NIIE NTT INSTITUTE OF INTERNATIONAL EDUCATION

Edexcel BTEC Higher National Diploma in Business

Unit: Communication Skills Unit ID: NIIE14002

Accounting and its role in

society

Facilitator: on Gia u Du

Student: Phm Cao Khnh Student ID:A1131007

Class: 13AAF01

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12/2013
Ho Chi Minh City, Vietnam

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 Table of Contents

1.Introduction ...................................................................................................................1

2.History of accounting and new problems....................................................................2

3.Statute of accounting in modern society......................................................................3

4.Constructing and development of a General accounting Theory..............................4

5.Conclusion and Recommendations..............................................................................7

6.References.....................................................................................................................10

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1.Introduction:

Accounting is concerned with collecting, analysing and communicating

economic information (Atrill & McLaney, 2004, p1). However in order to develop

a broader understanding of accounting and the central role it plays in society, we

need to consider it from a social perspective.

The need for accounting is all the more great for a person who is running a

business. He must know : (i) What he owns? (ii) What he owes? (iii) Whether he

has earn a profit or suffered a loss on account of running a business? (iv) What is

his financial position i.e. whether he will be in a position to meet all his

commitments in the near future or he is in the process of becoming a bankrupt.

(Garg, Mahesh C., p3)

Individuals in society coexist by establishing relationships with each other.

Another way of viewing society is by segmenting it into different groups or

arenas, for example the social, economic, organizational and political arenas

(Kyriacou, 2007, Lecture 1, p4). In order to function effectively, these different

arenas need to communicate and it is accounting information that facilitates this

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communication. According to Kyriacou (2007, Lecture 1, p5) accounting

information serves many important purposes, for example assisting users in

making informed decisions, in relation to the effective allocation of scarce

resources.

2.History of accounting and new problems:

Accounting has a long history and as demonstrated by Hines (1988, p251-

261) it is seen as being socially constructed i.e. it is practised by people for people

and therefore it is more of an art rather than a science. Unlike other professions,

which have a body of theoretical knowledge to depend on to make decisions,

accounting has evolved as a craft with few rules and little to no theoretical

knowledge underpinning its practise and function.

Accounting traditionally has played a stewardship role as depicted by

Morgan (Morgan et al, 1982, p309) when he uses the image of accounting as a

historical record to demonstrate accounting as an extension of the owners

personal memory. However society and business practices have changed. The

growth of global business and the emergence of new sectors such as ecommerce

have lead to complex transactions being undertaken. This in turn has unearthed

problems of subjectivity and inconsistency in the application of traditional

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accounting techniques. For example, changes in the nature of business assets to

include intellectual property or the use of leasing have lead to the question of how

to account for these types of transactions?

This fundamental change has resulted in loopholes in accounting and lead

to manipulation and scandals.

3.Statute of accounting in modern society:

In order to minimize loopholes the accounting profession has invested a

huge amount of time and money in injecting theory into accounting, in a bid to

provide a framework for the application of accounting techniques as well as

provide meaning to traditional accounting practices. However as mentioned earlier

accounting is an art not a science and so the development of theory though

beneficial is problematic in practice.

In this essay I will address more specifically how loopholes in accounting

are attributable to the lack of theoretical knowledge and critically evaluate

methods used by the accounting profession to implement theory into accounting.

In doing so I will be exploring, in particular the development of the conceptual

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framework, the contributions made by modern accounting theorist and the

developments in accounting concepts.

As mentioned previously, accounting has evolved as a craft during a time

when society was simplistic. Due to changes in social and economic activity,

accounting has been exposed to criticism for failing to be more responsive and

adaptable. As a result the profession has moved forward to restore accountings

position in society by taking a number of initiatives to implement theory.

4.Constructing and development of a General accounting Theory:

So what is theory? According to Wikipedia:

(http:/wikipedia.org/wiki/theory, 2007)

Humans construct theories in order to explain, predict and master phenomena

Therefore by developing accounting theory it should provide guidance for

accountants on how to apply certain accounting practises in certain circumstances.

This leads to the question of how theory is developed? Science is widely

considered to have a solid knowledge based on facts. The scientific formulation of

theory is derived through the process of inductive reasoning. This process is based

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on observation and generalizing upon a single observation to derive a law or

theory. Once the law or theory is established it can be used to explain and predict

through the process of deductive reasoning. Accounting theories such as stock

valuation and depreciation have been derived on the basis of inductive reasoning.

However according to Chalmers (1999, p4-5) there are loopholes in

developing theory through observation, for example observations can be bias as

one may not accurately depict what one actually sees. Also Chalmers argues that

our brain interprets what we observe, which depends on knowledge, experience

and expectation.

This leads us to believe that accounting theories developed in this way are

subjective and further reinforces Ruth Hiness point that In communicating

reality we construct reality (1988, p251-261)

One of the major attempts by the accounting profession to minimize

loopholes is with the development of the conceptual framework. According to

ORegan (2006, p35) the conceptual framework can be defined as:

A unified and generally accepted set of theories and principles that provide

a foundation from which specific practices and methods can be deduced.

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 In other words a conceptual framework can be considered a religious holy

book for accounting, containing definitions and concepts that are central to its

practice.The pioneers of the conceptual framework have been the (FASB)

Financial accounting standards board. Their progress has encouraged and

generated further interest in the conceptual framework, which has lead to the

IASC and ASB commissioning there own projects and developing their own

version.

However all three conceptual framework publications broadly cover similar

ground, which include:

The objectives of financial statements/reporting

The qualitative characteristics of financial information

The definition of elements in the financial statements

The recognition and measurement of an element

Although the conceptual framework project has been a lengthy and

expensive process, in my opinion it is a step in the right direction as it provides a

foundation for some kind of knowledge base and also reduces loopholes in certain

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 areas. For instance in the elements section key concepts have been defined for

example, what constitutes an asset or liability.

Although there are positives that have come from the conceptual

framework, in my opinion there are many loopholes still present that enable

significant judgement to be exercised. For instance the framework isnt a standard,

so will accountants adhere to it? The true and fair view is considered to be a

fundamental aspect of all accounting information, however there is a lack of

coverage of issues relating to it. In addition some of the issues covered are too

board and non-specific, such as how to measure an element, weather through the

historic or cost method?

5.Conclusion and Recommendations:

Overall in my opinion the accounting profession has made significant progress in

developing a theoretical base for accounting. Also due to the function of accounting being

dependent on the needs of users and there needs being responsive to constant changes in

society and economic activity, the accounting theoretical jigsaw is never likely to be

complete as when one problem is resolved another appears. Also the need for an

independent auditor to verify weather accounting information gives a true and fair view

partly demonstrates the subjective nature of the profession and the presence of loopholes.

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 But what is a true and fair view? Carpenter (1994) recognises that it is a very

common statement in accounting, but one that is extremely difficult to define. This

relates to the vague accounting theory that currently exists. It is believed that it means

something like unbiased, correct, complies with rules, not misleading, substance,

right content, consistent with reality, right impression. A general theory of

accounting is needed to define exactly what this phrase means and what implications it

has for the practising accountant.

In conclusion, The Statement of Principles for Financial Reporting (ASB, 1999,

Introduction, p7) states the objective of financial statements as:

To provide information about the reporting entitys financial performance and

financial position that is useful to a wide range of users for assessing the stewardship of

the entitys management and for making economic decisions.

The financial position is inferred form the accounts so it is important that the

accounts arent open to bias. The wide range of users includes not only investors and

creditors but also non-accounting users. If they are to be used to assess management and

for making economic decisions, they have to be relevant, reliable, understandable and

comparable. There should be a general theory to hinder adverse influence of

management on the accounts and to help the accountant in publishing statements that

satisfy all the above conditions.

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 Some would argue whether we need a general theory at all, as we have got on fine

without it. While there is a need for a theory, I do not believe that it can cover every

single event, so the common sense approach is necessary. Accounting is a social

science, and so accountants are not machines. They should have the basis to make

informed decisions inferred from the general theory, on the presentation of financial

accounts.

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 6.References:

Book:

1.Atrill, P. & McLaney, E.(2004). Financial Accounting for Decision Makers. UK:

Financial Times Prentice Hall.

2.Chalmers, A. F. (1999). What is This Thing Called Science. University Press

Buchingham.

Articles:

1. Kyriacou ( 2007). Lecture 1, p4-5.

2.Hines, Ruth D.( 1988). In Communicating Reality, We Construct Reality, Financial

Accounting: Accounting Organisations and Society, Vol. 13, No. 3, p251 261.

3.Carpenter, David (Spring 1994). Some Approaches to a True and Fair View, The

Irish Accounting Review, p49, Volume 1, Number 1.

4.Accounting Standards Board, Introduction To The Statement of Principles for

Financial Reporting, 1999.

Web page:

Garg, Mahesh C. The hot button. Ddegjust. Retrieved December 27, 2013 from

http://www.ddegjust.ac.in/studymaterial/mba/cp-104.pdf, p1.
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