ACCT NOTES – CHAPTER #2
Conceptual Framework of Accounting
A coherent system of inter-related objectives and fundamentals that can lead to
consistent standards and that prescribes the nature, function, and limits of financial
The conceptual framework of accounting guides
- Decisions about what to present in financial statements
- Alternative ways of reporting economic events
- Appropriate ways of communicating this information.
Four Main Sections involved in the Conceptual Framework of Accounting:
The objective of Financial Reporting:
The main objective of financial reporting is to provide information that is useful to
individuals who are making investment and credit decisions.
Help users make decisions whether or invest of lend, or allocate their resources in some
Should provide info about the amounts, timing, and uncertainty of future cash flows,
economic resources (assets) and claims on those resources (liabilities and equity)
Should also include management’s explanations about the company’s financial
Qualitative Characteristics of Accounting Information:
To be useful for decision making, information should have these qualitative
characteristics: relevance, faithful representation, comparability, and understandability.
- Relevance: accounting info has relevance if it will make a difference in user’s
decisions and helps users make predictions on past, present and future
transactions. Therefore it’s said to have predictive value. It also helps users
confirm or correct previous expectations, therefore having feedback value.
- Faithful Representation: Must be a faithful representation of what really exists
or happened, representing economic reality. The information must be verifiable,
neutral and complete.
- Comparability: there is comparability when companies with similar