Question

What is a conceptual framework? Why is a conceptual framework necessary in financial accounting?

Answer 1

Before getting into what is conceptual framework lets's first come to know about what basically conceptual or framework means in themselves .

Conceptual meaning : something which is based on mental concepts while framework means a basic structure which underly a system,concept or text combining both of these it shows that when mental concepts were put in structured form leads to conceptual framework.

Now the technical definition of conceptual framework says that A Conceptual Framewok is a system of ideas and objectives that lead to the creation of a consistent set standards.

Hence Conceptual Framework is a set of standards which is set for everyone to follow.

Conceptual Framework in Accounting means rules for measuring assets . Liabilities , equity , income and expenses and other elements of financial statements.

Reasons For necessity of Conceptual Framework in Accounting:

Financial Statements not only show the financial position of Company but it is also required by various users also like investor to compare the financial position of various Company for their investment purpose , management is required to compare their performance with another their competitor or creditor / banker also require to check Company creditibility . Now in the absence of Conceptual Framework ambiguity is created in treatment of various financial elements like assets,liabilities ,income and expense.Every Company as per their own judgement will provide different treatment which leads to difficulty in understanding true position of Company to various Users. hence to remove such discrepancy Conceptual Framework is require which provide standard basis for treatment of various elements of financial statements to make it Comparative , useful and easy to understand as standards provide single set of rules which everyone know which is easy to understand. And if there are standards and any problem emerge it is easier to resolve and thus user's understanding and confidence also increases in financial reporting.

Hence above facts justify that Conceptual Framework is necessary for Accounting.