An Accounting Theory Lectured by Dr. Siriluck Sutthachai Accounting Department Faculty of Management Science Khon Kaen Univeresity Khon Kaen, Thailand

Definitions of Accounting Accounting : An art or a science??

Definitions of Accounting Accounting is the art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of a financial character, and interpreting the results thereof.

Definitions of Accounting Accounting is a service activity. Its function is to provide quantitative information, primarily financial in nature, about economic entities that is intended to be useful in making economic decisions, in making reasoned choices among courses of actions.

The Structure of An Accounting Theory 1. Objectives of Financial Statements 2a. The Postulates of Accounting 2b. The Theoretical Concepts of Accounting 3. The Principles of Accounting 4. The Accounting Techniques

The Objectives of Financial Statements The approach in formulating the objectives of accounting Conflicts of interests firms: firm-oriented users: user-oriented The accounting profession: profession-oriented

The Objectives of Financial Statements Trueblood Committee developing the objectives of financial statements determines: who needs financial statements; What information they need; How much of the needed information can be provided through accounting; and What framework is required to provide the needed information.

The Objectives of Financial Statements To provide information on which to base decision making.

Society Decision Making General users Organizations Earning power Nature of Information: Factual and Interpretative Balance sheet Income statements Financial activities forecasts Uses Society Accountability

The Accounting Postulates Accounting postulates: self-evident statements that portray the economic, political, sociological and legal environments in which accounting must operate. The Entity Postulate (หลักการเป็นหน่วยงาน) The Going-Concern Postulate (หลักการดำเนินงานต่อเนื่อง) The Unit-of-Measure Postulate (หลักหน่วยเงินตรา) The Accounting-Period Postulate (หลักงวดเวลา) ข้อสมมติขั้นมูลฐานของการบัญชี เป็นข้อกำหนดที่เป็นที่ยอมรับ โดยไม่มีการทดสอบ และการบัญชีมีวิธีการปฏิบัติที่อยู่บนข้อสมมตินี้ ถ้าไม่มีข้อสมมตินี้การบัญชีก็ไม่มีความหมาย

The Theoretical Concepts of Accounting Theoretical concepts of accounting: self-evident statements that portray the nature of accounting entities operating in a free economy characterized by private ownership of property. The Proprietary Theory (ทฤษฎีความเป็นเจ้าของ) The Entity Theory (ทฤษฎีความเป็นหน่วยงาน) The Fund Theory (ทฤษฎีเงินกองทุน) แนวคิดขั้นมูลฐานทางการบัญชี เป็นทฤษฎีที่ใช้อธิบายหน่วยธุรกิจในทางบัญชี

The Theoretical Concepts Proprietary Theory Owner is the centre of attention. Balance Sheet: Equation A-L = P Income: Income is the increase in the wealth of the owner from business operations during a given period. All accounting concepts, procedures and rules are formulated with the owners’ interest in mind. The purpose of the owner is to increase their wealth. Revenue and expenses occur because of the decisions and actions of the owner or their representatives. Income represent the increase in wealth of the owner from business operations during a given period. If this is what income represents, then all aspects that affect the change in the owner’s wealth in that given period should be included in income.

The Theoretical Concepts Proprietary Theory In practice, Dividends are considered a distribution of earnings rather than expenses because they are payments to owners. Interest on debts and income taxes are expenses because they reduce the owner’s wealth. Earning per share Financial capital concept Limitations: the development of nature of business and laws Financial capital concept: maintain the financial value of the capital of the entity, by taking into account changes in the general level of price. Capital represent the cash invested by the owner plus earnings reinvested by retention in the business. Income is the amount of cash recieved by the firm over the cash investment by owners into the firm. Limitations: the development of business requires the separation off the company and its owners, then there is a separation of shareholders and management. Shareholders rely on information reported by the management.

The Theoretical Concepts The Entity Theory The enterprise is separated from its owners and accounting procedures are conducted from the viewpoint of the entity. 2 versions of the entity theory: Traditional view: the business firm operates for the benefit of the equityholders, those who provide funds for the entity. New interpretation: the entity is seen as in business for itself and interested in its own survival. An entity can be defined as any area of economic interest that has a separate existence from its owners. New interpretation: because of the concern with itself, the entity gives an accounting to the equityholders in order to meet legal requirements and maintain good relationship with them in case more fund are needed in the future. Although different interpretations exist, each view leads to the same conclusion “stewardship or accountability is of primary significance”.

The Theoretical Concepts The Entity Theory Balance sheet: Equation Assets = Equities Income: Income is defined as a change in the ‘net assets’ of the firm rather than ‘capital’. In practice, Interest charges should be considered a distribution of earnings rather than expenses. Physical capital concept Balance sheet: equity represents rights or claims on the assets of the entity. Income: emphasis is on the determination of income. The stress on income is due to 2 reasons: 1) equityholders are mainly interested in income, because this amount denotes the result of their investment for the period; 2) the reason for the firm’s existence is to make a profit; it is necessary for the firm’s survival. And thus the profit and loss account is more relevant than the balance sheet. Revenue is defined as the inflow of assets due to the transactions undertaken by the firm with regard to its product. Expense relates to the cost of the assets and other services used up by the firm to create the revenue for the period. The physical capital concept: primary requirement is to maintain the ability of the entity to carry out the functions that are its responsibility and it is therefore concerned with maintaining the physical operating capacity of the firm. Income is earned only after the firm’s ability to replace its operating assets has been maintained. The relevant value is current or replacement cost.

The Theoretical Concepts The Fund theory: A fund is a unit of operations, a centre of interest, with specified purpose or set of activities, consisting of assets and equities. Equation: Assets = Restrictions on Assets The broad concept of fund theory introduce the cash flow statement. The first two theories were criticised that they take personal point of view in the attention. Every fund is aimed at fulfilling some purposes. Liabilities represent future payments and not present claims on the assets. Owner’s equity represents a final restriction on the assets and establishes the equality of assets and equities. Revenue is an increase in assets into the fund that are completely free of equity restrictions other than the final restriction imposed by the residual equity. Expenses represent the release of services for designated purposes specified in the objective of the fund.

The Theoretical Concepts The commander theory It focuses on effective economic control of the resources. People is the centre of actions; people who control over the company’s resources. The investor theory Accounting functions and financial statements should take the point of view of investors who are shareholders and creditors. Accounting equation: Assets = specific equities + residual equities The investor theory: investors are interested in future cash receipts, which depend on: The firm’s monetary capacity to disburse cash; The management’s willingness to pay investors The legal priority of the investor’s claims.

The Theoretical Concepts The Enterprise theory It views the enterprise as a social institution where decisions are made that affect a number of interested parties. Management is viewed as the guardian of the company who is responsible for its survival and growth. Managers act as a mediative function among the various interested parties. The theory introduces the concept of ‘value-added income’. value-added income: To determine the value created by the firm in a given period. Value-added statement include a company’s source and distribution among the participants of the enterprise. It measures the performance of the participants in the entity—employees, providers of capital fund and the government—who cooperatively endeavour to create additional wealth. Example of a ‘value-added’ statement.

The Accounting Principles Accounting principles: general decision rules, derived from both the objectives and the theoretical concepts of accounting, that govern the development of accounting techniques. The Cost Principle (หลักราคาทุน) The Revenue Principle (หลักการเกิดขึ้นของรายได้) The Matching Principle (หลักการจับคู่) หลักการบัญชีขั้นมูลฐานเป็นกฎเกณฑ์ทั่วไปที่ใช้ในการตัดสินใจเพื่อพัฒนาวิธีปฏิบัติทางการบัญชี ซึ่งหลักการบัญชีเหล่านี้อยู่บนพื้นฐานของวัตถุประสงค์และหลักทฤษฎีทางการบัญชี

The Accounting Principles The Objectivity Principle (หลักฐานอันเที่ยงธรรม) The Consistency Principle (หลักความสม่ำเสมอ) The Full Disclosure Principle (หลักการเปิดเผยข้อมูล) The Conservatism Principle (หลักความระมัดระวัง) The Materiality Principle (ความมีนัยสำคัญ) The Uniformity and Comparability Principles (ความเปรียบเทียบได้) Timeliness of Accounting Earnings and Conservatism (ความทันเวลาและความระมัดระวัง)