Question

Describe the three concepts from the Conceptual Framework that work together to create accrual accounting.

Answer 1

A Conceptual Framework can be defined as a system of ideas and objectives that lead to creation of a consistent set of rules and standards. Specifically in accounting the rule and standards et the nature, function and limits of financial accounting and financial Statements.

1. Cost Based Measures:

        The framework defines the elements of financial statements, not least assets and liabilities. It proceeds directly to issues              of recognition of the elements and the implementation of accrual accounting by the reporting entity The framework should    explain the aspects of value creation process the accruals process is attempting to capture.

2. Initial Measurement:

Initial measurement and subsequent measurement cannot be considered separately. If the initial measurement and subsequent measurement basis are not consistent then income and expenses will be recognized solely because of the change in the measurement basis. Hence, the choice of measurement basis for an asset or a liability and the related income or expenses is determined by considering both the initial measurement and the subsequent measurement.

3. Balance Sheet:

There are circumstances when current value focuced accruals will provide better information to the primary users than cost based accruals one of the primary factors is how the asset or liability contributes to future cash flows. The Changes in the current values are the accruals and the income and expense amounts are a consequence of the value change.