Importance of Conceptual Framework of Accounting
The conceptual framework of accounting is a set of guidelines or constitutions by which all accounting activities are developed, managed and regulated, and new situations are addressed and controversial issues are resolved. Also, the accounting profession has to follow the conceptual framework of accounting to perform various tasks and solve problems. So, the conceptual framework acts as a guide in the management of the accounting profession.
Before World War II, businesses were limited in size, shape, and function. As a result, there were fewer transactions, less liabilities, less property, and fewer parties to the business, but after World War II, as the nature, scope, and scale of the business organization became more extensive, the number of organized transactions in the business also increased. As a result, with the increase in property and filing, the number of different parties involved in the business also increases. In-order to present accurate information to various interested parties, it is necessary to formulate and implement sound policies. The conceptual framework of accounting arises to deal with this urgent new situation and to solve various controversial issues.
1. Making Accounting Information Reliable: Data producers can prepare and provide accounting information as accurate and reliable as possible for the purpose of guiding the conceptual framework of accounting. Users benefit from accurate and reliable information.
2. Guidelines: The conceptual framework serves as a guideline in the management of the accounting profession. As a result, professional accountants can perform their functions well.
3. Setting Accounting Standards: One of the advantages of the conceptual framework of accounting is that it analyzes and reviews existing accounting system and helps in setting new standards.
4. Defining the Purpose of Financial Reporting: The purpose of financial reporting has been defined in the conceptual framework of accounting. As a result, information about the profit and total assets of the business can be easily provided to the user.
5. Quality of Information: Accurate and important decision making requires relevant and reliable information. Relevance and reliability can be ensured with the help of conceptual framework.
6. Assumptions and Principles: Concepts and principles have been formulated for how the accounting profession should be conducted and how to bring uniformity in the management of accounting profession all over the world. Since the nature of business is diverse and there are alternative methods of valuing assets and liabilities, the only way to get rid of it is to have a well-established policy and its proper implementation with the help of conceptual framework.
7. Tackling New Problems: Accounting is a practical subject. Its application has to deal with numerous problems in the modern competitive market. The conceptual framework acts as a guideline to deal with the problem.
8. Resolving Difference of Opinion: Differences of opinion may arise from field to field in the formulation of accounting standards and preparing final financial statements. The conceptual framework helps to bridge these differences through guidelines for all accounting users.
9. Help in Creating Useful and Rich Standards of Data: The conceptual framework of accounting helps FASB and other quality control organizations to create more useful, informative and consistent standards. In emergent situations, accounting standards provide solutions to practical problems.
10. Explanation of Elements of Financial Statements: The conceptual framework provides a clear explanation of the various clauses of the financial statements so that there is no ambiguity or difference of opinion.
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