Conceptual Framework of Accounting

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.

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. 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.

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.

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