CONCEPTUAL FRAMEWORK OF

ACCOUNTING

Generally accepted accounting principles

Accounting Principles set of standards and rules that are recognized as a general
guide for financial reporting
Generally accepted
means that these principles must have substantial
Presented By authoritative support
Md. Mahedi Hasan International Accounting Standards Board
BBA (DU), CA Advance Stage (ICAB under ICAEW Syllabus) (IASB) and Securities and Exchange
Deputy Manager, ACNABIN, Chartered Accountants
Commission (SEC)

IASB’S CONCEPTUAL OBJECTIVES OF FINANCIAL

FRAMEWORK REPORTING

The conceptual framework developed by the

IASB serves as the basis for resolving accounting
and reporting problems.
The conceptual framework consists of:
1) objectives of financial reporting;
2) qualitative characteristics of
accounting information;
3) elements of financial statements; and
4) operating guidelines (assumptions,
principles, and constraints).
IASB objectives of financial reporting are
to provide information that is:
1 useful to those making investment
and credit decisions
2 helps in assessing future cash flows
3 identifies the economic resources (assets),
the claims to those resources (liabilities),
and the changes in those resources and
claims

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QUALITATIVE CHARACTERISTICS OF
ACCOUNTING INFORMATION RELEVANCE
Accounting information has relevance if
To be useful, information should possess it makes a difference in a decision.
the following qualitative characteristics: Relevant information helps users forecast
1 relevance future events (predictive value),
2 reliability or it confirms or corrects prior
expectations (feedback value).
3 comparability
Information must be available
4 consistency to decision makers before it
loses its capacity to influence
their decisions (timeliness).

COMPARABILITY AND
RELIABILITY
CONSISTENCY
Comparability means that the information should be
Reliability of information means that the comparable with accounting information about other
information is free of error and bias, in enterprises.
short, it can be depended on. Consistency means that the same accounting
principles and methods should be used from year to
To be reliable, accounting information year within a company.
must be verifiable.

2005 2006 2007

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QUALITATIVE CHARACTERISTICS OF CHARACTERISTICS OF USEFUL
ACCOUNTING INFORMATION INFORMATION

Useful
Financial
Information has:

Relevance Reliability
1 Predictive value 1 Verifiable
2 Feedback value 2 Faithful representation
3 Timeliness 3 Neutral

Comparability Consistency

THE OPERATING GUIDELINES OF ASSUMPTIONS

ACCOUNTING USED IN ACCOUNTING
Operating guidelines are classified as assumptions,
principles, and constraints.
Assumptions provide a foundation for the accounting
process.
Principles indicate how transactions and other economic
events should be recorded.
Constraints on the accounting process allow for a relaxation
of the principles under certain circumstances.

Assumptions Principles Constraints

Monetary unit Revenue recognition Materiality
Economic entity Matching Conservatism
Time period Full disclosure
Going concern Cost

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The primary criterion by which accounting The primary criterion by which accounting
information can be judged is: information can be judged is:

a. consistency. a. consistency.
b. predictive value. b. predictive value.
c. decision-usefulness. c. decision-usefulness.
d. comparability. d. comparability.

ASSUMPTIONS
ECONOMIC ENTITY
Monetary unit assumption:
ASSUMPTION
only transaction data expressed in terms of money can be Activities of the entity kept separate
included in the accounting records
Example: employee satisfaction and percent of
and distinct from the activities of the owner
international employees are not transactions that and all other economic entities.
should be included in the financial records. Example: BMW activities
can be distinguished from
those of other car
Customer Satisfaction manufacturers such as Mercedes.
Percentage of
International Employees
Should be included
in accounting records Salaries paid

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 GOING CONCERN
TIME PERIOD ASSUMPTION ASSUMPTION

Enterprise will continue in operation long

Economic life of a business divided into
artificial time periods.
enough to carry out its existing objectives.
Implications: depreciation and amortization are
used, plant assets recorded at cost instead of
liquidation value, items are labeled as fixed or
long-term.

2005 2006 2007

QTR 1 JAN FEB MAR
QTR 2 APR MAY JUN
QTR 3 JUL AUG SEPT
QTR 4 OCT NOV DEC

PRINCIPLES MATCHING
REVENUE RECOGNITION (EXPENSE RECOGNITION)

Revenue recognition principle Expense recognition is traditionally

dictates that revenue should be
recognized in the accounting
period in which it is earned.
When a sale is involved, revenue is
recognized at the point of sale.
tied to revenue recognition.
• referred to as the matching
principle
• dictates that expenses be matched
with revenues in the period in which
efforts are made to generate
revenues.

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 MATCHING (EXPENSE RECOGNITION) EXPENSE RECOGNITION
PRINCIPLE PATTERN

Unexpired costs become expenses in two ways: Operating expenses contribute to the revenues
of the period but their association with revenues
1) Cost of goods
is less direct than for cost of goods sold.
merchandise inventory becomes expensed when
the inventory is sold Provides No
Provides Future Cost Apparent Future
2) Operating expenses Benefit Incurred Benefits
other unexpired costs through use or
consumption or through the passage of time Benefits Decrease
Asset Expense

FULL DISCLOSURE COST PRINCIPLE

PRINCIPLE
Requires that circumstances and events that
make a difference to financial statement users
be disclosed.
Compliance with the full disclosure principle
1) data in the financial statements
2) notes that accompanying the statements
Summary of significant accounting policies
usually the first note to the financial
statements
The cost principle dictates that assets be
recorded at their cost.
Cost is used because it is both relevant and
reliable.
1) Cost is relevant because it represents a) the
price paid, b) the assets sacrificed, or c) the
commitment made at the date of
acquisition.
2) Cost is reliable because it is a) objectively
measurable, b) factual, and c) verifiable.

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BASIC PRINCIPLES USED IN
CONSTRAINTS IN ACCOUNTING
ACCOUNTING STUDY OBJECTIVE 6

Two constraints
• Materiality
– relates to an item’s impact on a firm’s overall
financial condition and operations.
• Conservatism
– dictates that when in doubt, choose the method that
will be the least likely to overstate assets and income

CONSTRAINTS IN
ACCOUNTING CONCEPTUAL FRAMEWORK

Objectives of Financial Reporting

Qualitative Elements of
Characteristics of Financial Statements
Accounting Information

Operating Guidelines

Assumptions Principles

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The organization that issues international The organization that issues international
accounting standards is the: accounting standards is the:

a. Financial Accounting Standards Board a. Financial Accounting Standards Board

b. International Accounting Standards Board. b. International Accounting Standards Board.
c. International Auditing Standards Committee. c. International Auditing Standards Committee.
d. None of the above. d. None of the above.

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