Conceptual Framework

Overview of the Conceptual Framework

 First Level = Basic Objectives

 Second Level = Qualitative

Characteristics and Elements

 Third Level = Recognition,

Measurement, and Disclosure
Concepts.

LO 2 Describe the FASB’s efforts to construct a conceptual framework.

Illustration 2-7
Conceptual Framework for
Financial Reporting

LO 4
Capital:-
It means the amount (in terms of money or
assets having money value) which the proprietor has
invested in the firm or can claim from the firm.
For the firm Capital is a liability towards the
owner. It is so because the owner is treated to be
separate from the business.
Liabilities:-
If an amount is due to be paid to any other person
or institution other than the owner it is called as a liability.

Liabilities can be classified into following:

i) Long-term liabilities: These are those liabilities which are
payable after a long term, (generally more than one year).
Example; Long-term loans, debentures etc.
ii) Current liabilities: These are those liabilities which are
payable in near future ,(generally within one year).
Example; creditors, bank overdrafts, bills payable, short-
term loans, etc.
Assets:-
Any physical thing or right owned that has a money
value is an asset. In other words, an asset is that
expenditure which results in acquiring of some property
or benefit of a lasting nature.
Assets can be classified as:
i) Fixed Assets: Fixed assets are those assets which are
purchased for the purpose of operating the business and
not for resale. E.g. land, building, machinery, furniture,
etc.
ii) Current Asset: Current assets are those assets of the
business which are kept for short term for converting into
cash. E.g. debtors, bills receivables, bank balance, etc.
Debtors:-
A person who owes money to the firm, generally on
account of credit sale of goods is called a debtor.

For e.g. When goods are sold to a person on credit

that person pays the price in future. He is called a debtor
because he owes the amount to the firm.
Receivables:-
The term receivables is used for the amount that
is receivable by the firm, other than the amount due from the
debtors.

Creditors:-

A person to whom the firm owes money is called

a creditor. For e.g. Mr. M is creditor of the firm when goods
are purchased on credit from him.
Payables:-
The term payables is used for the amount payable by
the firm, other than the amount due to creditors.

Drawings:-
It is the amount of money or the value of goods
which the proprietor takes for his domestic or personal use.

Revenue:-
It means the amount which, as a result of
operations, is added to the capital. “Revenue is an inflow of
assets which results in an increase in owner’s equity. E.g.
sale of goods, rent income.
Expense:-
It is the amount spent in order to produce and sell the
goods and services which produce the revenue. “Expenses is
the cost of the use of things or services for the purpose of
generating revenue”. E.g. payment of salary, wages, rent,
etc.

Income:-
It is the profit earned during a period of time. In
other words, the difference between revenue and expense is
called income.
Gross Profit:-
Gross profit is the difference between sales
revenue or the proceeds of goods sold and services rendered
over its direct cost.

Net Profit:-
Net Profit is the profit made after allowing for all
expenses. In case, expenses are more than revenue, it is Net
Loss.

Cost of goods sold:-

It is the direct cost of the goods or
services sold.
Expenditure:-
Expenditure is the amount spent or liability
incurred for the value received. Expenditure may be
classified into:
i) Revenue Expenditure: It is the amount that is incurred in
current activities to purchase goods and services which are
consumed during the period.

ii) Capital Expenditure: It is the amount that is incurred in

purchasing assets which will give benefit extending over a
number of accounting periods.
Discount:-
When customers are allowed any type of reduction
in the prices of goods by the businessman, that is called
discount.

Gain:-

It is a term used to describe profit of an irregular nature,

e.g. capital gains.
Cash Transaction:-

Transactions involving immediate

receipt or payment of cash.

Credit Transaction:-

Transactions in which the

receipt/payment of cash is postponed to a future date is
called as a credit transaction.
Net worth:-
It means assets minus outside liabilities.
Profits of a business increase net worth where as
losses reduce the net worth of a business.

Turn over:-
It means total trading income from cash sales and
credit sales.

Voucher:-
Any written document in support of a business
transaction is called a voucher. It is an objective evidence in
support of a transaction.
 Basis of Accounting

a) Cash Basis

b) Accrual / Mercantile Basis

Cash Basis:-
Under this basis, actual cash receipts &
actual cash payments are recorded. Credit transactions
are not recorded until the cash is actually received or
paid.

Limitation: Does not show actual profits nor does it

show the financial position of a firm.
Mercantile or Accrual Basis:-
In the accrual basis of accounting, the income, whether
received or not, but has been earned or accrued during the
period forms part of the total income of that period.

Similarly, if the firm has taken benefit of a particular

service, but has not paid within that period, the expenses will
relate to the period in which the service has been utilised.
Accounting concepts

1. Entity
2. Money measurement
3. Going-concern
4. Cost
5. Réalisation
6. Accruals
7. Matching
8. Periodicity
9. Consistency
10. Conservatisme
• Accounting concepts The affairs of the
business are distinct from
1. Entity the personal affairs of
2. money measurement its owner. The business is
an independent ENTITY.
3. Going-concern
4. Cost
5. realization
6. Accruals
7. Matching
8. Periodicity
9. Consistency
10. conservatism
• Accounting concepts
Records are kept in
1. Entity monetary terms, and only
2. money measurement matters capable of being
expressed in monetary
3. Going-concern terms are reflected in the
4. Cost books.

5. realization
6. Accruals
7. Matching
8. Periodicity
9. Consistency
10. conservatism
• Accounting concepts
1. Entity
2. money measurement The business is assumed to
have a continuing and
3. Going-concern indefinite life. The
4. Cost business IS NOT on the
verge of extinction.
5. realization
6. Accruals
7. Matching
8. Periodicity
9. Consistency
10. conservatism
• Accounting concepts
1. Entity
2. money measurement
Accountants compute the
3. Going-concern value of an asset by
4. Cost reference to its
acquisition cost, AND NOT
5. realization by reference to its
6. Accruals expected future benefits.

7. Matching
8. Periodicity
9. Consistency
10. conservatism
• Accounting concepts
1. Entity
2. money measurement
3. Going-concern
4. Cost Any change in the value of
an asset may only be
5. réalisation recognized at the moment
the firm REALIZES it, or
6. Accruals
disposes of that asset.
7. Matching
8. Periodicity
9. Consistency
10. conservatism
 SFAC #1: Accrual
accounting attempts to
• Accounting concepts record the financial
1. Entity effects on an enterprise
of transactions and other
2. money measurement events and circumstances
The
thatrecognition
have cash of an
3. Going-concern
expense (or revenue)
consequences for the and
4. Cost the related in
enterprise liability
the periods
(or asset)
in which results from
these
5. realization
an accounting EVENT,
transactions, and
etc… occur
6. Accruals is not necessarily
rather than only in the
signaled by a cash
periods when cash is
7. Matching transaction.
received or paid.
8. Periodicity
9. Consistency
10. conservatism
• Accounting concepts
1. Entity
2. money measurement
3. Going-concern
4. Cost
Expenses
Revenues should be
and expenses
5. realization recognized in the
resulting from thesame
same
6. Accruals accounting period
transactions during
(or events,
which the firm has
circumstances, etc…)
7. Matching recognized the associated
should be recognized
8. Periodicity revenues.
simultaneously.
9. Consistency
10. conservatism
• Accounting concepts
1. Entity
2. money measurement
3. Going-concern
4. Cost
5. realization
6. Accruals
7. Matching Accounting reports must be
8. Periodicity prepared for fixed, and
relatively short, periods
9. Consistency of time.
10. conservatism
• Accounting concepts
1. Entity
2. money measurement
3. Going-concern
4. Cost
5. realization
6. Accruals
7. Matching
8. Periodicity Like transactions should
be treated the same way in
9. Consistency consecutive periods.
10. conservatism
• Accounting concepts
1. Entity
2. money measurement
3. Going-concern
4. Cost
(1) The accountant should
5. realization not anticipate profit, and
should provide for all
6. Accruals
possible losses;
7. Matching (2) Faced with several
methods of valuing an
8. Periodicity asset, the accountant
9. Consistency should choose that which
leads to the lesser value.
10. Conservatisme