concept is easy to understand. In consequence of the simplicity of historical cost, users can easily understood and interpret financial reports well even though they do not have any financial background. Thirdly, Historical cost accounting concept is objective, verifiable and reliable. Since the historical cost is record based upon original amount paid, hence the original cost of the assets can confirmed through an original invoice or receipt.
Moreover, historical cost accounting concept also enables biz to keep track of their assets. Because the financial items are recorded in financial reporting based on the original cost of the items, therefore the users can compare the current cost and the original cost of the assets.
However, historical cost accounting concept also has shortcomings or disadvantages. Firstly, historical cost accounting concept is fixed, which means it is recorded based on the original cost in the invoice or receipt. Thus, it does not take inflation or changing prices into the account. During the inflation period, the price of the assets is different from changing a lots, it reflects large difference between original price and current price, so it does not seem sensible to record the value of assets by using the historical cost accounting concept when facing changing price.
Secondly, historical cost accounting concept does not show the true value of company’s assets. It recorded all the assets at the price at the date they are acquired. It is unrealistic fixed assets values, which mean the balance sheet value of the financial assets are differ from the true value.
Thirdly, historical cost accounting concept is lead to the insufficient provision of depreciation. Depreciation is a mechanism of making funds for fixed assets replacement. Depreciation is charged on original cost of the fixed assets in historical cost accounting concept, it is not charged at the price at which the same assets are acquired. Therefore, the provision of depreciation which is charged on the original cost will not be sufficient for the replacement of the assets.
Other than that, the disadvantages of historical cost accounting concept are unrealistic profit. Under historical cost accounting concept, financial reporting, such as Income statement does not show the true profit of the company as the revenues of the company are recorded on current price while the expenses are recorded at historical cost. So, it will lead to an overstatement of profit during the inflation period.
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