Paper PSA - Financial Acc Theory

8/13/2019 Paper PSA - Financial Acc Theory

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I. INTRODUCTION

Financial accounting theory is critical to business growth, as it is the best methodologyfor deciding what a business should charge for its services. Without proper understanding of

accounting theory, business are at a risk of under-or-over-charging, and either case is bad for

business. The very basics of accounting theory date back to 12.292.2 and were founded in Italy.

Financial accounting theory states that accounting for business to understand their profits or

losses. Accounting involves recording the financial value of all assets and liabilities of a business

or individual. Keeping track of all financial transactions is also important to understand the

charging value overtime. This information is used to build and maintain a budget, which isnecessary for financial planning and growth. Therefore, the following issues relating to financial

accounting will be

II. FINANCIAL ACCOUNTING THEORY

Financial Accounting

Financial Accounting is the process of recording, summarizing, and reporting of

transaction from the business, so as to provide an accurate picture of its financial position and

performance. In other words, financial accounting is a system that accumulates, processes and

reports information about an entity's performance (i.e. profit or loss), its financial position (i.e.

assets, liabilities and shareholders' equity) and changes in financial position.

Every entity, whether for-profit or not-for-profit, aims at creating maximum value for its

stakeholders. The goal of maximum value addition is best achieved when there is a mechanism

to monitor the management and the board of directors. Financial accounting helps in such

monitoring by providing relevant, reliable and timely information to the stakeholders.


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Inputs to a financial accounting system include business transactions which are

supported by source documents, such as invoices, board resolutions, management memos, etc.

These inputs are processed using generally accepted accounting principles (GAAP). The

processed information is reported through standardized financial statements.

Accounting Theory is conventionally concerned with financial accounting. Example: with

accounting to external providers of finance. It includes all aspects of published financial reports,

1. Their purpose2. Their form3. Their content4. The laws, regulations, and guidelines governing them.5. The accounting policy-makers who determine them

The literature of accounting theory is relatively new, and it has until recently, been almost

exclusively concerned with public limited companies. Now accounting must above all be useful.

If accounting reports are to be useful, therefore, we must define the users of those reports and

the uses to which they put them. However, if we assume to include potential users and

potential users needs.

2.1 PURPOSE OF FINANCIAL ACCOUNTING

The purpose of financial accounting is to prepare financial reports that provide

information about a firm's performance to external parties such as investors, creditors and tax

authorities. It provides the information needed for sound economic decision making. Financial

Accounting is performed according to Generally Accepted Accounting Principles guidelines, and

also to give the information that is needed for sound economic decision making. The main

purpose however, is to prepare financial reports that provide information about a firm's

performance to external parties such as investors, creditors, and tax authorities.


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2.2 USERS OF THE FINANCIAL ACCOUNTING

The most basic objective of financial accounting is preparation of general purpose financial

statements, which are financial statements meant for use by stakeholders external to the

entity, who do not have any other means of getting such information, i.e. people other than the

management. These stakeholders include:

2.2.1 Investors and Financial Analysts: Investors need the information to estimate the

instrinsic value of the entity and to decide whether to buy, hold or sell the entity's shares.

Equity research analysts use financial statements to conduct their research on earnings

expectations and price targets.

2.2.2 Employee groups: Employees and their representative groups are interested in

information about the solvency and profitability of their employers to decide about their

careers, assess their bargaining power and set a target wage for themselves.

2.2.3 Lenders: Lenders are interested in information that enables them to determine

whether their loans and the interest earned on them will be paid when due.

2.2.4 Suppliers and other trade creditors: Suppliers and other creditors are interested

in information that enables them to determine whether amounts owing to them will be paid

when due and whether the demand from the company is going to increase, decrease or stay

constant.

2.2.5 Customers: Customers want to know whether their supplier is going to continue as

an entity, especially when they have a long-term involvement with that supplier. For example,

Apple is interested in long-term viability of Intel because Apple uses Intel processors in its

computers and if Intel ceases operations at once, Apple will suffer difficulties in meeting its own

demand and will lose revenue.


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2.2.6 Governments and their agencies: Governments and their agencies are interested

in financial accounting information for a range of purposes. For example, the tax collecting

authorities, such as IRS in USA, are interested in calculating taxable income of the tax-paying

entities and finding their tax payable. Antitrust authorities, such as Federal Trade Commission,

are interested in finding out whether an entity is engaged in monopolization. The governments

themselves are interested in efficient allocation of resources and they need financial accounting

information of different sectors and industries to decide on federal and state budget allocation,

etc. The bureaus of statistics are interested in calculating national income, employment and

other measures.

2.2.7 Public: the public is interested in an entity's contribution towards the communities

in which it operates, its corporate social responsibility updates, its environmental track record,

etc.

2.3 CAN ACCOUNTING BE DEFINED AS SCIENCE, OR PROCESS, OR ENGINEERING?

Philosophy of accounting

The philosophy of accounting is the conceptual framework for the professional preparation

and auditing offinancial statements andaccounts.The issues which arise include the difficulty

of establishing a true and fairvalue of anenterprise and itsassets;themoral basis of disclosure

and discretion; the standards and laws required to satisfy the political needs of investors,

employees and otherstakeholders.It is based on the reasonable man principle.

Accounting introduces central difficulties: how do we find out who the users are and how do we find out

their needs?

1. The number of users will be huge2. Their need may/will conflict3. Users have been contained by accountants over many years
http://en.wikipedia.org/wiki/Financial_statementhttp://en.wikipedia.org/wiki/Accountinghttp://en.wikipedia.org/wiki/Value_%28economics%29http://en.wikipedia.org/wiki/Value_%28economics%29http://en.wikipedia.org/wiki/Businesshttp://en.wikipedia.org/wiki/Assethttp://en.wikipedia.org/wiki/Moralshttp://en.wikipedia.org/wiki/Politicshttp://en.wikipedia.org/wiki/Investorhttp://en.wikipedia.org/wiki/Employeehttp://en.wikipedia.org/wiki/Stakeholder_%28corporate%29http://en.wikipedia.org/wiki/Stakeholder_%28corporate%29http://en.wikipedia.org/wiki/Employeehttp://en.wikipedia.org/wiki/Investorhttp://en.wikipedia.org/wiki/Politicshttp://en.wikipedia.org/wiki/Moralshttp://en.wikipedia.org/wiki/Assethttp://en.wikipedia.org/wiki/Businesshttp://en.wikipedia.org/wiki/Value_%28economics%29http://en.wikipedia.org/wiki/Accountinghttp://en.wikipedia.org/wiki/Financial_statement


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4. Users are not necessarily rational5. Users needs are likely

The purpose of accounting is to provide the information that is needed for sound economic

decision making. The main purpose of financial accounting is to prepare financial reports that

provide information about a firm's performance to external parties such as investors, creditors,

and tax authorities. Managerial accounting contrasts with financial accounting in that

managerial accounting is for internal decision making and does not have to follow any rules

issued by standard-setting bodies. Financial accounting, on the other hand, is performed

according to Generally Accepted Accounting Principles (GAAP) guidelines.

2,4 CREATIVE ACCOUNTING AND/OR ACCOUNTING ENGINEERING?

We wonder which the connection between engineering, accounting and creation is?

In the literature on accounting we meet two concepts: accounting engineering and creative

accounting. Very often they may be taken one for another, some specialists argue that the y

have the same meaning, but according to our opinion is that we should regard them as two

distinctive notions up to a certain point: their aim. Accounting engineering refers to the

activity of projecting and research the so-called technological process while creative

accounting is an activity based on highlighting new possibilities of modeling the information ,

the aim being the same in both cases: manipulation of results by taking advantage of the flaws

of the accounting rules, creating a disguised image of the firm.

2.5 ACCOUNTING THEORY: FUND ACCOUNTING THEORY

Fund accounting theory was established by the economist William Joseph Vatter in 192.27 in

his book The Fund Theory of Accounting and Its Implications for Financial Reports as an

alternative to the proprietary and entity theories of accounting. Vatter argued that both the


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proprietary and entity theories use insufficient accounting approaches due to the focus of

proprietary theory on the proprietor of assets and liabilities, which is not adequate to modern

reporting system, and the focus of entity theory on the accountability of business itself as a

separate entity.

He saw no logical basis for viewing a corporation as a person in the legal sense, and he argued

thatthe corporation is the people it represents (Schroeder et al, 2011, p. 2.285).

Vatter (192.27) proposed three areas with different levels of significance of accounting

figures and reports: (1) management, (2) social control agencies (governmental units), and (3)

overall process of credit extension and investment. Since the single-person approach cannot

satisfy needs of such different groups, a more fundamental and objective approach than the

proprietary and entity theories are required (Vatter, 192.27).

The fund theory allows eliminating any effect of personality and personal implications on the

accounting procedures and quality of financial statements.

Main concepts

Fund is a cornerstone concept of the fund theory. Fund is understood by Vatter (192.27) as a

collection of service potentials, provided by assets.

In the sense of fund there are involved: (1) the segregation of assets for the given purpose

and (2) a practical recognition of the set of separate operations which pertain to these assets

It determines the primary focus of fund accounting on the service potential of assets instead of

their value in monetary terms. According to the fund theory, assets are acquired in order to

contribute to an increase of their service potentials and, therefore, the bookkeeping of fixed

assets is not considered from the point of view that the fixed assets are to be replaced at the

end of their lifetimes, and it is also not a question about allocating the historical costs of the

fixed assets over the life times of the assets (Monsen, 2012, p. 35).


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The concepts of revenues and expenditures in terms of the fund theory

Immediate cash Later cash Immediate cash Later cashrevenues revenues

expenditures expenditures

REVENUES EXPENDITURES

MoneyMoney

revenuesexpenditures

Source: Monsen, 2010

2.6 WHY PUBLIC SECTOR APPLY FUND THEORY

Public sector funding sources came from taxes and levies, changing for services, a State-owned

company profit, the Government loan in the form of foreign debt and Government bonds, etc.

While the private sector revenue sources, separated into internal financing sources and sources

of external financing. Internal financing sources are retained earnings and capital owners, while

the source stemming from external debt financing bank, the issuance of bonds, and the

issuance of shares.

III. conclusion


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Paper PSA - Financial Acc Theory