UNIT 2 ACCOUNTING CONCEPTS AND STANDARDS
ACCOUNTING FRAMEWORK
The rules and conventions of accounting are commonly referred to as the conceptual framework of accounting. As with any discipline or body of knowledge, some underly-ing theoretical structure is required if a logical and useful set off practices and proce-dures are to be developed for reaching the goals of the profession and for expanding knowledge in that field. Such a body of principles is needed to help answer new questions that arise. No profession can thrive in the absence of a theoretical frame-work. According to Hendriksen (1977), Accounting theory may be defined as logical reasoning in the form of a set of broad principles that (i) provide a general frame of reference by which accounting practice can be evaluated, and (ii) guide the develop-ment of new practices and procedures. Accounting theory may also be used to explain existing practices to obtain a better understanding of them. But the most important goal of accounting theory should be to provide a coherent set of logical principles that form the general frame of reference for the evaluation and development of sound accounting practices.
The American Institute of Certified Public Accountants (AICPA) discusses financial accounting theory and generally accepted accounting principles as follows.
Financial statements are the product of process in which a large volume of data about aspects of the economic activities of an enterprise are accumulated, analysed, and reported. This process should be carried out in accordance with generally accepted accounting principles. Generally accepted accounting principle incorporate the consensus at a particular time as to which economic resources and obligations should be recorded as assets and liabilities by financial accounting, which changes in assets and liabilities should be recorded, when these changes should be recorded, how the assets and liabilities and changes in them should be measured, what information should be disclosed and how it should be disclosed, and which financial statements should be prepared.
Generally accepted accounting principles encompass the conventions, rules and procedures necessary to define accepted accounting practice at a particular timegenerally accepted accounting principles include not only broad guidelines of general application, but also detailed practices and procedures.
(Source: AICPA. Statements of the Accounting Principles Board No.4 "Basic Concept and Accounting Principles Underlying Financial Statement of Business Enter-prises", October, 1970, pp.54-55)
The word `principles' is used to mean a "general law or rule adopted or professed as a guide to action, a settled ground or basis of conduct or practice". You will note that this definition describes a principle as a general law or rule that is to be used as a guide to action. This implies that accounting principles do not prescribe exactly how each detailed event occurring in business should be recorded. Consequently, there are several matters in accounting practice that may differ from one company to another.
Accounting principles are man-made. They are accepted because they are believed to be useful. The general acceptance of an accounting principle (or for that matter any principle) usually depends on how well it meets the three criteria of relevance, objectivity, and feasibility. A principle is relevant to the extent that it results in meaningful or useful information to those who need to know about a certain business. A principle is objective to the extent that the information is not influenced by the personal bias or judgement of those who furnished it. Objectivity connotes reliability or. trustworthiness which also means that the correctness of-the information reported can be verified. A principle is feasible to the extent that it can be implemented without undue complexity or cost.
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