Introduction to Accounting Principles

Course Information

• Course title: FAR661
• Subject: Accounting: Theory and Emerging Issues

Topic 1: Introduction to the Accounting Environment - Part 1

• Topic: History of Accounting Theory
• Definition of accounting (per Committee on Terminology of the American Institute of Certified Public Accountants): "the art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events which are in part at least, of a financial character and interpreting the results thereof"

Role of Accounting

• Accounting as a historical record: Provides a history of managers' stewardship of owners' resources, evolving through pure custodial, traditional custodial, and asset-utilization periods. The first two directions are determined by owners
• Accounting as a language: Two components: symbols (numerals, words, debits, credits) and grammatical rules (procedures to create financial data). Translates economic events into understandable words and numbers for users to interpret financial performance, resources, and past transactions.
• Accounting as intra-corporate politics: Reflects and supports values of special interest groups. Shaped by resources and company policies, used for decision-making to enhance and further management aims. Examples include increasing resource allocation to a department by convincing management.
• Accounting as standard setting as politics: Accounting standards are products of political processes rather than technical efficiency. Often, accounting standards serve self-interest and maximize utility of those involved. Example given was managers supporting standards that lower taxes, reduce costs, and increase compensation
• Accounting as mythology: Supports the concept of professionalism to justify, rationalize, and legitimize made decisions.
• Accounting as communication: Decision information - prepared accounting reports to meet needs of users, in turn affecting decision making behavior of managers and investors.
• Accounting as magic: Viewed as a method of deceiving users of reports. (e.g. Enron used accounting techniques to disguise investments)

Accounting as a Recorded History of Stewardship

• Timeline of stewardship evolution: Pure custodial, Traditional custodial, Asset Utilization
• Early periods ("do as instructed") focused on owner-directed asset use
• Later period (asset utilization) focuses on manager initiative to maximize owner asset value

Accounting as a Language

• Two-part system of accounting: Symbols and grammatical rules
• Symbols are unique to accounting—numerals and words and terms
• Used to translate events into words and numbers
• Makes financial data and performance easily understood by various stakeholders

Accounting as Intra-corporate Politics

• Supports the values and needs of special interest groups.
• Influencing company policy
• Improving management aims and enhancing decisions.
• Used to influence resource allocations within an organization. Example mentioned—convincing management to increase resource allocation to one area by highlighting other areas that seem less efficient

Accounting as Standard-Setting Politics

• Accounting standards are outcomes of political processes, not technical efficiency
• Interests guide standard setting rather than just maximizing efficiency
• Standards lower tax burdens, reduce costs for book-keeping, and maximize manager compensations

Accounting as Ideology & Exploitation

• Perceived as ideological means of sustaining and legitimizing social/economic/political arrangements.
• Seen as a myth, symbol, and ritual that promotes social relations between agents.
• Serves as an instrument of economic rationality, a tool of the capitalist system.

Overview of Accounting Theory

• Hendriksen's definition: A coherent set of hypothetical, conceptual, and pragmatic principles forming the general framework for a field of inquiry.
• Logical reasoning in the form of broad principles for evaluation of accounting methods
• Guiding development of new accounting procedures
• Reactive development to solve problems that arise
• Led to inconsistencies in practice (e.g. variations in depreciation methods)
• Accounting standard setting and conceptual framework projects are noted but inconsistent in practice

Overview of Accounting Theory (Continued)

• Accounting theory is a modern concept—compared to mathematics or physics
• Pacioli's work focused on documenting procedures, not explaining underlying theories.
• Development of accounting theory has been mostly unstructured
• Based on practical needs, not deliberate, systematic thinking
• Acceptance of theories is dependent on how well they explain and predict reality—theoretical and empirical construction—acceptance of implications

Development in Accounting Theory

• Pre-1400s (focus on practice): Little written regarding accounting theory
• 1450-1750 (Pre-theory): Development of practice, but not on a systematic theory basis
• 1750-1920s (Formalization of Practice): Existing practices formalized in textbooks and teaching methods
• 1800-1955 (General Scientific): Explanations of accounting practices and development of explanatory frameworks based on real-world observations
• 1956-1970s (Normative): Ideal practice statements, basis for achieving them. Focusing less on observations and more on prescriptions of accounting practices
• 1970s-2000 (Positive): Positive accounting theory as framework for understanding and predicting behavior
• 2000-present (Mixed): Mixed development—combination of positive and normative regulatory theories

Development in Accounting Theory (Specific Time Periods)

• 1494: Luca Pacioli (double-entry bookkeeping).
• 1450-1750: Pre-theory period (Practice focused, rather than systematic theory).
• 1750-1920s: Formalization of practice into textbooks and teaching methods.
• 1800s-1950s: General scientific period (explanations & frameworks, from observations).
• 1956-1970s: Normative period (ideal practice, less observation-based).
• 1970s-2000: Positive accounting theory period (explaining/predicting accounting practices).
• 2000-present: Mixed (positive/normative regulatory theories).

Two Kinds of Double Entry

• Classification: Focused on maintaining accounting equation, summarizing classification positions, and classifying by debit and credit. For example—Dr Machine (Assets) and Cr Account Payable (Liabilities)

• Causal: Focused on cause and effect relating to increments/decrements, and debit/credit balances to show the offset of one value by the value of another. For example—Dr Machine (20,000) and Cr Account Payable (20,000)

Topic 2: Introduction to the Accounting Environment - Part 2

• Overview of accounting concepts and principles development (in Malaysia)
• Statutory requirements: Companies Act 1965, Securities Industry Act 1983, Securities Commissions Act 1992, Anti Money Laundering Act 2001, Banking & Financial Institution Act 1989, Financial Reporting Act 1997
• Focus on public and investor relations (Financial and operational performance) and their concerns (Maintaining legal standing, confidentiality)
• Role of Regulators, Enforcement, and Authorities: Reduced information disparity, protection of public interest, and setting/monitoring standards.
• Capital Market Users: Decision-making and concerns regarding relevance and reliability

Accounting Development in Malaysia (Timeline)

• Prior to 1957: Companies Ordinance and amendments
• 1958: Malaysian Association of Certified Public Accountants (MACPA) formed
• 1965: Companies Act 1965 established
• 1967: Malaysian Institute of Accountants established
• 1968: MACPA issued first accounting guidance.
• 1978: MACPA became MIA member
• 1984: First Malaysian accounting standards issued.
• 1985: Amendments to Companies Act (included disclosures requirements)
• 1987: Operations of MIA activated. MIA issued standards
• 1993: Securities Commission established
• 1997: Financial Reporting Foundation (FRF) and Malaysian Accounting Standards Board established

Development of Accounting Concepts and Principles

• Management (1900-1933): Management contribution—emphasized management's initiative, leading to concerns over consistency and focus on tax minimization
• Institutional (1933-1946): Institutions, like SEC and AIA, played major roles
• Professional (1959-1973): Issues with CAP led to establishment of APB and Accounting Research Division
• Politicization (1973-present): Accounting numbers' influence on economic behavior and increasing political elements

Relevant Developments (Accounting Theory)

• Conceptual framework (1980s): Revived, defining nature/purpose of financial reporting
• Criteria to decide between accounting practices
• SACS 1-4 developed
• Joint project between IASB and FASB for development of International Financial Reporting Standards (IFRS).

The Framework for IFRS (International Financial Reporting)

• Move towards accounting practices that provide useful information to investors
• Recognizing gains/losses in accounting periods
• Measurement using exit values

This quiz covers the foundational concepts of accounting, including its roles and historical significance. Explore the definitions, functions, and evolution of accounting practices from the fourteenth century to modern times. Test your understanding of key terms and principles in this essential field.