Chapter 2

Conceptual Framework of Accounting

Basic Accounting Concepts
Business
Entity
Matching Concept Monetary
Concept Concept

Going
Accrual
Concept Basic Concern
Concept
Accounting
Concepts
Realization Cost
Concept concept

Accounting Dual
Period Aspect
Concept Concept
Basic Accounting Concepts
Basic Accounting Concepts
Basic Accounting Concepts

Business is a continuing enterprise

and will exist for an indefinite period.
Balance sheet is prepared based on
 Basic Accounting Concepts

The
Cost
Concept
 Basic Accounting Concepts

Every transaction
entered into by a firm or
an institution will have
two aspects i.e. debit
and credit.
Basic Accounting Concepts

1st 31st
Shrawan
Ashad
Basic Accounting Concepts

• Also known as revenue

recognition principle
• Revenue is recognized by the
seller when it is earned
irrespective of whether cash from
the transaction has been received
or not.
Basic Accounting Concepts
Accrual Concept
Basic Accounting Concepts
Matching Concept
 Basic Accounting Conventions

• Guidelines used to help companies determine how to record

certain business transactions that have not yet been fully
addressed by accounting standards.
• These procedures and principles are not legally binding but are
generally accepted by accounting bodies.
• Basically, they are designed to promote consistency and help
accountants overcome practical problems that can arise when
preparing financial statements.
 Basic Accounting Conventions
• Materiality
Any information that could influence the decision of a person
looking at the financial statement must be included. Any
transaction that have small impact on financial statement of the
company does not necessarily need to follow theory strictly.
Example: purchase of calculator, ruler with expected life more than
1year can be charged to P/L considering materiality of the
transaction.

• Disclosure
Information considered potentially important and relevant must be
revealed, regardless of whether it is detrimental to the company.
Any facts and figures, interpretation should be disclosed.
 Basic Accounting Conventions
• Conservatism
Losses that are probable but have not yet occurred are recognized,
but gains that are probable are no recognized until they have
occurred. When two values of a transaction are available, the lower
one should be favored. The general concept is to factor in the
worst-case scenario of a firm’s financial future.
Example: Provision for bad debt, valuation of closing stock (market
price 45000, cost price 50000)
• Consistency
A company should apply the same accounting principles across
different accounting cycles. Once it chooses a method it is urged to
stick with it in the future, unless it has a good reason to do
otherwise. Without this convention, it will be difficult to assess how
the company performs from one period to the next.
 Accounting Standards
• Common set of principles, standards and procedures.
• Defines the basis of accounting policies and practices.
• Aims to bring a common base for evaluation through
uniform presentation, measurement, treatments and
disclosure of financial events.
• GAAP is US based and IFRS is European based. IFRS is widely
used standard.
 Accounting Standards
Need of Accounting Standards
• Uniformity

• Improves reliability of financial statements

• Prevents frauds and manipulations

• Comparability
 Accounting Standards
Terminologies
• GAAP (Generally Accepted Accounting Principles)
• IAS (International Accounting Standard)
• IFRS (International Financial Reporting Standards)
• NAS (Nepal Accounting Standards)
• NFRS (Nepal Financial Reporting Standards)
• ASB (Accounting Standard Board)
• IASB (International Accounting Standard Board
 Accounting Standards
IFRS (International Financial Reporting Standards)
• IFRS is developed by IASB (International Accounting
Standard Board).
• It provides a set of principles to be followed while
accounting for transaction and events in financial
statement.
• The use of single set of high quality standard by companies
all over the world improves comparability and transparency
of financial information.
• Cross-boarder investment are huge and IFRS helps to
provide better quality information for decision making.
 Accounting Standards
NFRS (Nepal Financial Reporting Standards)
• In Nepal Accounting Standards are developed by Accounting
Standard Board (ASB).
• To bring IFRS into national law ASB issued NFRS based on
international standard.
• Nepal Financial Reporting Standards (NFRSs) mean Standards and
• Interpretations adopted by the Accounting Standards Board (ASB).
They comprise:
a. Nepal Financial Reporting Standards;
b. Nepal Accounting Standards;
c. IFRIC Interpretations issued by the International Accounting
Standards Board (IASB); and
d. Application Guidance and SIC Interpretations issued by the IASB.
 Ethics in Accounting
1 2 3 4 5
• Integrity • Objectivity • Professional • Confidentiality • Professional
competence behavior
and due care

1. Integrity: Accountants should have honesty and should strictly follow accounting principles, standard
and guidelines. They should focus on organizational benefit rather than personal benefit.
2. Objectivity: Accountants should not be influenced/biased so that conclusion and decision will be fair.
3. Professional Competence and due care: Accounting is governed by different principles, standard and
guidelines. Accountant should have complete knowledge and up to date information.
4. Confidentiality: Account department is sensitive department. Competitors may get valuable
information in accounting. Any internal information of the organization should not be shared with
others.
5. Professional Behavior: Accountants should posses professional behavior. Any task given to him should
be completed on time following principles, standards and guidelines.