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. 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.
