Accounting theory

A document that explains the accounting theory and role in practice

1. DAC 601: ACCOUNTING THEORY AND ITS ROLE PRESENTED BY:REHEMA MERCY MINOO

2. A theory is a set of assumptions, propositions, or acceptable facts that provide a plausible or rational explanation regarding the relationships between events . The construction of a theory is a process that requires assumptions that can allow generalization , which can be acceptable and easily understood Introduction: Theory

3. It is the provision of information about the reporting entity’s financial performance and financial level(position) that is useful to users to asses the stewardship work of agents(management) and make economic decisions ACCOUNTING

4. Accounting theory is the basic assumptions, definitions, principles and concepts that underlie the financial reporting applicable to entities when preparing their accounting reports. It provides a logical framework for accounting practice Can also explain the reason behind existing rules and procedures of reporting. ACCOUNTING THEORY

5. The accounting theory is concerned with provision of both financial and non-financial information for decision makers The level of dynamism in the accounting environment has increased the need to apply the accounting theories. Cont’d

6. The basic objective of accounting theory is to provide a basis for prediction and explanation of accounting events and behavior There is no single comprehensive theory on accounting Accounting is viewed on different levels as a language, ideology, information system, historical record and current economical reality as well as a futuristic view of the organization. Nature of accounting theory

7. Conceptual frameworks Hypothesis and theories Accounting legislations Concepts Components of accounting theory

8. Inputs to policy making Political factors Economic conditions Business activities Dynamic accounting environment Complexity in the practice of accounting practice. Factors necessitating of accounting theory

9. Transaction concept- it is the exchange of assets from one entity to another or exchange of one asset for another within the same entity Accounting period Concept- is the span of time covered by a set of financial statements. This  period  defines the time range over which business transactions are accumulated into financial statements, and is needed by investors so that they can compare the results of successive time  periods Concepts of accounting theory

10. Full disclosure concept- involves effective summarization, classification, aggregation as well as explanations with the object of presenting a true and fair view of the activities of an enterprise Realization concept- revenue is recognized as it has been earned. The payments made for assets and services can only be recognized after they have been offered Cont’d

11. Cost-benefit concept- Optional information should be included in the primary financial statements only if the benefits of providing it exceed the costs. The concept of cost-benefit is applied generally in management accounting when marginal analysis is done to establish whether or not a project, product or investment line is profitable to the organization. Cont’d

12. Materiality concept -An item is material if knowledge of the item would affect the decision of an informed user, therefore, this is a somewhat nebulous concept. All Material items must be reported. This concept is more useful in the field of auditing in accounting profession. An item can be material either in amount or in nature. Materiality in amount is relative to the size of the amounts on a company’s financial report (e.g. $50,000,000 may not be material …) Cont’d

13. Stewardship role: the basic need for accounting in its early development period. The main role was to steward the owners wealth and involves an orderly recording of business transaction Financial reporting: this has come as an advancement of the reporting framework and was fully developed with the establishment of limited companies as a result of company law Role of Accounting

14. Management Accounting: Developed in the 20 th Century as a result of industrial revolution with the primary function of providing the entity’s management with information necessary for decision making Cont’d

15. Financial Accounting Standards Board (FASB)- The primary role is to establish and improve the financial accounting and reporting standards that foster reporting by non-governmental entities. This is accomplished through comprehensive and independent encouraging broad participation of all stakeholders. International Financial Reporting Standards (IFRS)- works to develop a single set of high quality, understandable, enforceable and globally accepted international financial reporting standards (IFRSs) through its standard-setting body, the IASB Some accounting regulatory bodies

16. Governmental Accounting Standards Board (GASB)- refers to the independent organization that establishes and improves standards of accounting and financial reporting for U.S. state and local governments.  Public Company Accounting Oversight Board (PCAOB)- it is a nonprofit corporation established by Congress to oversee the audits of public companies in order to protect the interests of investors and the public in the preparation of informative, accurate and independent audit reports. Also oversees the audits of broker-dealers, including compliance reports filed pursuant to federal securities laws, to promote investor protection.   Cont’d

17. American Institute of Certified Public Accountants (AICPA) -is the world’s largest member association representing the accounting profession, with nearly 386,000 members in 128 countries and a 125-year heritage of serving the public interest. It’s members represent many areas of practice, including b usiness and industry , public practice , government , education and consulting . The AICPA sets ethical standards for the profession and U.S. auditing standards for audits of private companies, nonprofit organizations, federal, state and local governments.    Cont’d

18. International Federation of Accountants . This body sets the International Public sector Accounting standards ( IPSAS ) which are to be adhered to by all the government/Public entities through the International Public Sector Accounting Standards Board (IPSASB) Cont’d

19. Baker et al. (2015). The Historical Evolution from Accounting Theory to Conceptual Framework in Financial Standards Setting. The CPA journal, 85 (8 ). CFI. (2019, March 21). Accounting ; Financial accounting Theory. Retrieved from Corporate Financial Institute: https :// corporatefinanceinstitute.com/resources/knowledge/accounting/financial-accounting-theory Eldon S. Hendriksen . (1965). Accounting Theory. Homwood -Illinois: RICHARD D. IRWIN INC . Skyler , H. (2018, November 09). The History of Accounting Theory. . Retrieved March 19, 2019, from Bizfluent : https://bizfluent.com/about-5207102-history-accounting-theory.html References