Accounting Theory and Standards - Assignment Example

Accounting Theory Contents Answer 3 Answer 2 6 References 9 Answer Accounting theory provides some disciplinary guidelines which help to examine the frameworks, assumptions and methodologies of accounting principles. An accountant operates all the accounting procedure within a broad socio-economic environment. Accountant cannot be able to control all the aspects which are related to this procedure only by using his knowledge. In this case, some conceptual guidelines are required for compartmentalizing the whole procedure. Again it is very difficult to discuss on one particular topic without relating with other areas of knowledge. So it is not possible for one person to complete the whole cycle. Accounting method is one scientific method of classifying, recording and summarizing transactions in such a way that the transactions are easily understandable by any person related to any particular company and its external stakeholders such as auditors, share holders, government etc. Financial position of an organization and operating result of a business entity can be determined by using such method (Banerjee, 2009). Accounting theories help to determine the amount and nature of income, the increase or decrease in the volume of capital employed, the nature and amount of actual losses, possible losses and expenses, the values and nature of outstanding liabilities & assets owned, any specific amount due to the business and their nature, any specific amount due to be paid to the government and their nature, the reports regarding interpretation of the financial results of a business entity etc. Objectives of accounting theories are – to check the fraud cases and misappropriation of money, to detect any defalcations, to confirm about the arithmetical accuracy of all the books of accounts, to detect various errors and rectify those errors through the appropriate entries in the journal proper, to find out the net profit or net loss or deficit /surplus for any particular period, to furnish information regarding cash & credit; purchase & sale, to find out the position of liabilities and assets on a particular date, to help the management by supplying financial reports, relevant data and accounting ratios; to maintain various ledger accounts in more efficient way etc (Carmichael and Graham, 2012). In case of classification this can be observed that there are different types of accounting theories which show different knowledge areas of accounting procedure. The brief details of the types of accounting theories are as follows. Descriptive Theory – This type of accounting theory shows descriptive approach. It explains the causes and effects of the day to day events of a business and helps the accountant to treat that event in the form of accounting transaction. This theory directs the accountants for maintaining a detailed and descriptive accounting procedure. Normative Accounting Theory – This type of theory is mainly concerned on the future acts of a business entity on the basis of present financial situation. It helps to solve out critical problems which arise in daily business practices. It also provides independence on the current accounting practices. Communicative Accounting Theory – This type of theory forecasts the future of an organization in an exact way. According to such forecasting process, management of organization can take appropriate strategies for the benefits of business. Chances of risk can be minimized and amount of losses can be mitigated by using the above mentioned accounting theory (Deegan, 2009). Inductive Accounting Theory – This theory helps for detailed analysis of any particular transaction within the procedure of a business. Again this can be said that the analysis can be done not only the present transactions but also on the past transactions. From the analysis part of the past financial transactions, managers and accountants of a company can get knowledge and experience. After that they can anticipate the trend of business in more efficient way. Business decisions and strategies can be formulated by using this accounting theory. Evaluative accounting Theory – This theory focuses on the quantitative quality and qualitative quantity of any event and its related accounting records (Dworsky, 2009). Different organization selects different type of accounting theories according to the nature of business and operational procedures. Some factors also affecting an organization for choosing accounting methods for the purpose of business. These factors are – Local Laws – All companies have to start business operations after fulfilling the requirements of legal documentation of local government authority. According to the local laws, government rules, regulations and compliances, company decides its accounting procedure and applies accounting theories. If accountant has the good knowledge regarding the nature & activities of the company and the applicable accounting law then he can easily select the appropriate accounting theory for better understanding the book of accounts (Weil, Schipper and Francis, 2012). Stock Market – If companies issue stocks or shares through stock market exchange then the accounting procedure of these companies are different than those companies which are not issuing shares to the public. As per the reporting standards of different stock exchange, companies are applying accounting theory in business practices. Perception – Selecting accounting theory always depends on the perception of business. Management of an organization decides which accounting theory provides competitive advantages than the others. If company decides to focus on revenue recognition then management selects the related accounting theory. Again company can also decide to focus on the depreciation based accounting theory if that is suitable for their business practices. Every organization has to decide either cash based accounting theory or accrual based accounting theory for the purpose of paying taxes. In very rare cases, hybrid method of these two above mentioned accounting theories can be observed. For example it can be said that construction business companies always maintain accrual based accounting theory as such kind of businesses are generally involved in long term contracts. Small business entity would like to maintain the accounting procedure on cash basis because it is a simple way for keeping records of all the business related transactions. Cash method focuses on the income, expenses, receipts and payments whereas accrual method focuses on the economic performance of an organization. So this can be said that using such kind of theories completely depend on the size, functional activities and nature of business organization (Kimmel, Weygandt and Kieso, 2010). Answer 2 Accounting standards can be defined as the authoritative standards for the purpose of financial reporting. These are the basically primary sources of ‘Generally Accepted Accounting Principle’ (GAAP). These standards specify the ways for measuring, recognizing, presenting and disclosing financial transactions in the financial statements. The main objective of accounting standard is to provide financial information to the shareholders, investors, creditors or lenders, contributors, government, external auditors and other governing bodies in a clear and accurate way. The related parties of a business organization can take decision after getting information from the financial statements which are made after following the guidelines stated in accounting standards. Now it can be observed that choice of accounting method is reduced after application of accounting standard. Accounting standard has certain guidelines which have to be followed by every organizations and business entity. These guidelines reduce the scopes for using different accounting methods and policies in the business practices. Accounting guidelines fix the way of doing valuation of inventories, treatment of goodwill, treatment of expenditures, methods of depreciation, amortization and depletion, translation or conversion of foreign currency items, valuation of investments, treatment of contingent liabilities, valuation of fixed assets, recognition of profit in case of long term contracts etc (Brown, 2013). So business organizations follow only the specific accounting policies and theories for doing the above mentioned accounting works. Corporation law or corporate law is such kind of study which shows how directors, creditors, employees, shareholders, other stake holders such as consumers, community and environment interact with one another. Corporation law also indicates special accounting theory and practice which reduces the options of accounting theories to a business concern. It specifies the duties and responsibilities of directors and management, structure of corporate finance, procedure of liquidation, insider dealing etc. Corporate law often divides into corporate finance and corporate governance. In case of corporate finance it can be observed that Corporation law determines the rules on how capital is used in business. Now if any company wants to use its capital in different way in its business activities then the company fails to follow accounting standard guidelines and corporation law. Again various conceptual frameworks reduce the number of permitted alternative accounting theories. Conceptual framework provides a general frame of reference by which accounting practices can be done and evaluated in an organization. Conceptual framework also guides the development of new procedures and practices. Accounting theory can be used to explain the existing business practices and to obtain better understanding them. But the most important goal of accounting theory should be to provide a set of logical principles for developing and evaluating sound accounting practices. All type of accounting theories may not provide such appropriate logical principles which are beneficial for the growth of business activities. For this reason, each company has to follow specific guidelines and accounting theories which are mentioned in corporation law, accounting standards and conceptual frameworks. So these scenarios reduce the chances of applying other alternative accounting theories in business practices. Standardization is one type of process which helps to develop and implement a technical standard. This technical standard maximizes safety, quality, compatibility, repeatability, interoperability etc. In case of applying accounting theories, this can be said that standardization can resolve the issue of reducing different choice of accounting methods in business practices. Sometimes organization has to maintain some rigid accounting methods as it has to follow the accounting standards, corporation law and conceptual frameworks. These rigid accounting theories and methods are not suitable for future growth of business and company may face several problematic situations for running day to day operational activities. For this reason, a proper standardization is required. This standardization can provide a developed accounting policies and procedure for the future benefits of business. Management can operate the business operation in more advanced way. This type of accounting method reduces the chances of fraud cases and mal practices in the business operations and accounting record keeping procedure. Standardization can resolve the coordination problem among various interested parties in a business organization. Such coordination problems sometimes bring financial losses within a business entity. If the business can control these coordination problems after applying standardized accounting theories then financial strength of business become stronger than the earlier days. References Banerjee, A. 2009. Financial Accounting. New Delhi: Excel Books India. Brown, P. 2013. Financial Accounting and Equity Markets: Selected Essays of Philip Brown. London: Routledge. Carmichael, D. and Graham, L. 2012. Accountants Handbook, Financial Accounting and General Topics. Beijing: John Wiley & Sons. Deegan, C. 2009. Financial Accounting Theory. New York: McGraw-Hill. Dworsky, L. 2009. Understanding the Mathematics of Personal Finance: An Introduction to Financial Literacy. New Jersey: John Wiley & Sons. Kimmel, P., Weygandt, J. and Kieso, D. 2010. Financial Accounting: Tools for Business Decision Making. Beijing: John Wiley & Sons. Weil, R., Schipper, K. and Francis, J. 2012. Financial Accounting: An Introduction to Concepts, Methods and Uses. Boston: Cengage Learning. Read More