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Financial Accounting Theory: Reducing Balance Method Vs. Straight Line Method

1134 words - 5 pages

Accounting is a multifaceted discipline. It is neither a dull profession nor a simple practice as how it has been viewed by lay people. This essay demonstrates the side of accounting that is complex and intriguing. It is structured in the following way: firstly, how my view of accounting is developed throughout this module will be explained. Next, the issue of what accounting profit is and whether it is a measure of true profit of an organisation will be tackled.
The first part of my essay is challenged in various ways. I stated that a true profit may be attained by including non-financial measures to accounting profit (Author, 2013). However, Hines (1988) explained that there is no truth in accounting as it is the outcome of naming and counting by the professionals who create the truth. For instance, what can be included in revenue and when to realise them is decided by accounting professionals, whereas ordinary people will accept this as they view the professionals as a legitimate body in the field. By reading his paper, I can conclude that there is no such thing as the true profit since there is no truth in accounting. Adding non-financial measures may give a better picture of an organisation, but there is no full picture as this is subjective (ibid.).
Accountants will make sure that they are operating within what is acceptable by the society to maintain their legitimacy in the profession and preserve the power they have, as in the legitimacy theory (Deegan and Unerman, 2011). It is important to note that being legitimate does not mean that someone is doing the right thing but he is doing what is perceived to be socially right (Suchman, 1995). The boundaries may change with time as in the case of pollution (Hines op.cit.). Previously, pollution is not considered to be a cost for businesses, but currently, this issue is highlighted particularly by activists such as Greenpeace. In the future, it is possible that pollution needs to be included in financial statements, although the process of putting monetary measures will be difficult.
In the next section, I will explore further what accounting profit is. It is a figure derived from a complex process of recording, selecting, counting and so on. The procedure involves judgement by professionals on issues including how to value fixed assets, influenced by various factors including self-interest, as evidenced by the Positive Accounting Theory (PAT) by Watts and Zimmerman (1986). It predicts managers’ actions, with the assumption that people are self-driven (Deegan and Unerman, 2011). For instance, the bonus plan hypothesis states that managers will increase the current period income by choosing accounting methods that shift future periods’ earnings to the current period (Watts and Zimmerman, 1986). One of the criticisms of PAT is that the self-driven individuals’ assumption is too simplistic and may be unrealistic, for instance, if the managers are the relatives of the owner. By learning about PAT,...

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