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Chapter 2.1

chapter 2.1

Financial Accounting
Course Code
Liang Chen

of 1
Chapter 2
Conceptual Framework of Accounting
The conceptual framework of accounting is 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 accounting statements. Conceptual framework ensures that existing standards and practices
are clear and consistent, makes it possible to respond quickly to new issues, and increases the relevance,
faithful representation, comparability, and understandability of financial reporting results.
It is impossible to create a rule for every situation; therefore there are general principles rather than
specific rules. The international accounting standards board (ISAB) was formed to try to reduce the lack
of uniformity with other governments. The conceptual framework of accounting has four main sections:
the objective of financial reporting, the qualitative characteristics of accounting information, the
elements of financial statements, and recognition and measurement criteria.
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.
Qualitative Characteristics of Accounting Information
Information should have these qualitative characteristics: relevance, faithful representation,
comparability, and understandability.
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predictive value and feedback value. For accounting information to be relevant, it must also be timely.
Faithful representation means that it must represent economic reality, verifiable, neutral, and complete.
Comparability allows users to identify the similarities and differences between companies and over time
with itself. Consistency is crucial in comparability as it means the company uses the same accounting
Understandability on a base level for all users is necessary. That base level is that the average user is
assumed to have a reasonable understanding of accounting concepts and procedures, as well as of
general business and economic conditions.
Elements of Financial Statements
The basic terms used in accounting are assets, liabilities, equity, revenues, and expenses.