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In order for us to clearly understand 'how a conceptual framework can be easily developed for accounting', we have to give a definition as to what a conceptual framework actually is. Thus a conceptual framework in accounting is a framework that introduces the major objectives as well as the concepts that are essential in financial accounting and coverage by businesses. The main objective of coverage of financial accounting is the establishment of the conceptual framework. The concepts run the objectives and they symbolize a structure of values giving meaning to financial reporting.
This definition hasn't helped us a lot in truly identifying the conceptual framework. We can't just define the conceptual framework, but we have to understand how it operates as well.
The most important reasons for developing an established conceptual framework are that it shows us an origin for resolving accounting disagreements, essential values which subsequently don't have to be recurring in accounting principles and a structure for setting accounting principles.
A conceptual framework is necessary in accounting as the standards that are set in the framework must construct on and transmit to a recognized body of concepts and objectives. A thoroughly developed conceptual framework must allow the FASB (Financial Accounting Standards Board) to subject more helpful and reliable principles over time.
A logical set of principles and rules must be the consequence for the reason that they would be built upon the similar groundwork. The framework must raise financial statement users indulgent of and self-belief in financial reporting. In addition to that it must also develop comparability in the midst of an institutions financial statement.
Many accounting concepts form part of the conceptual framework in accounting. The SSAP2 (Statement of Standard Accounting Principles) identifies the 4 major concepts in accounting. The SSAP2 was drawn in November 1971 and its main purpose was to make sure the admission in accounts of understandable explanations of accounting policies adopted designed for the principle of giving people a true and fair view. There was no declaration of how accounting policies were to be clear although the introducement of the four accounting concepts came to live. These concepts were seen as practical and functional assumptions having universal recognition at the moment that the model was issued. Thus these are the four accounting concepts that were covered in the SSAP2.
The going concern concept shows that when arranging accounts the businesses are obliged to presume that there is no meaning or requirement to be in the line of liquidation or to cut back drastically the present level of a companies' operations. The company should view itself as continuing with its business operations into the predictable future.
The accruals concepts requires income and expenses to be accrued, with the intention of it being acknowledged as they were earned or gained, not as cash that is received or paid, in addition to that it has to be coordinated by means of one and another in the line of it being that their connection can be recognized or understandably understood.
Accruals are written down in the profit and loss account at the time they occur.
The consistency concept declares that whenever a business decides on an accounting concept it is obliged to always relate it commencing one period to the subsequent one to make sure that they can compare their financial information that was gathered over the years.
An accounting procedure can be altered if the business is sure of it that once it is altered it would develop the perceptive and analysis of the financial statements or whilst an accounting procedure is made redundant because of alterations in accounting principles. An alteration in an accounting principle may call for a restatement of the accounts in the previous years.
The prudence concept declares that proceeds and earnings cannot be imagined as a result all of the unjustified earnings cannot be revealed in the accounts. The concept also reveals that all recognized costs and liabilities have to be taken into account whenever you want to be preparing any accounts, whether the sum is recognized by means of assurance or that is has been made by estimation. Examples of transactions that happen within a business are provisions and warranties. These are acknowledged as a result of the purpose of the prudence concept.
The prudence concept is the dominant accounting concept, If any concept is in disagreement with the prudence concept, than the prudence concept must take priority over the other concept that it is in disagreement with.
In 1973 the United States of America had established a board which was called the FASB (Financial Accounting Standards Board), because of the fact that the APB (Accounting Principles Board) was dismantled. The FASB was set up because their main objective was to put together a conceptual framework in accounting.
Recently the IASB (International Accounting Standards Board) and the FASB are occupied in a dual scheme to amend their conceptual framework consecutively intended for the conceptual framework towards being used in the improvement of new principles in addition to the alteration of active standards. This dual scheme is called the joint conceptual framework project. Its aim is to bring up to date and improve the existing concepts to reveal the alterations in markets, companies and the economic environment that have played a part since the IASB and FASB concepts were developed.
The main aim of the joint conceptual framework is to create a solid base for prospective accounting standards that are principles-based, on the inside steady and globally congregated. Therefore the IASB and the FASB have taken on this project together.
In order to result in rational financial accounting and reporting, the primary theory requires it to form a structure that is sound, complete, and on the inside steady. Nevertheless, in its present condition, once the congregated structure has been finished, a number of existing FASB and IASB financial reporting standards will inevitably conflict with the concepts. Accounting standards will most likely not straight away be distorted to duplicate the latest, congregated framework, for the reason that both boards' values take for granted hierarchical precedence over concepts, for this reason precedence is possible still designated to be agreed to principles. It is thought that disagreements among perceptions and principles will progressively fade away as recent, congregated, principles-based standards are developed with the intention of them being based on the enhanced, congregated concepts.
The expression GAAP (Generally Accepted Accounting principles) plays a huge part in the FASB. GAAP consists of three essential sets of conventions.
Basic Accounting ethics and procedures.
Thorough rules and principles issued through the FASB along with its predecessor the APB (Accounting Principles Board).
Commonly acknowledged business practises.
When a business hands out its financial statements towards the general public, the business is then obligated to follow commonly acknowledged accounting principles in the preparement of those statements. In addition to that, whenever a business's stock is traded publicly, the law then needs the company's financial statements to be reviewed by public accountants that are independent. Both the business's managing boards and the accountants that are independent are obliged to officially state that the financial statements along with the associated notes towards the financial statements are all set up in agreement with GAAP.
GAAP is remarkably helpful for the reason that it tries to control and standardize accounting explanations, theories, and techniques. Due to the fact that we have commonly acknowledged accounting principles, we are capable to presume that there is regularity in the techniques that are used to prepare a business's financial statements in every operational year. Even though there are a lot of varieties that are currently present, we are able to make conclusions that are logically certain when measuring one business to another, or measuring a business's financial figures to the figures for the industry it works in. Generally accepted accounting principles are becoming more and more complicated over the years, due to the fact that financial transaction are becoming more complicated.
Read more at Suite101: Fundamental Accounting Concepts: Statement Of Standard Accounting Principles (SSAP) 2 http://www.suite101.com/content/fundamental-accounting-concepts-a196419#ixzz180MbCZVG