Theoretical Framework of Accounting

Theoretical Framework

Any study or methodology depends on a framework upon which the building blocks of the concept is laid. Such is also the case with accounting. Various fundamental frameworks are associated with this study. The tools, methods, and frameworks implemented in the study and evaluation of accounts regarding the financial reports, is termed as the theoretical framework of accounting. 

The theory involves both the interpretation of historical accounting procedures as well as recent measures. It also indicates the official modifications updated to the financial framework by the regulating body. It comes with a certain basic framework of accounting involving significant sessions and fundamentals.

Accounting Framework

The concept of the Theoretical Framework comprises these following sessions.

  •  Introducing to the concept of accounting

  • Major functions of accounting

  • Merits and demerits

  • Bookkeeping

  • Accounting System

  • As an information system

  • Role of an Accountant

  • Accounting standards, concepts, and policies

  • Classification

  • Debit and credit rules

  • Equation


These elements come together to form the conceptual framework of accounting. Now, we will be having a look at the major sections from the theoretical background.

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Principles and Functions of Accounting

The primary role of accounting is to provide businessmen with the right record of monetary transactions. The functioning method of Accounting and theoretical background has two different categories. They are historical functioning and managerial functioning.

Historical Functioning

Historical Functioning signifies that keeping a record of all the past transactions securely. The type of functioning involves:

  • The conceptual framework accounting helps in keeping a track of all the records and maintaining a journal for the same.

  • Preparation of summaries to site quick reviews.

  • The historical functioning not only gives insight to the records but provides a fair outcome.

  • A balance sheet is prepared to interpret the financial report of the organization or enterprise.

  • Analysis of data and records takes place to be used in other relevant places.

Managerial Functioning

The other theoretical background involves the functioning of the Managerial Committee, which looks after the decision making aids of the company. The functions for this step involves,

  • Setting up plans, other than maintaining and checking the financial policies.

  • The budget is prepared for the estimation of total expenses for future activities.

  • The accounting even gives an insight into the evaluation of the performance of the employee.

  • Checking if there’s any potential error or fault.

Merits and Demerits of Accounting

The theoretical framework meaning indicates the particular structure that is capable of supporting theory, for definite research or study.

Accounting mixes up both arts and science. It is an art that classifies and summarizes the report of financial transactions for a particular company. The accounting theory comes with both advantages and disadvantages.

Advantages

  • With the aid of an accounting framework, it is possible to maintain all the business records.

  • Accounting helps in setting up financial statements and ensures a healthy comparison of results.

  • The role of accounting theory is to help in issues related to taxation and the right valuation of the business.

  • With the aid of accounting, evidence in legal matters alongside relevant information can be secured too.

Disadvantages

Besides some remarkable advantages, the theoretical background of accounting theory comes with its own set of cons.

  • The information in accordance with the accounts is presented only in figures.

  • The information obtained is based on fair estimation only.

  • In some cases, the recording information might not be neutral.

  • Particular assets are only recorded in terms of their real price.

Did You Know?

Here are some amazing facts about the theoretical framework of accounting and the significance of the theoretical framework meaning that you will be surprised to know.

There are five fundamentals for the current accounting practices.

  • The Revenue Principle

  • The Expense Principle

  • The Matching Principle

  • The Cost Principle

  • The Objectivity Principle

In general, there are about ten basic accounting concepts. Significant ones include Business Entity Concept, cost concept, going concern concept, matching concept, etc.

Accounts are further classified into different accounts that are: personal account, tangible account, and intangible accounts.

Solved Example

Q. What are the theories involved in accounting?

Ans: Denoting the vitality of theoretical framework meaning, it appears, accounting doesn't come with its theories. However, it comprises a certain hypothesis that is truly impactful. These include size hypothesis, political cost hypothesis, debt covenant hypothesis, income hypothesis, bonus plan hypothesis, and the list continues.

FAQ (Frequently Asked Questions)

1. What are the Stages Involved in Developing the Theoretical Framework?

Ans: There are various aspects that need to be considered when it comes to developing the fundamentals of a subject. While solving what is a theoretical framework, people often get it difficult to understand how to discuss the stages related to the accounting framework theory. To set up an accounting theoretical framework, there are certain stages involved in it. That comes step by step. The stages include as follows,

  • Checking the thesis title properly.

  • Considering the most significant variables in the research.

  • Drafting all the variables that are useful for research and study.

  • Reviewing literature to get through the answers of the relevant questions,  keeping up the pace with theoretical framework meaning.

2. What is Regarded to be the Fundamentals of Accounting?

Ans: Like any other branch of education, accounting and the theories related to the practice also rely heavily upon various frameworks of the course. Keeping in mind the relevance of theoretical framework meaning, accounting itself signifies keeping the record of all the financial transactions for a particular brand or company. 

Some of the principal terms include revenues and expenses, particular assets, the income statement and records, liabilities, balance sheets, cash flow of income, and many such more. One eventually gets familiar with how to record transactions in relevance to credit or debit accounting after having a clear insight into the theoretical background.