TOPIC NO.

: 1
TOPIC TITLE: A Conceptual Framework for Accounting
Finance
HOURS / SUNDAY: 5 Hours (2 meetings)
MEETING QUALITY: 2 meetings
SPECIFIC INTRUCTIONAL OBJECTIVES: After completing this topic students
can:
1. Describe the conceptual framework of financial accounting.
2. Provides an understanding of the first level conceptual
framework (basic objective) of financial reporting.
3. Provide an understanding of the second level conceptual
framework (qualitative characteristics of accounting
information from financial statements).
4. Provides an understanding of the third level conceptual
framework (the concept of recognition and judgment).

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 TOPIC I
FINANCIAL ACCOUNTING COSEPTUAL
FRAMEWORK

A. preliminary
To be able to study accounting properly, it is necessary to understand the basics
and guidelines of accounting work which are called the basic concepts of accounting.
As a guide in the world of accounting in Indonesia, IAI has published a book of
Financial Accounting Standards (SAK) which is a collection of accounting principles,
procedures, methods and techniques that regulate accounting work in the context of
preparing financial reports, especially those aimed at outside parties such as;
creditors, government, banking and others. So Financial Accounting Standards are
guidelines for those who do accounting in Indonesia.
To study accounting can be distinguished according to the scope or scope
includes;
1. Financial Accounting
2. Management Accounting
3. Government Accounting
4. Tax accounting
Financial accounting is a field of accounting that specializes in its functions and
activities in processing accounting data from a company and preparing financial
reports to meet both the needs of external and internal parties of the company.
Because the purpose of financial accounting is to provide information to all interested
parties, the financial statements must be general in nature so that they can be accepted
by all interested parties. The financial report in question must be able to show the
financial condition and results of the company's operations. The financial statements
must be able to provide a historical series of economic sources, and the company's
obligations and activities that result in changes to these economic resources and
obligations, which are stated quantitatively in units of currency. In other words,
financial accounting is a process that ends in the compilation of the financial

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 statements of the company in an integral manner, for use by both external and internal
parties of the company.
The financial accounting conceptual framework consists of three elements or
elements, namely:
1. The first level is about the objectives of financial reporting
2. The second level consists of the Qualitative Characteristics of Accounting
Information and the Elements of Financial Statements
3. The third level, which contains the concepts of measurement and value, consists
of Assumptions, Principles and Constraints.
B. First Level Conceptual Framework (Basic Goals)
The objectives of financial reporting are:
a. Provides useful information for investment and credit takers
b. Provides information that helps current and potential investors and creditors and
other users assess the amount, timing and uncertainty in cash flows
c. Provide detailed information about economic resources, claims against them and
their changes.
C. Second Level Conceptual Framework (Qualitative Characteristics of
Accounting Information and the Elements of Financial Statements)
a. Qualitative Characteristics Of Accounting Information
The types of decisions, the methods used in decision making, the types of
information that can be obtained from other sources and the ability to process
information that are owned by each of the users of the financial statements vary
widely. As a consequence, in order for the information presented in the financial
statements to provide maximum benefit, there must be a relationship between the
users of the report and the types of relationships between the decisions to be
made. This relationship will only be realized if the information is presented in
accordance with the needs and in an understandable form. The comprehensiveness
of information is related to the quality of information, namely the level of ability
to perceive the importance of the information by its users.
In addition to the nature that must be understandable, in order for
information to provide maximum benefit, it must have other important

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characteristics which in the realm of accounting are grouped into two categories
as follows:
1. Primary qualitystated that relevance and reliability are the two main qualities
that make accounting information useful for decision making. Relevance
consists of three elements, namely Predictive Value, Feedback Value,
Punctuality. Meanwhile, reliability / reliability consists of being able to be
checked, honesty of presentation and neutrality.
2. Secondary Quality states that information about a company is more useful
when compared to similar information about another company (comparability)
and with similar information about the same company at different times
(consistency).
• Predictive Value, Accounting information is expected to be able to help to
make predictions about the outcome of past, present and future events.
• Feedback Value, Accounting information can also be used to support or
improve previous forecasts.
• Punctuality, A good report is one that is there when it is needed. The faster
the information, the better. In today's information age, those who master
information will be superior to those who do not. Therefore financial reports
must be prepared as quickly as possible.
Example:
Financial reports that are prepared should be adjusted to the needs of
management, so that they can assist in making the right economic decisions.
• Checkable, A good financial report must be able to prove the origin of the
transaction. Every record in accounting must be supported by evidence that
can be shown to others such as: receipts, invoices and so on.
Example:
Each payment transaction must be submitted a receipt from the party
receiving the money. In the case that receipts from the recipient of money are
difficult to obtain, such as taxi fees, then there must be a receipt from the
company employee who paid the fee which, as much as possible, has to be
approved by their supervisor, so that every sales transaction must be invoiced.

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• Honesty of Presentation, The purpose of this concept is that there must be a
relationship or a match between accounting numbers and descriptions and
their sources. In other words, do the numbers reflect the real situation? .
Example If a company's financial statements report sales of Rp. 100,000, -
while the actual figure is only Rp. 70,000, - the report is not an honest
presentation.
• Neutrality,A good financial report is an objective report, which means that it
is in accordance with the original data. The data may be processed in various
ways to suit the needs of the user, but cannot be manipulated so that it only
benefits someone or one party.
Example:
The financial statements for company leaders were changed to conform with
tax regulations in the framework of financial statements for taxes. This is
possible because SAK gives freedom to choose methods for decision-making
purposes while tax regulations do not, however it is not justified if reports for
management, reports for taxes, reports seeking credit numbers are changed
according to their needs.
• Comparability / Comparability, A good report is a report that can be
compared with one another. From comparing two financial reports,
information about the development of a company can be obtained with a note
that the two companies use the same accounting method, with the same type
of business and company scale.
Example:
If company A uses the straight-line depreciation method for its fixed assets
while company B uses the declining balance method, it is difficult to draw
conclusions from the results of the comparison.
• Consistency, If a company applies the same accounting treatment for the
same events over several periods, the company is considered consistent in
using its accounting standards. This does not mean that the company cannot
switch from one method to another. It is possible to change methods, but the
change is limited to situations where it can be shown that the new method is

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 preferred over the old one. Then the nature and effects of this method change
and why should be disclosed in the financial statements for the period in
which the change was made.
Example:
Company A from its inception until 1997 used the cost of goods method to
value its inventory, and starting in 1998, the company used the cost of goods
or lower market price method to value inventory.
b. Elements of Financial Statements.
In order to provide an explanation of the meaning of the elements of financial
statements, it can be explained as follows:
• Treasure, Possible future economic benefits to be obtained or controlled by
an enterprise as a result of past transactions or events.
• Obligations, Possible future tradeoffs of economic benefits arising from the
present obligation of a particular entity to deliver goods and services to
another entity in the future as a result of past transactions or events.
• Equity, The residual value of the assets of an entity after deducting the
obligations. In a commercial company equity is ownership.
• Owner's Investment, Additions in the net assets of certain companies
resulting from the transfer of other entities or additional ownership. Assets are
the most commonly accepted form of owner's investment, but these revenues
include services or satisfaction or conversion of corporate liabilities.
• Distribution to Owner, Reduction of certain company assets resulting from
the delivery of goods and services or the incidence of liability for companies
to their owners. Distribution to owners reduces ownership (equity) in a
company.
• Comprehensive Income,Changes in the equity (net assets) of an entity during
a period from transactions and other events and circumstances at non-owner
sources. This includes all changes in equity during a period except those
arising from owner's investments and distributions to owners.
• Income, Inflows or other additions to assets of a unit or settlement of an
obligation (or a combination of both) during a period of delivery or production

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 of goods, delivery of services, or other activities that are the primary
operations of the entity.
• Load, The outflow or other use of assets or the occurrence of liabilities (or a
combination of both) during one period from the delivery or production of
goods, delivery of services, or other activities that are the main operations of
the entity.
• Advantage, Additions in equity (net assets) from indirect transactions of a
unit and from all other transactions and other events and situations that affect
the entity during the period except those that arise from the income and
investments of the owners.
• Loss, Deductions in equity (net assets) from indirect or incidental transactions
of a unit and from all other transactions, events and circumstances that affect
the entity during the period except those that arise from expenses and
distributions to owners.
D. Third Level Conceptual Framework (Concept of Recognition and Assessment).
The third level of the conceptual framework relates to the concept of recognition
and valuation which is used to obtain answers to controversial issues regarding
financial reporting, the concepts are separated into assumptions, principles and
constraints.
1. Assumptions
a. Economic Entity Assumption, This concept requires a clear separation
between a company / business unit and other parties, including the owner
himself. What is meant by strict separation is that the assets and debts of the
company cannot be mixed or equated with the assets and debts of the owners.
Likewise, company costs / expenses must be separated from those of the
owner. The rights of the owner to the company are reflected in the capital
estimate.
Example:
• Mr. Romi pays employees a salary of IDR 500,000 per month. One of Pak
Romi's employees is a gardener in Pak Romi's private house. If Mr. Romi
pays his salary with company money, then the salary of employees who

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 work in his private home (for example Rp. 100,000) must be considered as
taking the capital or prive Mr. Romi, then the journals made by Mr. Romi's
company are as follows:

Salary Expense Rp. 400,000

Prive Tuan Romi IDR 100,000
Cash`Rp 500,000
• Mr. Rahman bought a motorbike with his personal money of Rp.
10,000,000. Due to the company's needs, the motorbike was eventually
used by the Salesman of Rahman's Company to offer the company's
merchandise. Therefore, the motorcycle must be considered as an
additional deposit from Mr. Rahman and be journalized:
Vehicle Rp. 10,000,000
Mr. Rahman's capital is IDR 10,000,000
b. Sustainability (Going Concern Assumption),This concept requires an
assumption that a company / business entity has an unlimited age, unless there
is evidence to the contrary. Even though in reality the form of a company such
as a Firm is very easy to dissolve legally, that is, if an ally leaves or if a new
partner enters. But in accounting it must be considered to have an unlimited
age.
Example:
• Firma Aminah bought a building for IDR 20,000,000 on January 1, 1996.
Even though in reality the value of the building was sold on December 31,
2000 for IDR 35,000,000, - an increase of IDR 15,000,000, - is stated in
the report. finances are not recorded until the building is actually sold.
However, the value of the building on the balance sheet decreases in
value, due to the depreciation assuming that the building will suffer
damage from year to year.
c. Monetary Unit (Monetary Unit Assumption),As we know the size for a
variety of objects such as rice is measured in liters or kg., Chickens are

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 measured in tails and so on. In accounting, the unit of measure used is money,
in this case in Indonesia, it is rupiah.
Example:
• Purchased a land area of 10 hectares. With a price of IDR 100,000.0000,
in this case the journal in the company is:
Land Rp 100,000,000
Cash Rp 100,000,000

We are not allowed to journal:

Land 10 Ha.
Kas10Ha
d. Accounting Period (Accounting Period Assumption),The most accurate
way to measure the results of a company's activities is to assess them when
the company experiences liquidation. But companies, governments, investors
and other users certainly cannot wait until then. Therefore financial
information must be published every period.
Example:
• Financial reports can be issued / compiled every year, quarterly or even
monthly.
2. Principles
a. Historical Costs, This principle requires that company transactions be
recorded at the exchange price or an amount of money that must be issued or
received from a transaction.
Example:
• The company buys a motorbike at the following prices:
➢ If paid in cash IDR 2,500,000
➢ If in installments, 20% down payment plus 12 months of installments
@ IDR 200,000
➢ If you buy more than 10 units, you will get a 10% discount
➢ For tax purposes, the vehicle is valued at IDR 3,000,000

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 So in accounting the value to be recognized is IDR 2,500,000, - that is, the
journal that is made if you choose to buy it in cash as follows:
Vehicle Rp 2,500,000
Cash Rp 2,500,000

And if purchased in installments, it will be journalized:

Vehicle Rp 2,500,000
Cash Rp. 500,000
Vehicle Purchase Payable Rp 2,000,000
When paying the excess payment above the principal price, it is an interest
expense.
b. Income and Expense Recognition, This principle requires that the
determination of revenues and expenses / costs be linked to the time of the
transaction, not to the time of payment. Income is calculated in accordance
with the principle of realization, namely for service companies when the
service / work has been completed and for trading companies when the goods
are sold (transfer of title). Meanwhile, costs are calculated when the service
has been enjoyed or has provided benefits to the company.
Example
• Mr. A printed the photo at Photo Studio Laris on March 27, 1999 and paid
Rp. 3,500 for the photo printing. The photo was completed by Photo
Studio Laris on April 2, 1999 and was only taken by A on April 4, 1999.
Journal for Photo Studio when paying print money dated March 27, 1999:

27-3-99 Cash Rp 3,500, -

Opinion. Wash Print Dit. Upfront Rp. 3,500, -

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 Journal for Photo Studio when the photo is finished printing on April 2,
1999:
2 –4-99Pendpt. Wash Print Dit. Upfront Rp. 3,500
Opinion. Wash Print Rp. 3,500

• On April 1, 1999 PD. Ali pays rent for a room for 1 year Rp.1,200,000
The journals made by PD Ali on April 1, 1999 are as follows:
1-4-99 Prepaid Rent of IDR 900,000
Cash Rp. 900,000

Journal made by PD. Ali end of the period December 31, 1999:
31-12-99 Rent Expense IDR 900,000
Prepaid Rental of IDR 900,000

c. Matching, To prepare periodic financial statements, income earned or

incurred in a particular accounting period must be matched appropriately with
expenses incurred in the same period. If the recognized revenue originates
from previous years or is partially deferred by the recognition for the next
accounting period or periods (at the time of recognition of revenue), then all
cost elements related to the deferred income must also be deferred in
accordance with the recognition of the income. Cost of goods or cost that has
benefits in future accounting periods or is useful for obtaining income in
future accounting periods. must be treated as an asset and then matched with
income in accordance with the period enjoying the benefits. The principle of
bringing together income and expenses means using a time basis in
accounting. If the recording is used on a cash basis, an adjustment is required
so that revenues and expenses show an up-to-date position. So the principle of
bringing together income and expenses aims to present a reasonable net
income for each accounting period.
d. Full Disclosure,The determination of what information should be presented in
the financial statements must be based on the consideration that the financial

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 statements provide sufficient information that can influence the judgments and
decisions made by users of the reports. This principle recognizes that the
nature and amount of information presented in the financial statements
illustrates or reflects the results of a series of considerations to achieve a
balance between the costs required and the benefits provided by the
information. This comparability of processing costs and operating benefits is
primarily intended to obtain sufficiently detailed information so as to be able
to make perceptual differences for report users and adequate classification so
that the information maker has an understandable character.
• In financial reports
• In the notes to financial statements
• In the attachment / supplement to the financial statements.
3. Constraints
a. Benefit-Cost,Often users of financial reports think that information is a free
commodity. But the compilation and disclosure of accounting information
knows that it is not free. The costs of providing the information should be
calculated together with the benefits received from providing the information.
Traditionally practicing accountants have enforced this constraint through
statements of “feasibility” (feasibility) and “practicality” (practical / not), but
it is only recently that competent bodies have considered cost-benefit analyzes
before deciding on anything. The benefits obtained must be greater than the
costs incurred. The difficulty with cost-benefit analysis is that costs and
particularly benefits are not always demonstrable or quantifiable. There are
various costs of possible court fees, the cost of disclosure to competitors, and
the cost of analysis and interpretation. Benefits are received by both
constituents (such as management control and tighter access to capital) and by
users (such as resource allocation, tax assessment and interest rate regulation)
but are generally more difficult to quantify than costs.
b. Materiality,An item is considered material if its loading or deletion affects or
changes the valuation or other parties. It is declared immaterial and therefore
irrelevant if loading or deleting has no impact on the decision maker. In short

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 it must make a difference or it should not be said. So the problem is its
relative size and importance. If the amount of the item is large enough in
comparison with the income and expenses, assets and liabilities or other net
income of the entity, the standards must be followed.
c. Industrial Practice, Another practical consideration, which is sometimes
inconsistent with basic theory, is the specific nature of some industries and
companies. For example, banks often report investment in certain securities at
their market value because these securities are often bought and sold, and
many argue that their cash equivalent price provides more useful information.
In the public works industry, non-current assets are reported in advance in the
balance sheet to emphasize the capital-intensive nature of this industry.
Agricultural crops are often reported at their market value because it can be
costly to find accurate cost of goods per crop. There are not many variations
on this basic theory, but they do exist,

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