Judgement in Accounting - Essay Example

? Judgement in Accounting The purpose of this essay is to argue the fact that accounting is simply mathematics and a precise subject as compared to the belief that it involves judgment and other critical thinking tools. First of all, by definition, accounting is an important tool used in evaluating the operations of a business through the use of bookkeeping methods that related to financial records of business transactions and preparations of asset statements. Secondly, accounting follows a framework popularly known as “The Conceptual Framework for Financial Reporting”. In addition, the overall accounting structure and basic formation of reporting, assists in conceptualizing accounting better. The knowledge of accounting principles, procedures, and rules is valuable to business and its eventual success in any given financial period. Financial records are made numerically and any accounting analysis on them should be numerical (Anthony, 1993). The “International Public Sectors Accounting Standards Board” sets standards and Recommended Practice Guidelines in accounting. They are used by government agencies in the national, regional, and local governments. According to this board, the Conceptual Framework for Financial Accounting is mainly used for preparation and presentation of general purpose financial reports (Needles & Powers, 2012). The Conceptual Framework also extends its authority to public sectors social security funds, trusts, statutory authorities, as well as, international governmental organizations. However, the general purpose financial reporting has the main objective of providing financial information about a business that comes in handy when looking for current investors; reports to creditors when requesting for loans; and decision making regarding purchases, sales, equity holding and debts in line with the profits or returns. There are two types of financial reports. They include general Purpose Financial Reports and Special purpose Financial Reports. General Purpose Financial reporting refers to a central component of enhancement and support, of the financial reports by public sector entities. The intentions of these reports is to satisfy the information requirements, for users who may be in a position that lacks enabling factors for preparation of financial reports that are tailor-made, to meet their information needs. They also contain a number of reports each of which gives a response that is within the scope of financial reporting, with respect to the objectives of financial reporting. However, the scope of financial reporting also includes guidelines on how other various events and activities can be reported in the financial report. On the other hand, Special Purpose Financial Reports (SPFRs) are financial reports whose sole purpose is to respond to specifications for users that bear authority, to make such requirements and for a specific purpose (Piper, 2013). There are characteristics that guide the qualitative nature of important financial information. These characteristics include comparability, timeliness, verifiability and comprehensibility. However, the basic qualitative characteristics include relevance and faithful representation. For financial information to display relevance, it should influence the decision made by the user (Balakrishnan & sprinkle, 2008). Failure to consider the importance of the relevance of the information will create a niche, even after the decision is made. However, the financial information must display a predictive value and a confirmatory value to attain relevance. Moreover, the confirmatory value should either confirm or differ with the evaluations that were previously made. On the other hand, financial information that exhibits a predictive value must also exhibit a confirmatory value because these two values are interrelated. For instance, a company’s financial report can be used to project future earnings for the company (Gupta, 2009). However, it should also be verified that the method of prediction had been used previous and succeeded. Therefore the predictive value and confirmatory value disregard any need for judgement and critical thinking in accounting practices. It is also worth noting that financial information must display materiality and reliability. Financial information could be described as material if any errors, be it omission or misstatement, will force the decision maker to take a totally course of decision making. The course must be far from the correct and required decision. In other words, relevance is a superset of materiality. In this case, this assumption is being made on the basis of size or nature. However, there is no standard of measure for materiality and relevance (Porter & Norton, 2013). The fundamental qualitative characteristic of faithful representation refers to the exact representation of the situation as it is. It should therefore be neutral, unbiased, complete, significant, error-free and sufficient enough to represent the phenomenon at hand. In contrast to the above requirements, it is difficult to attain perfection and, therefore, the representation should be as close as it possibly can. This makes it easy to display the maximum truth about the phenomenon. It, therefore, implies that there are minimum errors and omissions to the representation. For instance, an approximation made in a report that is close to the actual value, displays faithful representation with the condition that the method of approximation and estimation is clearly described. This is contrary to the expectation that faithful representation displays useful information. For instance, a company may receive subsidies and property through a government grant (Ryan, 2004). Faithful representation would display the value of such property according to the acquisition cost which is no cost at all. Such information is relatively not important since a report such indicate the actual value of an asset in spite of the method used to acquire it. In application of the fundamental quality characteristics, the main objective is to aid the user of the report to make reasonable, profitable and correct decisions. Therefore a two-step process must be followed to ensure that the characteristics are achieved. The first step would be the identification of the economic situation to be reported on. The second step would be displaying the type of relevant information required with respect to the economic situation that will be faithfully represented. As a result there is barely any need for objective thinking and judgement in accounting (Warren, 2013). Principles guiding accountancy are general concepts that set the guidelines and rules regarding the field of accounting. They are popularly known as the ‘Generally Accepted Accounting Principles.”They contain two categories of the basic principles, the rules and standards, as detailed by the FASB and the generally accepted practices. These principles come in handy during preparation of financial statements for public release, company audits among others. Moreover, these principles prove that accounting is simply mathematics and not open to judgement (Weygandt, 2013). Some principles in the category of basic guidelines are as follows. The first one is the economic entity assumption principle. It states that a business, be it a sole proprietorship or company, is a separated economic entity. Therefore all busy records should be separated from the owner’s personal financial records. However, it is important to note that legally, a sole proprietorship and its owner are regarded as one financial entity. The second one is the monetary unit assumption. It assumes that economic transactions are recorded in dollars. Therefore accountants using foreign currencies assume the effect of inflation while making conversions from one currency to the other. The third principle is the principle of time period assumption (Anthony 1993). It assumes that reports of transactions and other business activities can be made a short periods. However, the time interval for the reports is indicated at the title of the financial statements. The fourth one is the cost principle which assumes that the word cost defines the amount incurred during original acquisition of the purchased item. Effects on prices such as inflation, appreciation, depreciation and deflation are not considered. As a result of this assumption, amounts indicated on financial statements are referred to as historical cost amounts. The other principle is the full disclosure principle. It indicates that information that is of importance to creditors and investors should be disclosed after consideration of faithful representation and relevance. The other principles include the going concern principle, matching principle, revenue recognition principle, materiality, among others. However, the basic rules of accounting define the condition for debiting and crediting entries in book keeping. This principles and rules clearly indicate that only mathematical factors influence the outcome and decisions made in accounting (Weygandt, 2013). CONCLUSION In relation to the argument in this essay, the Conceptual Framework indicates that financial reports can be used to create models. These models are eventually used in making judgments and estimates regarding data. In addition to that, decision making in accounting is done on the basis of figures and data provide and not use of judgement and reasoning. This is clearly seen from the principles and rules that guide accounting processes and practices. References Anthony, N. R. 1993, Tell It Like It Was: A Conceptual Framework for Financial Accounting. New York, NY: Richard D Irwin Balakrishnan, R., Sivaramakrishnan, K., & Sprinkle, G. 2008, Managerial accounting: models for decision-making. Hoboken, N.J., Wiley. Farris, S. 2009, Nonprofit Bookkeeping & Accounting For Dummies. New York, NY: For Dummies Flood, M. J. 2012, Wiley GAAP 2013: Interpretation and Application of Generally Accepted Accounting Principles. New York: Wiley Gupta, A. 2009, Financial accounting for management: an analytical perspective. Delhi, India, Dorling Kindersley (India) Pvt. Horngren, C. T., & Harrison, W. T. 2008, Financial and managerial accounting. Upper Saddle River (N.J.), Pearson/Prentice Hall. Kotler, P. 2011, Framework for Marketing Management. New York, NY: Prentice Hall Needles, B. E. et al. 2010. Principles of Accounting, Financial Accounting Series. Belmont, CA: Cengage Learning. Needles, B. E., & Powers, M. 2012, A guide to international financial reporting standards. Mason, Ohio, South-Western. Piper, M. 2013, Accounting Made Simple: Accounting Explained in 100 Pages or Less. London Simple Subjects Porter, G. A., & Norton, C. L. 2013, Using financial accounting information: the alternative to debits and credits. Mason, OH, South-Western/Centgage Learning. Ruegg, L. D. & Venkatrathnam, M. L. 2003, Bookkeeping Basics: What Every Nonprofit Bookkeeper Needs to Know. St Paul, MN: Amherst H. Wilder Foundation Ryan, B. 2004, Finance and accounting for business. London, Thomson Learning. Warren, C. S. 2013, Managerial accounting. Mason, Ohio, South-Western Belmont, CA: Cengage Learning. Weygandt, J. J. 2013, Accounting Principles. New York, NY: Wiley Read More