Nature of Accounting and the Accounting Standard Background Accounting is an important part for business and it is dubbed “language” of business activities conducted by firms. People think it is used to communicate business transactions per se to all stakeholders. However, some people argue that the functions of accounting are not that easy. Except the communication tool, accounting acts as many other difference roles in business. When doing accounting, different standard may be used. There are many issues about accounting standard nowadays.
To getting a subjective view of accounting, it is necessary to understand how accounting is worked. This essay will analyze the application of accounting in the various situations to reach a conclusion. It will give some perspective for accounting also. Firm as an accounting object As we know, accounting was widely used in the firm. In accounting, firm means some business entity aiming at earning economic profit. In general, there are three types of firms: proprietorship, partnership and corporation. Firms are classified by the types of ownership, limitation of liability and so on.
According to Scott Besley (2007), a proprietorship and partnership is an unincorporated business. Proprietorship firm owned by one individual while partnership owned by two or more people. A corporation is “a legal entity by a state”. The owners and managers may not be the same person. Corporation have unlimited life and enjoin limited liability. Owners have no responsibility for liabilities of the corporation. However, for proprietorship and partnership, owners must payback all liability of creditor. Although there are various classifications for firm, its object is quite same.
The general object of a commerce firm is earning profit. However, firms cannot just focus on the financial income. There are many other aspects must consider. The firm which is just care about financial achievement will suffer form ethic dilemma. Dobson (1997) defined the behavior that firm just consider about self-interest individualistic and opportunistic as “finance paradigm”. He criticized that it would cause another lost for people. To be an ethic firm, it should select object carefully to maximize the benefit for all relevant people.
Rather than running business individually, people do commerce via firm. Firms exist because it can provide a more efficiency operation environment for people. However, even if firms can offer a better way for people doing business, we shouldn’t ignore the troubles arising from it. Accounting and transaction Transaction plays a special role in firm’s daily operation. In general meaning, transaction is exchange of goods or services between entities, as well as other events that have an economic impact on a business.
It is a business’s economic record by accounting (Weygandt, Kimmel, & Kieso, 2011). It should be clarify that not all events generated in business process can be record. Accounting must considers about what transaction should record and how it is record. There are two major assumptions about whether transaction should be record. The first one is monetary unit assumption. In accounting, we just record the transaction data which can be express in money term (Weygandt, Kimmel, & Kieso, 2011). Another assumption is economic entity assumption.
Accountant must just account the transaction relevant to certain firm. The active of its owner or other economic entity should not be record in the firm’s account (Weygandt, Kimmel, & Kieso, 2011). In addition, such action must affect the component of accounting equation dually. That means it should affect assts, liability or equity. Measurement method in accounting As it mentioned before, the major object of account is identify, record and communicate the transaction. In real life, the environment for accounting is changing continuously.
So, accountant should know how to record and measure transaction properly. To facing price changing, there are two major approaches to record and measure transaction: historical cost principle and fair value principle. When using historical cost principle, companies record assets as its cost (Weygandt, Kimmel, & Kieso, 2011). That means if the value of goods in such transaction is changing, it will keep the original record of such goods. However, we should update the record of assets value according to the market price in fair value principle.
When managers decide which standard should be used, there are various factors need to be consider. Inflation is necessary for measurement method decision. Alhashim & Arpan (1992) claimed that when price is stable, the historical cost principle could provide an objective view for company’s performance. Managers may prefer this method to measure transaction. However, study also show that when it is high inflation, using historical cost principle will provide some useless information. If the price is changing frequently, the historical cost principle will not suitable.
For example, in British, because it was suffer from high inflation rate in the history, the accounting standard in this country select fair-value principle. (Alhashim & Arpan, 1992) Cost measurement is an important part in accounting. Since the component of cost for business is complex, it will select material cost for example. There are two common principles for material cost evaluation. One is average value method, another is FIFO method. Company’s objective should be considered when choosing those approaches of cost measurement.
When using average cost method, company’s income statement will show lower income so that company will enjoin lower tax. However, when firm choosing FIFO method, they will pay higher tax because of the high income present by income statement. When company wants to reduce tax cost, they may choose average cost method. Otherwise, they will choose FIFO method to attract investment by showing well performance. Except form pervious example discussed, there are many other factors could affect the measurement method.
For example, David Solomons (1970) think that feasibility like objective, low cost of implementation and ease of understanding for users will affect the judgment for measurement method. In different condition, managers will choose different principle. So, it is difficult to say which principle is better. Conclusion By analyze relevant item of accounting, the perspective of accounting is more clearly now. Transaction is a vital component of accounting and there are various principles about it. However, accounting is related to other aspects also. Merely defined accounting as analyzing transaction per se is not false but not objectively.
Communication is also a vital part of account. It is properly to descript accounting as a “language” of business. As mention before, there are many communicating methods and standards for accounting. Different regions may have different accounting “language” (Alhashim & Arpan, 1992). It is a challenge for current international company. To solve this problem, it is necessary to build and spread a unified standard for international accounting right now. Reference Alhashim, D. D. , & Arpan, J. S. (1992). International dimensions of accounting. Boston: PWS-KENT publishing company.
Dobson, J. (1997). Finance ethics: the rationality of virtue. Cummor Hill, Oxford OX2 9JJ, England: Lanham [u. a. ] : Rowman & Littlefield. Scott Besley, E. F. (2007). Essentials of Managerial Finance. Natorp Boulevasr, Mason OH: South Westren College. Solomons, D. (1970). Assets valuation and income determination: appraising the alternative. In R. R. Sterling, Assets valuation and income determination (p. 105). 4431 Mt. Vernon, Houston, Texas: Scholar Book Co. Weygandt, J. J. , Kimmel, P. D. , & Kieso, D. E. (2011). Financial Accounting. USA: John Wiley & Sons, Inc.