The conceptual framework in accounting is a system of interrelated financial reporting objectives, accounting information characteristics, financial statement elements, and transaction measurement and recognition principles. A conceptual framework is necessary for all the parties affected by accounting in relation to their respective capacity, namely accounting rule-setting bodies, companies that prepare financial statements, and users of financial statements. The conceptual framework in accounting is a building block used for effective financial reporting.
The conceptual framework provides basic financial reporting objectives, fundamental accounting and financial statement concepts, and ways to measure accounting information, recognize financial events and report them in the accounting system. It facilitates the generation of useful accounting information to those making investment and credit decisions in a way that helps them understand a company's economic resources, the claims to them and the changes in them. The framework also assumes a reasonable level of competence on the part of users in understanding the related accounting matters.
Standards and Rules
The conceptual framework plays an important role in setting and issuing accounting standards and rules, which should be built on an established body of concepts and objectives. Without the use of a common accounting language among all constituents, rule-setting bodies may issue new standards in a random fashion, which can be detrimental to the dissemination of useful financial accounting information.
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Comparability and Consistency
The conceptual framework also provides comparability and consistency of financial statements. By using the same conceptual framework, companies benefit from increased efficiency and better communication in the process of their financial reporting. The framework also enables companies to quickly resolve emerging practical accounting issues by referencing basic principles.
Understanding and Confidence
The conceptual framework in accounting increases financial statement users' understanding of and confidence in companies' financial reports. Knowing that companies' financial statements are prepared in connection with a set of universal accounting standards and rules, investors and creditors can make decisions based on the face value of the financial information received. Understanding the framework, users of financial statements can better interpret any changes in accounting standards and rules, as well as different practices adopted by companies, which in turn helps with their financial statement analysis.