accounting year 13

conceptual framework/ accounting framework

sets out the concepts that helps in the preparation and presentation of financial statements for external users

purpose of Conceptual framework

• Assist the standards setting bodies to develop the accounting standards

• Help in resolving accounting issues

• Assist in understanding and interpreting the accounting standards

• Assist in developing consistent accounting policies

• Guide auditors into forming an opinion

Separate entity concept

States that the financial affairs of the owner are separate and distinct from the financial affairs of the business

Reason for separate entity concept

The owner will want to know the profit earned in capital employed by the business

Drawbacks of separate entity concept

Owner is responsible for all the debts

Legal entity concept

States the business entity is formed by a process of it can sue or be sued

Reason for legal entity

Owner responsible for all debts owned by the business

Drawbacks of legal entity concept

Clear line run between Owner and the firm in terms of business transactions

Money measurement concept

States that all transactions must be recorded in money or monetary terms

The reason for money measurement concept

It enables users to understand better

Drawbacks of money measurement concept

Not all transactions can be recorded in money terms Like customer service, location and working atmosphere etc

Historical cost concept

States that business transactions are recorded in terms of their original cost at the time the transaction occurred

The reasons for historical cost concept

Objective and verifiable evidence

Drawbacks of historical cost concept

It doesn't reflect on the current market value of the asset

Current cost accounting concept

States that assets and expenses are recorded in the books of account in current market price

The reasons current cost accounting concept

It takes account more useful information that satisfy needs of the stakeholders

Drawbacks Current cost accounting concept

In time of raising prices, lower rates of return on investment

Going concern concept

Assumes business is going to continue its operation indefinitely and is not likely to liquidate in the foreseeable future

Reasons For going concern

The business will continue making profit in the future without being liquidated