Scope and subject matter of Conceptual Framework of Accounting
The conceptual framework of accounting is the principles of the constitutional theory and application of accounting. It is primarily concerned with the preparation of financial statements, and the guiding principles of practice, which are considered to be the constitutive accounts of accounting. The objectives of financial reporting, the qualitative characteristics of financial information, the definition and interpretation of the elements of financial statements, the terminology used in financial statements, the recognition of the elements are covered under the guidance of the conceptual framework of accounting.
In 1976, FASB published a discussion memorandum entitled “Conceptual Framework of Financial Accounting and Reporting; Elements of Financial Statements and their Measurement.” It identifies the main issues related to the conceptual framework of accounting. So far, five Statements of Financial Accounting Concepts have been issued by the FASB, which are considered the main topic or basis or content of the conceptual framework.
1. SFAC No.1: Objectives of Financial reporting
It describes the purpose of the financial statement or report. The explanations were:
Objectives of Financial Reporting by business Enterprise.
1) Income Statement
2) Statement of Retained Earnings
3) Balance Sheet
4) Statement of Cash Flows
See detail here: Objectives of Financial Reporting (SFAC No. 1)
The main purpose of financial reporting:
a) Provide the overall financial condition of the organization to the interested party.
b) Cash inflow and outflow.
c) Providing information on business operations and profitability.
d) Provide information on the use of funds.
e) Provide the necessary explanations and notes to make the financial information usable.
f) The total amount of assets.
2. SFAC No. 2: Qualitative Characteristics of Accountings Information: It’s main title is ‘’Qualitative Characteristics of Accounting Information”. Make accounting information more meaningful and accessible to the user, it is necessary to verify those accounting data.
3. SFAC No 3: The main point of SFAC 3 is ‘’ elements of Financial Statements of Business Enterprise “. The important terminology used in financial statements is defined here. Like: i) Assets, ii) Liabilities, iii) Equities, iv) Investment by Owners, v) Distributions to owners, vi) Comprehensive Income, vii) Revenues, iix) Expenses, ix) Gains, x) Loses. Total ten topics have been defined.
4. SFAC No 4: Title of this statement is ‘’Objective of Financial Reporting by Non- business organization ‘’. It’s published for the purpose of non-business organization’s financial statements
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5. SFAC No 5: Title of this statement is ‘’ Recognition and Measurement in Financial statement of Business Enterprise’’. It provides guidance on oral recognition and what types of information should be included in financial statements. In this regard, basic and self-evident concepts and principles are followed for the proper performance of accounting activities. The ideas are as follows: (a) Assumptions, (b) Principles, (c) Constraints.
6. SFAC No 6: It has been issued in lieu of SFAC No. 3 which was originally ‘’Elements of Financial Statements of Non-Profit Organization’’. It defines the terms of financial statements of non-business and non-profit organizations.
Advantages/Importance of Conceptual Framework of Accounting see detail.