Accounting Theory Structure -Part 1 PDF

# People's Democratic Republic of Algeria ## Ministry of Higher Education and Scientific Research ### Chadli Bendjedid University - El Tarf #### Faculty of Economics, Business and Management Sciences ##### Department of Basic Education in Economics, Business and Management Sciences # Lectures in Ac...

# People's Democratic Republic of Algeria ## Ministry of Higher Education and Scientific Research ### Chadli Bendjedid University - El Tarf #### Faculty of Economics, Business and Management Sciences ##### Department of Basic Education in Economics, Business and Management Sciences # Lectures in Accounting Theory ## Level: 3rd Year in Financial and Accounting Sciences ### Prepared by: Dr. Feddaoui Amina # Lecture Nº 3: Accounting Theory Structure -Part 1- The American Accounting Association (AAA) defined accounting theory as a set of concepts and assumptions and their related principles that explain and guide the accountants actions in identifying, measuring and communicating economic information about companies to interested parties. The levels and structure of accounting theory can be identified through the following figure: ## Figure Nº (01): The structure of accounting theory. ### Accounting Theory Structure & Levels | | Level | |:------|:------:| | Objects | 1 | | Assumptions | 2 | | Theoretical Concepts | 2 | | Accounting principles | 3 | | Accounting Standards | 4 | | Applicable & procedures to achieve Financial Statements (Accounting Methods) | 4 | Source: Isam Rimawi, Accounting Theory, Accounting Master Program, 2007, http://www.geocities.com/irimawi/, p4. ______ # I. Objectives of Accounting: The purpose for which accounting is made explains its objectives. The development of accounting objectives is the basic object of accounting theory. There may be general and specific objectives. It means the accounting theory can be effectively implemented only when objectives are defined in definite terms. Accounting objectives are: - To provide reliable information about economic resources and obligation of business enterprise to the internal and external users in order to: - Evaluate its strengths and weaknesses, - Show its financing and investment, - Evaluate its ability to meet its commitments, - To show its resources base for growth. - To provide reliable information about changes in net resources resulting from a business enterprise's profit directed activities in order to: - Show expected dividend return to investors, - Show the enterprise's ability to pay creditors and suppliers, to provide job for employer, to pay taxes, and to generate funds for expansion, - Provide information to management for planning and control, - Show its long-term profitability. - To provide financial information useful for estimating the earning potential of the firm, - To provide other needed information about changes in economic resources and obligations of business, - To disclose other information relevant to users' needed. # II. Accounting Assumptions/Postulates: Assumptions are generally accepted as truths, but not proven. But, the whole scientific thinking is based upon these. They are the basic needs, something believed to be true, but not proven, on which an argument or scientific discussion is based. The following are the features of postulates: - The fundamental assumptions, - They are self-evident truths, - They are the basic of principles, - They portray all environments i.e. economic, social, legal and political, - The usefulness of postulates depends upon the better and proper understanding of the same. The following are the main assumptions of the accounting: ## Accounting entity and legal entity assumption: For accounting, if a proprietor owns number of businesses, each business is a separate entity. ## The going concern assumption: Going concern means, any created business will continue for a long period in future. In simple words, business entity is created to operate for an indefinite period. ## Unit of measurement assumption: Accounting is the language of business, the language used should be common to all and able to communicate effectively, the business transactions are to be measured in monetary unit, monetary unit may be rupee, dollar, pound, yen etc. 'money' is common means which can measure and express the value of goods, building, raw-material, labor, services etc. ## Accounting period assumption: Luca Pacioli, the monk who authored first time on double entry system of book keeping in 1494, states that “books should be closed each year", accounting period may be a year, it may also be for 6 months' period, the accountant chooses the most convenient segment of time and they measure the net income for that period. Financial statements prepared for this period indicate the result of that period only. *** Source: Accounting theory, Rani Channamma University, India, https://rcub.ac.in/econtent/ug/bcom/sem246/accounting\%20theory\%20unit\%203,\%204\%20an d\%205.pdf, pp. 1-8.