Current Cost Accounting (CCA) attempts to provide more realistic book values by valuing assets at current market buying prices. It takes into account time-value of money and inflation. It is more complex than the traditional accounting, and it has created controversy about what adjustments are appropriate. Unlike Historical Cost Accounting, there is no need for inventory cost flow assumptions such as last-in-first-out and weighted average. The business profit in CCA shows how the entity has gained in financial terms the increase in cost of its resources, which is ignored by historical cost accounting. Differentiating operating profit from holding gains and losses has claimed to enhance the usefulness of information being provided by CCA. Holding gains are different from trading income as they are due to market-wide movements which are beyond the control of the management. Therefore, Current Cost Accounting doesn’t rewards managers for profits from holding gains and losses which Continue reading
Financial Accounting Concepts
Earnings Management – Meaning and Mechanism
The relationship between managers and shareholders in the business world cannot be disputable. This relationship is interpreted under Agency Theory. They are very dependent each other, even somehow there exist conflict of interest among these two parties. In example the shareholders put on trust to agency by contributing huge amount of money in terms of paid up capital, so that agency can generate business and obtain profit and increase the firm’s value as principles return. Meanwhile agency (managers) is dependent to the principles for remunerations and bonuses as compensation. Because of the great pressure from principles (shareholders) towards the high performance of firms values, so agency commonly practice earnings management in order to be sustained in market place. Earnings management may involve manipulation of accounting record, intentional omission or intentional misapplication of accounting o accounting principles. Earnings management is defined as the intentional misstatement of earnings leading to bottom line Continue reading
Stakeholder, Institutional, and Legitimacy Theories of Accounting
A theory is defined as a set of principles that form the underlying structure that can be referred to in a discipline of study. Accounting, being a human activity, considers such things as the behavior of people and their needs in regard to information that is financial in nature. It also considers why an organisation might choose to divulge or give information to a particular group of stakeholders. The theories of accounting date back to the early 1920’s when researchers were basically relying on observation. All through this period, there has been an attempt to prescribe how assets should be valued for the sake of external reporting, predict on what basis managers should be paid or motivated, predict the power of different stakeholders, and how the organisation aspires to be judged by the community. This article will discuss three accounting theories namely the stakeholder theory, legitimacy theory and institutional theory. Continue reading
Approaches to Accounting Theories
Accounting theory is a set of basic assumptions, definitions, principles, and concepts surrounding the accounting rule. It includes the reporting of accounting and financial information to relevant or interested parties. There are several approaches that are used in the development of accounting theory. The two main ones are normative theory approach and the positive theory approach. Normative theory approach is a theory that is not based on observation. It is based on how things in the accounting process should be done. This approach comprises of different approaches to have a single but effective accounting approach. This kind of approach uses a formula to come up with an income based on value, not costs. On the other hand, positive or descriptive theoretical approach to accounting theory is a set of theories that is concerned with what accountants actually do. These theories rely on a process of inductive thinking, which involves making Continue reading
Financial Reporting – Meaning, Objectives, Characteristics, and Principles
Financial statements entail the end products which are prepared from the adjusted trial balance. Financial statements play an important role of communicating key accounting information concerning a business organization to those people who are interested in the business. The financial statements act as a model of a business enterprise by showing the business organization in financial terms. The major financial statements includes income statements or profit and loss account, the balance sheet or statement of financial position, the cash flow statement and changes in owner’s equity. The income statement or the profit and loss account summarizes the expenses and revenues that a business incurs in a particular accounting period. Income statement is an important financial statement as it enables people to determine as to whether the business has attained its profitability objectives or not. The balance sheet main purpose is to explain the position of a firm at a particular Continue reading
Factoring of Receivables – Meaning and Mechanism
Raising short term and medium term debt by inviting and accepting deposits from the investing public has become an established practice with a large number of companies both in the private and public sectors. This is the outcome of the process of dis-intermediation that is taking place in Indian economy. Similarly, issuance of Commercial Paper by high net-worth Corporates enables them to raise short-term funds directly from investors at cheaper rates as compared to bank credit. In practice, however, commercial banks have been the major investors in Commercial Paper in India, implying thereby that bank credit flows to the corporate sector through the route of CPs. Inter-Corporate loans and investments enable the cash rich corporations to lend their surplus resources to those who need them for their working capital purpose. Factoring of receivables is a relatively recent innovation which enables corporates to convert their receivables into liquidity within a short Continue reading