What is the Importance of Conceptual Framework and Accounting Standards with Essay? 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 is that gives a framework for setting accounting standards; a basis for resolving accounting disputes, and fundamental principles; which do not have to exist repeated in accounting standards. Furthermore, a Conceptual Framework can exist categorized in terms of the distinctive; function of management accounting within the management process in organizations. Moreover, how the utility of the outcomes of the management accounting process can exist tested. Conceptual Framework is a criterion that can exist 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.
Conceptual Framework plays an important role in accounting. It is because a Conceptual Framework helps a better understanding of accounting information; for example, general-purpose financial reports and, in turn, their confidence in IFIs. Furthermore, the Conceptual Framework promotes harmonization by giving a basis for selecting; the most appropriate accounting treatment permitted by financial accounting standards. It 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 is also direct to the development of future financial accounting standards and regulator of subjective judgment made by management; while preparing financial statements and another financial report. Moreover, it helps national standard-setting bodies in increasing national accounting standards. In addition, it gives who exists interested in the work of AAOIFI 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 randomly issue standards. The framework provides a necessary common conceptual underpinning that helps the Board resolve issues,” by Jeannot Blanchet.
A conceptual framework is 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 exists needed to help them to determine whether they should sell, buy or hold the shares. The information which enables assessment of the ability of the enterprise to pay dividends exists interested in the shareholders. Employees and their representative groups exist 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 exist 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 exist 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 stand also interested in the information about the continuance of an enterprise, especially during the long-term involvement of the enterprise. Finally, the allocation of resources and the activities of the enterprise is important to the government and its agencies. The 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 stands defined as 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 the debit and credit system and keeping track of a business’s financial transactions exists involved.
Bookkeeping has evolved through the years from clay tablets to paper ledgers, and now computerized systems. Even, for now, bookkeeping fundamentals have not existed 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 exists always considered to be of vital importance to categorize and record financial data. Each transaction or activity must exist posted to the proper general ledger account. The general ledger exists used to prepare Profit & Loss statements; which tell you if you are making or losing money in a certain accounting period. Also, The general ledger produces the Balance Sheet which shows the company’s assets, liabilities, and equity. The general ledger also produces cash flow statements; which exist analyzed by management and used as a gauge in making important decisions.
These three financial reports exist supposed to show the true financial condition of the company. Extremely important decisions stand made by management from these financial statements and they must be accurate. The bookkeeping process allows all data to stand 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 exist later made from. It must exist done correctly.
At least two changes in the balance sheet stand caused by every business transaction. Therefore, the books of account must record the two changes. Otherwise, completion of the books of accounts would not exist 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 reduction by an equal amount. While this transaction record is in accounting, recording 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 the same amount for each debit. In turn, for the credit entry, there will be a corresponding debit entry of the same amount. Thus, the double-entry system is in which both the changes which occur under a transaction record together; one change debit when another change credit with an equal amount.
A double-entry system could help an account to double-check while doing the accounting; a mistake would discover if the two totals are not equal. After that, an accountant could double-check and make corrections to the figure to balance.
A double-entry system of books would keep by an accountant for his or her accounts. The accountants have their records and the bank has its own. When the two are unable to achieve the agreement then a missing charge will happen which refers to a mistake, a service charge, a bad check, or a case of identity theft. If the accountant realizes 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 advantage of regulating accounting information through accounting standards is protecting investors. Accounting standards will increase the confidence of investors to invest in the business. It is because investors exist interested to realize that their money will finally earn and go back to them. In addition, investors’ interests exist ensured as the documents they review are correct and authentic. Thus, it is very important accounting information for investors.
Next, understandability is an advantage of regulating accounting information through accounting standards. FASB published the accounting standards to represent the required processes for businesses to succeed. When creating financial statements, users expect companies to follow the published accounting standards. In addition, interpreting the results reported when these users depend on the assumptions outlined in the accounting standards. The same assumptions exist used by the users to interpret the financial statements of different companies. Once the users realize these assumptions, they use this knowledge when learning any financial statement.
Besides that, guidance is another advantage of regulating accounting information through accounting standards. 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 operations 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 contributes to the accounting standard passed the rigidity process of establishing that it matches everyone’s needs.
Lastly, the advantage of regulating accounting information through accounting standards is flexible. Flexibility stands as one of the main principles-based accounting methods. 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.
The disadvantage of regulating accounting information through accounting standards is the cost to comply. Using the accounting standard considers the costs for the company to comply with the standard. The company needs to change its 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 reports in their ways.
Lastly, following the accounting standards to prepare the financial report, it requires a lot of steps to prepare. For example, record all amounts into a journal then record them to the ledger. After that, we get the balance from the ledger and record it to the trial balance. The trial balance stood prepared then we can proceed to our income statement and balance sheet. All the procedures may take a long time to prepare it. If the company has many branches, the accountants will take a few months to prepare the financial report.
The merit and shortcomings of the historical cost accounting concept.
The historical cost is the cost at the date of acquisition and when they exist incurred. The historical cost accounting concept requires the amount of all financial items recorded based upon original cost, even the items have increased in value due to inflation. It is the most common and widely used basis of financial reporting. While current value or fair value accounting concept is the concept that financial items record at the realistic value at which they could exist sold or settled as of the current date.
There are several merits or advantages of the historical cost accounting concept. Firstly, it is easy to use and simple to apply as it does not require referring to market values. Therefore, users do not need to do market research to get the current price or market value of the financial items as the historical cost does not subject to any future changes. They can just record 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 contribute to cost savings and time savings.
Secondly, the Historical cost accounting concept is easy to understand. In consequence of the simplicity of historical cost, users can easily understand and interpret financial reports well even though they do not have any financial background. Thirdly, the Historical cost accounting concept is objective, verifiable, and reliable. Since the historical cost is recorded based upon the original amount paid, hence the original cost of the assets can be confirmed through an original invoice or receipt.
Moreover, the 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, the historical cost accounting concept also has shortcomings or disadvantages. Firstly, the 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 account. During the inflation period, the price of the assets is different from changing a lot, it reflects the large difference between the 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, the historical cost accounting concept does not show the true value of a 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, the 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 the original cost of the fixed assets in the 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 the historical cost accounting concept are unrealistic profit. Under the historical cost accounting concept, financial reporting, such as Income statements 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.