Introduction
Accounting is viewed by many people as a cold, dry, and highly analytical discipline. As a discipline, accounting offers precise answers, which are either correct or incorrect. The answers provided by accounting may be true or false (Richard, 2011, p.6). For instance, let us take two companies which are similar in the value of their inventory and cost of goods sold calculated using different accounting methods. Company A uses last in first out (LIFO) method while company B uses first in first out (FIFO) method, and in the process, give results that are totally different but equally correct. Considering that both methods provide correct answers, it is difficult to know which method is precise.
On the other hand, one might say that the choice one makes when selecting an inventory method is merely an “accounting construct”, it is essential to note that most of the games that accountants play are solely of interest to them and they have nothing to do with the real world (Gaffikin, 2005). According to research, this assertion is considered to be wrong. Considering the LIFO and FIFO example, it is essential to understand that this argument has essential income tax ramifications in countries like the US (Richard, 2011, p.6). Considering LIFO, a more rapid write-off of a company’s current inventory costs weighed against revenues, and assuming that inventory prices are rising, will generally provide income taxes that are lower (Maharshi University, 2004, p.7).
In that case, it is essential to note that, accounting construct has an essential social reality, and not only in terms of income tax payment. Accounting is thought of as the language of business throughout the world. In that case, the language of accounting is regarded as a means of communication of feelings or ideas by using conventionalized gestures, signs, marks and articulated vocal sounds. In the same way, the language of accounting is used by many people to communicate matters which relate to various business aspects (Maharshi University, 2004, p.7). The reason why accounting has an essential social reality is because individual enterprise keeps their business separately.
The fact that accounting is regarded to have an essential social reality possesses various questions about the social consequences that are associated with accounting numbers. The question that many people ask is: ‘Is it difficult to measure economic reality accurately?’ This question can only by answered by understanding the concepts that exist within accounting theory. This paper provides a general understanding of accounting theory in different perspectives. The paper also provides a critical perspective of accounting theory, which might provide a vivid reason as to why it is difficult to measure economic reality accurately.
Accounting Definition
As a definition, accounting is regarded as the process required to measure and record financial values of assets and liabilities of a company as well as monitoring the value of assets as they change with time (Gaffilkin, 2005). In accounting terms, a business is mostly referred to as an individual. The term ‘asset’ is used to refer to the things with a positive financial value and those that belong to the business. Liabilities, on the other hand, are the business belongings with a negative financial value. Understanding accounting theory requires one to firmly understand its assets, liabilities as well as other things, which include the business equity and the information that is projected in the accounting balance sheet (Gaffilkin, 2005).
In that case, the role of accounting is that of communicating the outcome of operations of a business. Accounting manages to communicate the operations by accepting its definition. Practically, accounting is regarded as the art of record keeping, summarizing and classifying records in a manner that is significant and in terms of transactions, events and money. Regarded as the art of recording, accounting requires putting what is being communicated into writing or in printed form. Therefore, the transactions of financial characters needed to be recorded and maintained in the form of cash books, journals, day books and memoranda (Gaffilkin, 2005).
Record keeping is not only used to ensure that all business operations that are associated with the organization finances are recorded, but they also used to ensure that these financial activities are recorded in the right manner. For instance, when a company’s executive needs to travel with his work, he might ask the company’s cashier for advanced funds, which are needed to meet his travel expenses. On the receipt, which is created from the executive memo, the cashier is expected to prepare a voucher, which is done and handed over to the executive to sign before the cash is handed over to the executive. This transaction is mostly recorded in the cashbook as well as the travel advances accounts of the ledger (Gaffilkin, 2005).
Accounting Theory and Various Contributions
Defining accounting is essential but not enough to understand why this theory is essential. It is, therefore, essential to venture further into the construct of accounting to understand various aspects of accounting theory. The Egyptians are considered among the first people to implement accounting in their activities. The Egyptians, who are known for their glorious appearance in the commercial market in the past, derived their first norm of trade from the intercourse with other ingenious people (Belkaoui, 2004, p.5). From the consequence of trading with other ingenious people, the Egyptians received their first form of accountantship, which was regarded as the natural way of communicating to all the cities found within the Mediterranean (Belkaoui, 2004, p.5).
During the time when the Western empire was overrun by the Barbarians, and the countries that were composed took the opportunity of asserting their own independence, commerce was filed quickly after liberty (Belkaoui, 2004, p.3). Immediately, Italy, which was formally regarded as the court of the universe, was transformed to the seat of trade. While this seat of trade was not entered in the business of exchange, which was created by the help of Lomberds, it helped to connect all trade cities within the European Union. In the process, this connection helped to create the first method of keeping accounts, which was done by double entry, and was later referred to as the Italian book keeping (Belkaoui, 2004, p.3). Although the Italian double entry book keeping was not the first accounting concept, it greatly contributed to accounting theory which is currently being implemented in most academic fields and institutions.
Another contribution to accounting theory was done by Luca Pacioli in 1494. Known as a Franciscan friar, Pacioli is mostly associated with the introduction of double entry book keeping accounting method, which was among the first accounting methods (Belkaoui, 2004, p.3). In 1494, Pacioli published his first book, which described double entry book keeping. Pacioli’s treatise of book keeping method was done to reflect Venice practices, which at the time became known as the Method of Venice or what many people came to know as the “Italian method” (Belkaoui, 2004, p.5). It is essential to note thatPacioli did not invent double entry book keeping method, but provided a vivid description of what was being practiced in Italy to be used for academic purposes (Belkaoui, 2004, p.5).
According to Pacioli, the aim of devising the book keeping method was to enable the trader to obtain information regarding his assets and liabilities (Gaffilkin, 2005). In this method, both debt and credit were used as entries to secure what came to be known as double entry. In his assertion, all entries needed to be doubled, which meant that, if one made one creditor, he needed to create a debtor (Gaffilkin, 2005). With this notion, three books were needed, which are a memorandum, a ledger and a journal. The entries required for these books were found to be quite descriptive. Research suggests that double entry method not only required the name of the buyers or sellers recorded, but the description of the goods with their weight, price, measurements and size were included (Gaffilkin, 2005).
Therefore, while the accounting theory is considered essential in the current accounting practices, the concepts embedded in the theory dates back several centuries. Various contributions have made this theory more appropriate, which makes them appropriate for all forms of organizations.
Critical Perspective of Accounting Theory
According to Gaffikin (2005, p.1), accounting is placed in the same category as social science disciplines. According to research, social sciences are difficult to define accurately and have been subjected to many debates. Like social sciences, accounting is regarded as a discipline that is concerned with the aspects of human society (Gaffikin, 2005, p.2). The main reason why accounting finds itself in this class is because it is a system of thought, which is designed by humans with the aim of assisting human decision making as well as influence their behavior (Gaffikin, 2005, p.2).
According to research, accounting theorists as well as researchers have been slow to recognize the evidence, which is associated with the heavy involvement of neo-empirical research programs that were carried out over the last fifty years. Although the concepts of accounting theory dates back centuries, research suggests that accounting as a field is fairly young as an intellectual discipline and is yet to demonstrate the maturity of self understanding and reflection (Gaffilkin, 2005). Earlier, a question was posed suggesting that, it is difficult for people to measure economic reality accurately. Although it might be difficult to explain why this is the case, research indicates that accounting has been accepted as a sub discipline and in the process has become inferior to economics (Gaffikin, 2005, p.7).
As a sub discipline, accounting heavily relies on theories and methodologies used in economics. However, this does not mean that accounting theory is not associated with economic concepts since companies require its theory to deal with economic phenomena. However, accounting theory deals with economic phenomena from a very different angle, which differentiates it from economic disciplines (Gaffikin, 2005, p.7). In many cases, accounting has been referred to as the “handmaiden of capitalist economics”, which is merely used to reflect a view point that is conservative and overly deferential since there are a number of accounting aspects which have been separated from simple economic analysis (Gaffikin, 2005, p.7). Some of the economic analyses that have been separated from accounting theory are control systems, behavioral consideration and information processing.
Another reason why it is difficult to accurately measure economic reality accurately is that the accounting theory has been developed from different individual works. Different researchers and theories emerged with different perspectives and used different assumptions to generate statements, which later became known as statement of accounting. The problem with these methods is that they were developed centuries ago and most of them used assumptions to assess economic reality. Currently, economic conditions are changing and accounting theory is still the same. Because of this difference, accountants are being forced to use assumptions, which are based on past concepts to predict current economic developments. With this being the case, it is very difficult to use accounting theory to accurately measure economic realities.
Conclusion
Accounting theory in different perspectives has been used in both the academic and corporate world. As an academic discipline, accounting theory provides the required concepts which are needed to understand how businesses operate. The definition of accounting suggests that accounting is a form of communication which is required to communicate the financial aspect of an organization. This theory and its concepts date back centuries with the Egyptians and Europeans making a significant contribution to its concepts. Despite its benefits, critics have argued that accounting theory emerges as a sub discipline and in the process has failed to provide a precise measurement of economic reality. The reason behind this reasoning is that the concepts of accounting theory are old and are failing to measure up with the changing economic development.
Bibliography
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Gaffikin, M., 2004. The Critique of Accounting Theory, s.l.: University of Wollongong.
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Maharshi Dayanand University, 2004. Accounting Theory, s.l.: Maharshi Dayanand University, ROHTAK.
Richard, M., 2011. Accounting and Analytical Methods, NY: Irwin.
