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Questions and Answers
What was a significant consequence of the management contribution phase in accounting practices from 1900 to 1933?
What was a significant consequence of the management contribution phase in accounting practices from 1900 to 1933?
What institution was established in 1934 that played a crucial role in the development of accounting principles?
What institution was established in 1934 that played a crucial role in the development of accounting principles?
Which phase contributed to the increasing role of institutions in developing accounting principles?
Which phase contributed to the increasing role of institutions in developing accounting principles?
During the management contribution phase, which of the following was a focus of accounting practices?
During the management contribution phase, which of the following was a focus of accounting practices?
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What was NOT one of the debates or issues that arose during the management contribution phase?
What was NOT one of the debates or issues that arose during the management contribution phase?
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Which of the following consequences of the dependence on management initiative in the management contribution phase is true?
Which of the following consequences of the dependence on management initiative in the management contribution phase is true?
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In what year was the Financial Reporting Foundation (FRF) established?
In what year was the Financial Reporting Foundation (FRF) established?
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Which of the following was NOT a consequence of the management initiative dependence in accounting?
Which of the following was NOT a consequence of the management initiative dependence in accounting?
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What key function does accounting serve in translating economic events?
What key function does accounting serve in translating economic events?
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Which of the following is an example of how accounting can reflect intra-corporate politics?
Which of the following is an example of how accounting can reflect intra-corporate politics?
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Accounting standards are often influenced by which process?
Accounting standards are often influenced by which process?
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In what way can accounting reports affect managerial decisions?
In what way can accounting reports affect managerial decisions?
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Which of the following best describes the perception of accounting as a form of deception?
Which of the following best describes the perception of accounting as a form of deception?
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How do managers influence accounting standards to align with their interests?
How do managers influence accounting standards to align with their interests?
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What is an economic good in the context of accounting?
What is an economic good in the context of accounting?
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What aspect do academic research in accounting primarily focus on?
What aspect do academic research in accounting primarily focus on?
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What is a primary goal of the conceptual framework in financial reporting?
What is a primary goal of the conceptual framework in financial reporting?
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Which statement reflects the potential lobby interests in accounting techniques?
Which statement reflects the potential lobby interests in accounting techniques?
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Which project aimed at the international harmonization of accounting practices?
Which project aimed at the international harmonization of accounting practices?
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Which of the following outcomes is favored by the conceptual framework underpinning IFRS?
Which of the following outcomes is favored by the conceptual framework underpinning IFRS?
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How does accounting history contribute to contemporary practices?
How does accounting history contribute to contemporary practices?
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Which event is often considered seminal in the history of accounting?
Which event is often considered seminal in the history of accounting?
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What is one implication of adopting international accounting standards?
What is one implication of adopting international accounting standards?
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What does a normative approach in accounting practice advocate for?
What does a normative approach in accounting practice advocate for?
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Flashcards
Conceptual Framework
Conceptual Framework
A set of guidelines outlining the nature and purpose of financial reporting, providing criteria for various accounting approaches.
IFRS
IFRS
International Financial Reporting Standards; a set of globally harmonized accounting standards.
Accounting Practices
Accounting Practices
Methods used to record and report financial information.
Decision-Making
Decision-Making
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Accounting History
Accounting History
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Double-Entry Bookkeeping
Double-Entry Bookkeeping
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Normative Approach
Normative Approach
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Academic vs. Professional Accounting
Academic vs. Professional Accounting
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Accounting as Politics
Accounting as Politics
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Accounting Standards as Politics
Accounting Standards as Politics
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Accounting as Mythology
Accounting as Mythology
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Accounting as Magic
Accounting as Magic
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Accounting as Economic Good
Accounting as Economic Good
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Accounting Information Costs
Accounting Information Costs
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Financial Performance Reporting
Financial Performance Reporting
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Past Transaction Details
Past Transaction Details
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Management Contribution Phase
Management Contribution Phase
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Separation of Ownership & Control
Separation of Ownership & Control
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Consequences of Management Control
Consequences of Management Control
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Institution Contribution Phase
Institution Contribution Phase
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SEC's Role
SEC's Role
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AIA's Contribution
AIA's Contribution
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Committee on Accounting Procedures
Committee on Accounting Procedures
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Overt Politicization Phase
Overt Politicization Phase
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Study Notes
Course Introduction
- Course title: FAR661 - Accounting: Theory and Emerging Issues
- Course description: Focuses on accounting theory and emerging issues.
Topic 1: Introduction to the Accounting Environment (Part 1)
- Subtopic: History of Accounting Theory
What is Accounting?
- The American Institute of Certified Public Accountants defines accounting as the process of recording, classifying, and summarizing economic events and transactions in monetary terms.
- This includes interpreting the results of those transactions.
Role of Accounting
- Accounting acts as a historical record of financial activities.
- It functions as a language for communicating financial information to stakeholders.
- Accounting is involved in intra-corporate politics by influencing company policies and decision-making.
- Accounting standards are set within a political process that might not always be purely technical.
- Accounting can function as a form of mythology, rationalizing and legitimizing decisions.
- Certain aspects of accounting are viewed as a form of manipulation or magic, masking real economic performance.
- Accounting can also be viewed as an economic good, as a resource in decision-making, and a social commodity used by various parties.
- It plays a crucial role in facilitating interactions and transactions within the economic system.
Accounting as a Historical Record
- Accounting provides a historical record of a manager's stewardship of owners' resources.
- Stewardship evolves across periods like pure custodial, traditional custodial, and asset-utilization periods.
Accounting as a Language
- Accounting is viewed as the language of business.
- It uses a unique set of symbols, including numerals and words and concepts like debits and credits.
- It follows grammatical rules to categorize and translate financial events and transactions into a common understandable language.
- The language allows for communication and comprehension of financial performance among varied stakeholders.
Accounting as Intra-Corporate Politics
- Accounting reflects the interests of different groups within a company.
- Accounting data influences and shapes the organization's strategies and policies.
- An example is allocating resources at the expense of other departments which may seem less efficient
Accounting Standard Setting as Politics
- Setting accounting standards is a political process rather than a purely technical endeavor.
- Stakeholders lobby to influence standard-setting for personal gain.
- Example of accounting being used for political means includes manipulating tax obligations and decreasing costs for management.
Accounting as Mythology
- Accounting systems and practices are used to justify decisions, rationalizing them as a form of professionalism.
Accounting as Communication-Decision Information
- Accounting reports are prepared to meet the needs of various users such as stakeholders, investors, and managers.
- Decisions made by managers and other investors are influenced by these accounting reports.
Accounting as a Magic
- Accounting might be viewed as a method of deceiving users of financial statements.
- Accounting sleight-of-hand can mask or misrepresent true financial performance.
- Use of accounting tools to misrepresent financial losses or liabilities. (Example - Enron)
Accounting as Economic Goods
- Accounting is part of a broader information system that includes macro-economic, political, and taxation factors.
- The costs of producing accounting information are a consideration for managers who try to minimize these costs.
- Shareholders and creditors will lobby to improve their ability to monitor the management's practice.
Accounting as a Social Commodity
- Accounting emerges from economic activity.
- It exists because of demand for information and skilled professionals for producing it.
- Accounting's impact on various groups within society can lead to varied welfare outcomes.
- There is a market for accounting information with supply and demand as key factors.
Accounting as Ideology & Exploitation
- Accounting can be viewed as an ideology used to maintain existing social, political, and economic structures.
- It functions as a myth and a tool, symbolizing and rationalizing interactions within the economic environment.
- Accounting can be a tool to rationalize and support the existing, often capitalist system.
Overview of Accounting Theory
- Accounting theory is a set of hypothetical, conceptual, and pragmatic principles providing a framework for evaluating and guiding accounting practice.
- Its development has primarily been reactive, addressing problems as they arise, rather than deliberate. This has led to inconsistency in practice and a lack of theoretical foundation.
- Early treatises, such as Pacioli's, focused on documentation of accounting practices without a strong theoretical underpinning.
- A theory's acceptance depends on its ability to explain and predict reality, its theoretical and empirical soundness, and the acceptability of its implications.
Development in Accounting Theory
- Early accounting (prior to 1400s) focused primarily on practical procedures, primarily double-entry bookkeeping.
- The development periods can be broadly categorized as such: pre-theory, General scientific, Normative, Positive Accounting, and Mixed Regulatory stages.
- Specific periods have different characteristics in terms of developments and influences.
Who is Luca Pacioli?
- Luca Pacioli, a 15th-century Franciscan monk, is often credited with codifying and disseminating double-entry bookkeeping.
- His book "Summa de Arithmetica, Geometria, Proportioni et Proportionalita" describes double entry bookkeeping techniques.
- He didn't invent the method but documented it and contributed to its dissemination.
What did Luca Pacioli write?
- Pacioli's work outlined the use of debit and credit, explained the use of a ledger, journal, and memorandum, and advocated for calculating periodic profits and closing books to monitor financial performances.
Evolution of Double-Entry Bookkeeping
- Bookkeeping has evolved over time, with different practices and tools being adopted, expanding to incorporate specific journals, new financial statements, and accounting for long-term assets, cost accounting, and funds' statements.
- The 20th century saw further development in accounting techniques (e.g., earnings per share, business combinations) reflecting the growing complexity of business.
Two Kinds of Double Entry
- Classification: Focuses on maintaining the fundamental accounting equation by classifying transactions into accounts (assets, liabilities, equity).
- Causal: Illustrates the effect of one event on another from an accounting standpoint; debits and credits have a reciprocal relationship. For example, an increase in an asset account is offset by a corresponding decrease in another account (such as accrued liabilities or expense).
Topic 1: Introduction to the Accounting Environment (Part 2)
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Subtopics: The Malaysian Financial Reporting Environment. Overview of developments in accounting concepts and principles.
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Overview of Development in Accounting Concepts and Principles
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Key periods in development: Management contribution, Institutional contribution, Professional contribution, and Overt politicization periods.
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Each period faced distinct issues impacting accounting development.
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Examples of accounting developments in Malaysia: Companies Act (1965), the creation of the Malaysian Institute of Accountants (MIA), and implementation of International Financial Reporting Standards (IFRS).
Overview of Financial Reporting Environment (Malaysia's Perspective)
- Statutory Requirements:
- Companies Act 1965
- Securities Industry Act 1983
- Securities Commissions Act 1992
- Anti Money Laundering Act 2001
- Banking and Financial Institution Act 1989
- Financial Reporting Act 1997
Financial Reporting Environment for Preparers, Regulators, and Users
- Companies/Preparers:
- Purpose: to communicate financial performance to stakeholders (investors, public)
- Concerns: maintaing financial information, mitigating legal risks, and preserving confidentiality
- Regulators/ Legislative bodies and Enforcement Authorities:
- Purpose: reducing information disparity, protecting public interest
- Concerns: standards setting, monitoring, enforcing compliance
- Users/ Capital Markets
- Purpose: Decision making in financial markets
- Concerns: relevance, reliability, and consistency of financial reporting.
The Financial Accounting Environment (Exhibit 1.1)
- Relationships exist between accounting theory, political factors, economic conditions, accounting policy, and the audit function. This exhibit demonstrates how these affect the accounting processes, its practice, and its reporting to users.
Accounting Development In Malaysia
- Prior to 1957: Companies Ordinance (and amendments) governed accounting practices and procedures.
- Subsequent Developments: Introduction of various Acts, organizations, standards, and modifications over time (1958 -1997). Various important Malaysian accounting standard-setting organizations were established to influence accounting in Malaysia. Key developments include the 1965 Companies Act, the establishment of the Malaysian Institute of Accountants (MIA), accounting standards, and the introduction of more comprehensive disclosure requirements.
Development of Accounting Concepts and Principles
- Several phases were categorized by theorists:
- Management Contribution Phase (1900-1933): Driven by significant increases in shareholders and a shift in corporate power; the management's initiative led to a focus on taxable income and smoothing earnings.
- Institutional Contribution Phase (1933-1946): Development of regulatory bodies, like the Securities & Exchange Commission (SEC) in the United States, affected standard-setting mechanisms.
- Professional Contribution Phase (1959-1973): Dissatisfaction arose regarding the accounting standards being issued so the accounting research program was developed, and the accounting principle board (APB) was established in the US to standardize and regulate practice. Overt Politicization Phase (1973-present): Accounting standard-setting processes became more political; regulatory bodies and legislation, such as the 2002 Sarbanes-Oxley Act, had more influence in accounting practices.
Recent Developments in Accounting Theory
- Some recent developments in accounting theory include the resurrection of conceptual frameworks and the emphasis on international harmonization through IFRS.
Importance of Accounting History
- Studying the history provides insights into the development of accounting as a social science and understanding accounting practices in relevant contexts.
Limitations of Accounting History
- Historical inquiry on accounting can be susceptible to biases, incomplete information, and the limitations of historians' judgment in constructing causal explanations.
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