ACCOUNTING

Accounting

Introduction

There are the following two assumptions of underlying the financial statements:

Accrual basis

On the accrual basis of accounting, the financial statements are prepared for an entity. The effects of events and transactions are recognized under the accrual basis, when they occur and then they are highlighted in the accounting records and reported in the financial statements of the specific area. The purpose of preparing the financial statements under the accrual basis, not only show the past transactions to inform the users that includes the receipt of cash and the payment but also highlights the obligations to pay in cash and the resources (cash) to be received both in the future (Admati and Pfleiderer 2000, pp.479-515). Therefore, this type of approach “accrual basis” is considered as it provides the past information regarding the transactions and other events for the objective of making useful economic decisions.

Going concern

Under the going concern, it is assumed that the financial statements are prepared of an entity because it will continue its operations in the near future. That means, the financial statements are prepared for this assumption that an entity will not go for liquidate its operations. If this issue exists for any entity, the financial statements should be prepared under the going concern but should be prepared on a different basis and they should be disclosed for the stakeholders.

The assessment of the management under the going concern, involves making an estimation and judgment at a specific time regarding the future event's outcome that is uncertain (Admati and Pfleiderer 2000, pp.479-515). At the time of available information where the judgment process is started, the complexity and the size of an entity, the condition and nature of its business and the extent that is affected by the macro-economic factors, ultimately affect the estimation and judgment related to the future conditions and events.

Conceptual Framework

The conceptual framework has emerged in the recent time. However, many setters of the accounting standards have operated historically without using the conceptual framework in place. As a result, the accounting standards are often become disorganized in nature and largely used for the purpose of responding to the scandals and issues on day to day basis. The nature of this accounting standard is reactive than a proactive approach. Due to the lack of agreeing the conceptual framework, the risk has been increased in which accounting standards are highlighted as inconsistent with each other and it shows no objective of the financial statements' preparation. The framework documents as a statement in which functions of financial statements are included are likely to increase the robustness of the process of standard setting. The framework enables the users for the interpretation of information and it is contained into the financial statements. The framework also provides the principles' understanding on which they are prepared. The national standard setting body has its own framework based on the conceptual and it provides the fundamentals concepts on which its standards of accounting are based. It is believed by the commentators that harmonized frameworks should ...