COURSE 2

ACCOUNTING CONCEPTUAL FRAMEWORK

Over the years, the accounting profession evolved without a defined set of guiding
principles. Confusion often arose as different firms used varying methods to correct similar
problems. This made comparison of financial reports between companies and over time difficult,
as information was interpreted in different ways by different people. For these reason,
conceptual framework, in the form of a number of concept statement, is being developed to
provide a set of guiding principles for the accounting profession.
Accountants themselves have developed traditional ways of doing things. This is
reflected in the Accounting Conventions, which are generally accepted accounting principles
which have been used for many years. These conventions (or accepted practices) include those
described below.
The entity concept (business entity concept). Under the business entity concept, for
accounting purposes, every business is conceived to be and is treated as a separate entity,
separate and distinct from its owner or owners and from every other business. Businesses are so
conceived and treated because, in as far as a specific business is concerned, the purpose of
accounting is to record its financial position and profitability. Consequently, the records and
periodically report its financial position and should not include either the transactions or assets of
another business or the personal assets and transactions of its owner or owners. To include either
distorts the financial position and profitability of the business. For example, the personally owed
automobile of a business owner should not be included among the assets of the owner's business.
Likewise, its gas, oil and repairs should not be treated as an expense of the business, for to do so
distort the reported financial position and profitability of the business.
It should be also made a clear distinction between accounting and legal entities. In some
cases the two coincide. For example, corporations, trusts and governmental agencies are both
accounting and legal entities.
The proprietorship is an accounting entity, as indicated by the fact that all assets and
liabilities of the business unit are included in its financial statements. The business proprietorship
is not a legal entity (is not legally separated from its proprietor). He is legally liable both for his
personal obligations and for those incurred in his business. For accounting purposes, the
proprietor as an individual and his business enterprise are separate entities. A corporation is a
legal entity (the shareholders are not responsible from the legal point of view for the company's
debts or obligation), separate from the persons who own it.
As a general rule, we may say that any legal or economic unit which controls economic
resources and is accountable for those resources is an accounting entity.
The substance over form principle
When assets are recorded, it is respected first the economic financial point of view and after
this, the juridical interference. (financial leasing)

The going concern assumption (continuity of activity convention). An underlying

assumption in accounting is that an accounting entity will continue in operation for a period of
time sufficient to carry out its existing commitments.
The assumption of continuity leads to the concept of the going concern. In general, the
going concern assumption justifies ignoring immediate liquidating values in presenting assets
and liabilities in the balance sheet. The going concern principle assumes an indefinite life for
most accounting entities. (seasonally activities)
Accrual convention (the independence of financial year principle). This principle states
that any transaction should be registered in the moment when it happens and not in the moment
of paying or receiving the money.
For example, a company sells merchandises in its total value of $400, on January, the 2 nd
2015 and will receive the money later on a certain maturity date, which is March, 3 rd 2015. The
accrual convention says that the company should register the transaction in the moment it was
generated (on January, the 2nd 2015) and not in the moment it will receive the money (Accounts
Receivable) which is March, 3rd 2015.
Consistency (permanence of methods). The same procedures used to collect accounting
information should be used each fiscal period; in the absence of this standard it is not possible to
make decisions and comparisons.
Prudence (conservatism). This standard requires that all losses are to be shown in
financial records if there is a reasonable change that such problems will occur; gains and related
financial benefits, however should not be reflected in records until really occur. Further on, in
accounting will register elements for the minimum value between book value and inventory
value.
This principle is important since many accounting decisions do not have a single right
answer. Therefore, a choice between alternative assumptions is necessary. This concept guides
the accountant faced with alternate measurement to select the option with the least favorable
impact upon the net income and financial position within the current accounting period.
The money measurement concept. This principle means that money is used as the basic
measuring unit for financial reporting.
Money is the common denominator in which accounting measurements are made and
summarized. The USD, or any other monetary unit (RON) represents a unit of value. Implicit in
the use of money as a measuring unit is the assumption that the USD (RON) is not a stable unit
of value. The prices of goods and services in economy changes over time. When the general
price level (the average of all prices) increases, the value of money (that is, its ability to
command goods and services) decreases.
According to the stable USD (RON) concept, subsequent changes in the purchasing
power of money do not affect the amount used for the evaluation of the event when it was
recorded in the accounts.
The cost (historical cost) concept. A fundamental concept of accounting, closely related
to the going concern principle, is that an asset is commonly entered in the accounting records at
the price paid to acquire it. This price is called acquisition cost because it means resources used

in order to bring the assets in the patrimony. This cost is the basis for all subsequent accounting
records related to the asset acquired.
Double entry. This principle is based on the fundamental accounting equation:
ASSETS = LIABILITIES + OWNERS EQUITY
Each transaction supposes at the same time at least two changes in the patrimony
substance. That means that minimum two accounts are going to be used in connection, in order
to reflect a business transaction (because for each item is used one account to reflect its existence
and its changes). The accounts used should be affected in different ways, because they reflect
two images of the same patrimony (assets and equity or assets and liabilities etc.).
Double entry applied for the accounts, used as a concept, can be summarized in the
correspondence existing between:
DEBIT ---------------------------------- CREDIT
Anyway, each phenomenon that occurs should be first analyzed from two points of view :
what is it? and where does it come from? And then registered with the inherent changes that
produces on the fundamental accounting equation.
The matching principle. This is a fundamental principle for determining the net
income of a company and preparing an income statement.