Essay on Accounting Theory

Competitive business environment requires better predictive figures that can assist in making the right decisions. Similar arguments have been put forward by to business operators and executives to make the right decisions and strategies. Finance managers require competence in financial knowledge to enhance business growth through prediction. In the accounting imperative, successful management of every business requires relevant accounting information. The effective use of available assistance in accounting consequently improves accounting as well as other systems of minor enterprises. In this aspect, the small and medium sized enterprises ultimately contribute towards economic growth. The accounting professional is guided by certain standards that are generally accepted around the world. The political and economic factors come into play in the formulation of accounting standards.

Conflicts between financial reporting and taxation run into history. Mostly, harmonizing the international standards of financial reporting indicates that nations still have some form of power in controlling their economic boundaries. Economic theory suggests that taxes on activities that increase emissions of pollutants indirectly reduce harm on the business environment. Direct taxes in areas such pollution tends to be economically effective since they motivate culprits to reduce the emissions. Claims of ethics, transparency, responsibility and honesty by corporations need to apply to all aspects of business operation including taxation. Corporate citizenship assumes that corporate make agreed tax payments. Various developments to the theory have been made in the contemporary world of scholars. These perspectives mainly tackle cost management, sustainability, and information disclosure and behavior science.

The accounting theory has great significance in the creation of financial reporting principles. The link between accounting theory and setting of standards is better understood from a broader perspective that considers political and economic components. The economic conditions affect political components as well as accounting theory. On the other hand, the political aspect has effects on the accounting theory. It is noteworthy that the policy-making process is informed by the socio-political and economic environment. The preparation of financial statements for an organization should be based on certain standards that are globally acceptable (Ijiri 6). The political perspective may also look into the difficulties and costliness of the implementation of standards. The conditions and ideas are brought together to in decision-making process that ultimately influences financial reporting.

Notable bodies such as Securities and Exchange Commission (SEC) and Financial Accounting Standards Board (FASB) have an obligation in the creation of accounting rules that help in performance of a policy function. The policy function is recognized as the standard or rule setting – essentially recognizing the declarations of IASB, SEC, or FASB. The primary ingredients in coming up with the policy function include accounting theory, political and economic factors. Nonetheless, their contributions differ significantly. For instance, the economic components may lead to disclosure on price changes in times of recession. During mergers or acquisition, the economic factor comes into play in a big way. The political aspects mostly relate to matters that subject to rules or regulations governing a certain jurisdiction. It is the responsibility of the auditors to ensure that the rules are adhered to during the preparation of the financial statements in readiness for presentation to investors and government agencies.

Accounting theory is created to aid in the maintenance of systematic and complete records of all transactions. It revolves around analysis of the financial position of an organization. Stakeholders within an organization have all reasons to get interest in knowing the results of financial transactions in line with the adherence to the established principles and rules in the accounting process. Standards and other declarations by policy-makers are construed and utilized in organizational level. The result of policy level is executed at the accounting practice level. It is important to consider some of the worst corporate frauds in companies such as Enron and Lehman Brothers Holdings where the executives failed to adhere to established accounting standards.

Majority of individuals in the corporate world recognize the general concept of account as the process of storing information about monetary transactions, events and a summary of reports in any given institution. Some individuals believe that accounting is a complex in accomplishing the reporting tasks that requires a blend of technical and measurement knowledge and requires extensive study. Accounting’s overall structure and basic formation of reporting helps in understanding accounting better (Ryan 20). The knowledge of accounting procedures, rules, and principles is valuable to business and its eventual success in any given financial period. However, accounting is considered as a straightforward process of reporting for policy makers and primarily describes the past to replicate what previously happened.
The users of accounting information include creditors, the government, financial analysts, and business owners among others. In most cases, these users of the provided data normally use it for their own interests especially on the providers of such information. However, these users put the accounting information provided to different users for instance, business managers and owners of given organizations use the data in order to make necessary decisions and implementation programs. Creditors use such accounting information provided to gauge the ability of organizations to repay its liabilities owed to them (Porter and Norton 23). Accounting theory can help one to make predictions on unlikely events that take place within an organization. This has implications in making predictions regarding the sustainability of a business in the wake changing global dynamics and needs.

A variety of managerial techniques and financial accounting are considered to be powerful in planning, managing and improving and communicating the economic outcome of businesses. Broad systems in accountability and accounting possess the potential in influencing approaches to planning, managing and improving and communicating the impression of organizations. According to Chapman, Hopwood, and Shields (2006), management accounting within an organization is a procedure that results to the creation and use of cost, quality, and time-based data to make efficient decisions. Majority of individuals and departments in a firm play important roles in management accounting. The management is required to create the firm’s objectives prior to making any decisions. Such decisions may include the organizations product line, pricing strategies, ability to assume various risks, and profitability. The strategic goals are considered as broad-based and qualitative which reflect a firm’s objectives.

The confidence in the provided reports on accounting information is dependent upon the rules, principles, and standardization of practices that are employed in their preparation (Higson 49). This makes it easy to understand the reports, compare with other organizations’ data, and put the information to use. The standardization of the financial reports is obtained from given well-organized procedures and organizations. The Financial Accounting Standards Board (FASB) is charged with the responsibility of formulating that form the basis of financial reporting. Again, there is the International Accounting Standards Board (IASB) that works in close collaboration with the FASB to generate international financial reporting standards (IFRS) (Choi 14). An increase in global business operations and finance calls for the need to establish consistency in financial reporting. Another advantage of the standardization of the reports is that it enables users to conveniently compare with other organizations reports in a particular economy. The utilization of the Generally Accepted Accounting Principles (GAAP) in coming up with financial reports is meant for consumption by all users. This helps accountants in keeping the reports neutral guided by the set concepts of reporting. Accounting Theory helps in making better prediction on the practical events not just in the corporate sector but also in the accounting transactions.

There has been unending debate regarding how accountants should advance their role as people responsible for validation of financial statements in an organization. The issue deals with the accounting standards on the implications of principles and rules. There are industry professionals who support GAAP approach while others advocate for the IFRS rules (Walters 82). Others believe that principle based IFRS are better than the rule based standards approach. The rules-based accounting allows the accountants to confirm that financial statements comply with the established regulations and laws (Collin et al. 157). The principle-based accounting requires demands the usage of the judgment of an accountant to ascertain the correctness of financial reporting. The rules-based accounting appears to be more commonly used by organizations as compared to principle-based system of accounting.

The IFRS seeks to standardize the approach used in the preparation of financial statements and their presentation to the users. This is because preparation of the statements presented to users varies according to the countries they are prepared in and other social, economic, and legal influences. Effective methods should provide for a mechanism through which the executives are held responsible for their actions in an organization. Nonetheless, the theory broadens the reporting requirements (Jogiyanto 90), particularly in public companies to prevent the high number of stakeholders from losing money. Accounting information should serve a company in a manner that enhances the attainment of positive outcomes. The findings reveal that the political cost issues affect CSR disclosures and earnings. In some companies, the aspect of ethics dominates the business operations and priorities (Schreck 41). In such a case, the CSR may have negative relations with the management earnings in a given organization.
In conclusion, the political, economic components, and accounting have significant contribution in policy-making function and standards. The users utilize financial statements and reports in making important decisions. Besides, they use policy-making function and its execution in accounting practice. These components in accounting theory and policy environment are necessary for consideration to help in better understanding of the accounting standards. The general concept of accounts is the process of storing information about financial transactions, events and a summary of reports in any given organization in the globe. Accounting is a straightforward process of reporting for policy makers and principally describes the past to replicate what previously happened in a firm.
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Works Cited
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Porter, Gary, and Curtis Norton. Using financial accounting information: the alternative to debits and credits. Nelson Education, 2012.
Chapman, Christopher S., Anthony G. Hopwood, and Michael D. Shields, eds. Handbook of management accounting research. Vol. 1. Elsevier, 2006.
Higson, Andrew. Corporate financial reporting: Theory and practice. Sage, 2003.
Choi, Frederick DS, ed. International finance and accounting handbook. John Wiley & Sons, 2003.
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