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Unit I Part A Theoretical Framework for Financial Accounting Bcom sem 1 Delhi university

Unit I Part A Theoretical Framework for Financial Accounting Bcom sem 1 Delhi university

Unit I Part A Theoretical Framework for Financial Accounting Bcom sem 1 Delhi university

Unit I Part A Theoretical Framework for Financial Accounting Bcom sem 1 Delhi university : Accounting is the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of a financial character and interpreting the results thereof ”. Book-keeping is a subject of profound-importance to all kinds of business enterprises. It is of great importance, for example, to manufacturing concerns, trading concerns, banks, transport companies and insurance companies. They have to follow a proper accounting system if they want to know as to whether they are earning, profits or incurring losses and how much; whether or not all the transactions have been recorded fully and accurately; the amount they owe to their creditors as well as the amount owed to them by their debtors.

A conceptual framework is like a constitution: It is “a coherent system of interrelated objectives and fundamentals that can lead to consistent standards and that prescribes the nature, function, and limits of financial accounting and financial statements.” Many have considered the FASB’s real contribution—and even its continued existence—to depend on the quality and utility of the conceptual framework.

Unit I Part A Theoretical Framework for Financial Accounting Bcom sem 1 Delhi university

Need for Conceptual Framework

First, to be useful, standard setting should build on and relate to an established body of concepts and objectives. A soundly developed conceptual framework should enable the FASB to issue more useful and consistent standards over time. A coherent set of standards and rules should be the result, because they would be built upon the same foundation. The framework should increase financial statement users’ understanding of and confidence in financial reporting, and it should enhance comparability among companies’ financial statements. Second, new and emerging practical problems should be more quickly solved by reference to an existing framework of basic theory. For example, Sunshine Mining (a silver mining company) sold two issues of bonds that it would redeem either with $1,000 in cash or with 50 ounces of silver, whichever was worth more at maturity. 

Both bond issues had a stated interest rate of 8.5 percent. At what amounts should the bonds have been recorded by Sunshine or the buyers of the bonds? What is the amount of the premium or discount on the bonds and how should it be amortized, if the bond redemption payments are to be made in silver (the future value of which was unknown at the date of issuance)? It is difficult, if not impossible, for the FASB to prescribe the proper accounting treatment quickly for situations like this. Practicing accountants, however, must resolve such problems on a day-to-day basis. Through the exercise of good judgment and with the help of a universally accepted conceptual framework, practitioners can dismiss certain alternatives quickly and then focus on an acceptable treatment.

Unit I Part A Theoretical Framework for Financial Accounting Bcom sem 1 Delhi university

Development of Conceptual Framework

Over the years numerous organizations, committees, and interested individuals developed and published their own conceptual frameworks. But no single framework was universally accepted and relied on in practice. Recognizing the need for a generally accepted framework, the FASB in 1976 began work to develop a conceptual framework that would be a basis for setting accounting standards and for resolving financial reporting controversies. The FASB has issued six Statements of Financial Accounting Concepts that relate to financial reporting for business enterprises.

They are:

SFAC No. 1, “Objectives of Financial Reporting by Business Enterprises,” presents the goals and purposes of accounting.

SFAC No. 2, “Qualitative Characteristics of Accounting Information,” examines the characteristics that make accounting information useful.

SFAC No. 3, “Elements of Financial Statements of Business Enterprises,” provides definitions of items in financial statements, such as assets, liabilities, revenues, and expenses.

SFAC No. 5, “Recognition and Measurement in Financial Statements of Business Enterprises,” sets forth fundamental recognition and measurement criteria and guidance on what information should be formally incorporated into financial statements and when.

SFAC No. 6, “Elements of Financial Statements,” replaces SFAC No. 3 and expands its scope to include not-for-profit organizations.

SFAC No. 7, “Using Cash Flow Information and Present Value in Accounting Measurements,” provides a framework for using expected future cash flows and present values as a basis for measurement.

Illustration 2-1 (on page 30) provides an overview of the conceptual framework.4 At the first level, the objectives identify the goals and purposes of accounting. Ideally, accounting standards developed according to a conceptual framework will result in accounting reports that are more useful. At the second level are the qualitative characteristics that make accounting information useful and the elements of financial statements (assets, liabilities, and so on). At the third level are the measurement and recognition concepts used in establishing and applying accounting standards. These concepts include assumptions, principles, and constraints that describe the present reporting environment. The remainder of the chapter examines these three levels of the conceptual framework.

Unit I Part A Theoretical Framework for Financial Accounting Bcom sem 1 Delhi university

Along with other FASB Concepts Statements, FASB Concepts Statement No. 8, Conceptual Framework for Financial Reporting, establishes the concepts that underlie financial reporting standards. When completed, the framework is expected to be a coherent system of concepts that flow from the objective of financial reporting. The concepts provide the FASB with a framework for selecting the transactions, events, and circumstances to be represented; how those items should be recognized and measured; and how they should be summarized and presented or disclosed in financial reports.

The FASB is issuing the proposed amendments Qualitative Characteristics of Useful Financial Information, of Concepts Statement 8 to ensure that the materiality concepts discussed are consistent with the legal concept of materiality. Respondents to the FASB Invitation to Comment, Disclosure Framework, and the proposed FASB Concepts Statement, Conceptual Framework for Financial Reporting—Chapter 8: Notes to Financial Statements, along with other stakeholders, have requested these amendments to eliminate inconsistencies between the framework and the legal concept of materiality.

Unit I Part A Theoretical Framework for Financial Accounting Bcom sem 1 Delhi university

Accounting unconsciously developed from socio-economic and political needs of the society by tracking down the historical and current events in business and economics. The inherent problems of measurement, proportion, recording and coincidence of wants eased out by the introduction of standard unit of measurement. The growth in business that culminated into industrial revolution compelled accounting to move to another stage of development called decomputis, or ‘charge’ and ‘discharge’ system of bookkeeping. This system however did not facilitate the determination of profit because it lacks method of inventory valuation, cost ascertainment and provision for depreciation.

The emergence of double entry system was to minimize fraud, errors, misappropriation and pilfering of assets. The system in most cases allowed equity owners to have confidence on the works and reports of the stewards (management), who were entrusted with the capital assets of the owners. The subsequent issues and development in accounting relates to the Generally Accepted Accounting principles (GAAP), a period when owners entrust their resources to the management group for target objective. Auditing and investigation however emerged to resolve conflict among users of financial statements.

Users however, with the exception of management, gain assurance on the financial statement when auditors certify that the accounts have been prepared in line with the generally accepted accounting principles. Decisions by stakeholders on investment, takeover, merger and acquisition were normally based on non-qualification of auditors’ reports. Finally today, accounting packages cum information technology and computing are readily available to ensure timely production of financial reports at minimum cost, high speed and accuracy.

Unit I Part A Theoretical Framework for Financial Accounting Bcom sem 1 Delhi university

SYLLABUS FINANCIAL ACCOUNTING

Level of knowledge: Working knowledge Learning Objectives: The objective of this paper is to help students to acquire conceptual knowledge of the financial accounting and to impart skills for recording various kinds of business transactions.

COURSE CONTENTS

1. THEORETICAL FRAMEWORK

3 Lectures

i) Accounting as an information system. The users of financial accounting information and their needs. Qualitative characteristics of accounting, information. Functions, advantages and limitations of accounting. Branches of accounting. Bases of accounting; cash basis and accrual basis.

ii) The nature of financial accounting principles – Basic concepts and conventions: entity, money measurement, going concern, cost, realisation, accruals, periodicity, consistency, prudence (conservatism), materiality and full disclosures.

iii) Financial accounting standards: concept, benefits, procedure for issuing accounting standards in India. Salient features of Accounting Standard (AS): 1 (ICAI)

Unit I Part A Theoretical Framework for Financial Accounting Bcom sem 1 Delhi university

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Unit I Part A Theoretical Framework for Financial Accounting Bcom sem 1 Delhi university

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Unit I Part A Theoretical Framework for Financial Accounting Bcom sem 1 Delhi university

Delhi University (DU) is one of the best University in India. This university every each year conduct the different type of exam and every year huge candidates are applied the application forms and every year lot of candidates are appeared the examination. 

The University of Delhi informally known as Delhi University is a public central collegiate university, located in New Delhi, India. it was established in 1922 as a unitary, teaching and residential university by an Act of the then Central Legislative Assembly of the British India. The University has grown into one of the largest universities in India. At present, there are 16 faculties, 86 academic departments, 77 colleges, and 5 other recognized institutes spread all over the city, with 132,435 regular students which include 114,494 undergraduates & 17,941 postgraduates. There are also 261,169 students in non-formal education program, of which UG students make up 258,831 whereas PG students are 2,338 in number. DU is one of the most sought after the institution of higher education in India. It is also among the university with highest publication count in India.

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