Importance of Conceptual Framework in Accounting
The concept of not generating profit for a profit organization is not realistic. Profits must be generated to meet expenses and keep the organization running. Most organizations are charities, but even donations must pay bills, and donations have been abandoned nowadays. These organizations’ maintenance and operation have proved to be more expensive than the number of donations collected. Every nonprofit organization that owns office space or a building will require profits to pay rent.
Private companies have the flexibility to hold cash, but the nonprofit organization does not have it. And they should not do it because that is not the reason, they have established the organization. However, they are still having the responsibility of meeting the needs of their constituents based on mission statements. Nonprofit organizations do not have shareholders like private companies, whose investors can buy shares to earn money. They make money from their creativity and innovation. The amount of money is directly used to fund their organization programs and activities.
Besides, almost all nonprofit organizations do not have many volunteer workers, so they need to appoint employees to run the organization.
Therefore, an organization has to generate profits to have the ability to pay employees according to their level.
Generally, 50% of the money raised by a nonprofit organization supports the employee’s salary.
Lastly, a nonprofit organization has to generate profit to benefit the public. Contributions and donations are revenue generated.
They have to use some creative funding methods, such as major events such as concerts, marathons, and community celebrations. The organization uses the funds to carry out activities to fulfill the organizations’ objectives that benefit the public.
Finally, there is also a nonprofit business; they need to generate profits to create a better society. The organization’s profit is used to provide goods or services to groups that were created to help the nonprofit organization.
Importance of conceptual framework for accounting.
An accounting framework is a coherent system of inter-related objectives and fundamentals that should lead to coherent standards that determine the nature, function, and limitations of financial statements and financial statements. The main reason for developing a conceptual framework is that a framework is given to establish accounting standards, a basis for resolving accounting disputes and fundamentals that are not to be replicated in accounting standards. Also, conceptual frameworks can be classified in terms of the specific function of management accounting within the management process in organizations—furthermore, how the utility of the management accounting process results can be tested. The conceptual framework is a criterion that can be used to assess the value of processes and work technologies used in management accounting and capabilities that are necessarily linked to the management accounting function’s effectiveness overall.
The conceptual framework plays an important role in accounting. This is because the conceptual framework helps in a better understanding of accounting information, for example, general-purpose financial reports and, in turn, their confidence in IFDs. Furthermore, the conceptual framework promotes cohesion by giving a basis for selecting the most appropriate accounting treatment allowed by financial accounting standards. It does not assist in dealing with events, transactions, situations, or situations with any financial accounting standard developed by AAOIFI.
This framework helps users of financial reports understand the information enclosed in financial statements prepared under financial accounting standards.
The conceptual framework directs the regulator of the development of future financial accounting standards.
Management’s subjective decisions when preparing financial statements and other financial reports. Besides, it helps national bodies determine national standards in raising national accounting standards. Additionally, it gives those interested in AAOIFI information about its approach to preparing the financial accounting standard. “In my view, the conceptual framework is an important document for the board as well as the constituent.
The conceptual framework is essential for investors.
This is because it provides risk capital to the investor and the advisor is concerned with the risk inherent to their investment. Information is needed to help determine whether to sell, buy, or hold shares.
Information that enables an enterprise to assess an enterprise’s ability to pay dividends is interested in shareholders. Employees and their representative groups are also interested in their employees’ stability and profitability and information that enables them to assess a company’s ability to provide retirement benefits, employment opportunities, and remuneration.