Accounting

Accounting view points

The adoption of a particular viewpoints of accounting is a function of a range of factors including history and culture, soceital values, the nature of economic activity and the objectives of those who prepare intrepret and apply accounting information.

The established objective of the accounting is the measurement and reporting of the economic activity of an entity. Then, there are significant changes to reporting by entities because of the consideration of the reporting not only the economic transaction and value of assets and liabilities but it broaden to include the effect of an entity's activities.

SAC 2 states that the objective if general purpose report is to provide the information useful for making and evaluating decisions about the allocation scare sources.

The boundary assumptions

Dr Ian Ball

The concept of reporting entity as it related to the boundaries of an entity. Ball's main concern was that the main boundaries of identified reporting entities may be defined by reference to ownership or control, where controls related to the ability to directly deploy scarce resources.

SAC 1

SAC 1 defines the reporting entity and outline criteria for determining the boundaries. It defines a reporting entity as ‘all entities in respect of which it is reasonable to expect the existence of users dependent on general purpose financial reports for information which will useful to them for making and evaluating decisions about the allocation of scarce resources'.

After all those definitions, companies or organizations will often act to redefine these boundaries in response to organizational or external pressures.

Recently, there is the extension of reporting boundaries to incorporate the information that needs of a broad range of stakeholders, not only for financial information but also for qualitative information concerning the impact of the entity's activities on the community and environment which is triple bottom line reporting. It extends the reporting on social, economic, and environmental issues.

Proprietary theory

Littleton argued that proprietorship is the substance of the double entry system.

Goldberg argues that there are instance where the double entry system is used and the measurement of profit from an owner's perspective is nor the underlying objective of accounting and reporting.

Balancesheet account

Sprague states

"The balance sheet of proprietorship is a summing up at some particular time of all the elements which constitute the wealth of some person or collection of persons…the whole purpose of the business struggle is increase of wealth that is increase of proprietorship"

Profit

Income is earned and expenses are incurred because of the decisions and action of the owner or the owner's representative. Income increases the proprietorship while expense decreases it.

The extend of the proprietary view is about the double taxation idea, where is the profit of the company belongs to the owners who must pay income tax on it when it is earned, and also pay income tax when it is taken out of the business in the form of dividend.

It sees the company as an instrument of the owners rather than an entity with its own identity separate from of shareholder.

Effect on practice

Dividends are considered as distribution of profits rather than expenses because they are payments to owners and interests on debt, income tax are considered as expense because they reduce the owner's wealth.

Financial capital concept

There is no distinction between the asset owned by proprietor or entity. All entity's profit is distributable to the owner of the firm and if the entity requires additional fund, it is available from proprietor's personal resource.

Limitation

Proprietary view is developed to small or proprietorships and partnerships use. In advent of company, it is inadequate as the basis to explain company accounting.