Accounting influences the decisions of the accounting report users. The essay focuses on the theoretical framework for accounting. The accounting theory writers continue to spend years learning the main purpose of accounting in its varied ways and forms. Contemporary debates in the essentially subjective field of accounting revolve around the advocacy of competing images and the way accounting is implicated in the construction of social reality.
There are different images embedded within the debates concerning accounting’s subjectivity in the construction of social reality. Davis et. al. emphasized that there are many images of accounting. Researching on the conceptual framework of accounting, the accounting personnel must study the different images to understand the complexity of the accounting theories. Understanding the different images hastens the developments in the preparation of the accounting reports. The accounting report’s preparation fills the unique needs of the readers of the accounting reports (Davis et al 1982, p.307).
Further, the historical record images focus on the company’s stewardship role. The company acts as the steward of the company’s assets, liabilities, equity, revenues, costs, and expenses to safeguard the interests of the affected parties. The company uses historical cost accounting method in recording business transactions. The historical cost method is in compliance with international accounting standards.
Historical cost method requires the recording of the assets at the historical amount paid. On the other hand, replacement cost method states that the cost of the inventory is recorded in the books of accounts using the current replacement cost of the inventory. Under events accounting, the accounting system focuses on the recording of business transactions in chronological order. Likewise, accounting includes the recording of accounting figures and other things that can be measured exactly.
Furthermore, Baumol affirmed that economic reality images focus on reporting the fair value of the assets. The supply and demand theory influences the recording of the company’s assets in the books of accounts. Under the demand theory, a decrease in the price of goods will cause an increase in the demand for the products. On the other hand, an increase in the price of goods will cause a decrease in the demand for the products (Baumol 2007, p.372).
In addition, financial statements imitate markets. An accounting report normally show the company’s selling prices close to the competitors’ prices. Generally, the prices of goods having the same quality and quantity may slightly differ from the average market segment price. In the very competitive securities market, financial information is very accessible and stock market transactions are executed at minimal transaction costs.
The accounting, economic, and other reports influence the rise and fall of the securities’ stock market prices. The stock market players correctly use the financial statements for their own subjective needs. Within the social reality situation, the accounting report indicating a net income will tend to increase stock market prices. An accounting report showing a net loss usually triggers a decrease in stock market prices. The accounting report influences the players’ stock market activities (Buckle 2004, p.138).
Further, Rutherford confirmed that accounting influences consumption activities. Management uses the accounting report as a basis for determining the availability of funds. Management uses a prior period income statement as basis for using enough raw materials, labor, and factory overhead funds. Furthermore, the accounting report improves investment decisions. For example, the investors use the accounting data for their own subjective needs.
Rutherford convincingly theorized that the stock market investors use the accounting reports to determine the appropriate time to buy or sell stocks. Stockholders want to grab a copy of the accounting report as a basis for determining if their investments generated dividends. An accounting report indicating a net loss indicates that investors are not receiving dividends. Consequently, the investors may choose to withdraw their current investments. This is another social reality environment (Rutherfored 2007, p.54).
In the same manner, Nikolai reiterated that accounting vividly offers relevant information to ensure a better measurement of income and wealth. An increase in net income increases the company’s equity balance. An increase in equity balance increases the company’s total assets. Consequently, the company’s wealth increases (Nikolai 2009, p.8).
In addition, Rutherford proposed that the information processing images focus on the production of information, behavioral accounting research, security price research, human information processing, and information inductance to enhance decision making activities. The suppliers use the accounting reports (financial statements consisting of the income statement, balance sheet, and statement of cash flows) for their subjective concerns.
The suppliers want to know if the company will be able to continue buying the suppliers’ goods and services. An accounting report showing the company increasing its revenues for the past two years persuades the supplier to increase production. The company’s production process increases to fill the company’s increasing supply needs (Rutherford 2007, p.117). This is a social reality.
Further, Cooper and Sherer emphasized that different users of accounting records place different values on the financial statements and accounting reports. In terms of social reality, the users persuade others to study the accounting reports. Consequently, the study increases their advantages and reduces the chance of incurring any future disadvantage. The readers of the accounting reports study the context of ecsonomic, social, and political environment (Cooper & Sherer 1984, p.207).
For example, Gee theorized that the creditors use the accounting reports for their own subjective needs. Within the parameters of this social reality, the creditors normally grant credit terms to companies presenting an accounting report. The accounting report normally shows last year’s net income. Generally, creditors refuse to grant credit terms to companies having a net loss ( Gee 2006, p.344).
Furthermore, Chapman affirmed that management uses the financial statements to fill management’s need to be fill subjective needs. Under this social reality environment, the accounting report’s indication of a net income translates to management’s passing grade. The management was able to maximize the company’s scarce resources to generate net profits (Chapman 2007, p.299).
In addition, Morris insisted that the public commodity images focus on information that is bought and sold. The customers use the accounting reports to fill their own subjective needs. The customers want a copy of the accounting report to determine if the company will be able to stay long enough to supply their needs and wants. An accounting report indicating a continuing loss for the past two years may indicate the company is on the brink of bankruptcy. Consequently, the customers will search for alternative companies to supply their needs. This is another social reality (Morris 2009, p. 493).
Further, Tony Tinker affirmed the theory that accounting focuses on the presentation of true and fair financial statements to avoid unjustly benefiting one party at the expense of another. The financial statements must be prepared with representational faithfulness and neutrality. Tony Tinker believes accounting must not focus only on mere scholastic or technical presentation of accounting reports. Accounting must also focus on the theory that social reality must be based on neutrality and representative fairness to ensure a more meaningful and realistic picture of the company’s business transactions (Tinker 1991, p.297).
In this regard, Glee confirmed that an external auditor comes into the picture to express an opinion on regarding the trueness and fairness of the accounting reports. An audit report indicating a violation of the accounting standards casts doubts on the organization’s accounting assertions (Glee 2006, p.13).
Further, Jesse Dillard theorized that accounting is social science. The accounting reports present the social reality of the business world. Consequently, accounting practices and theories cannot be fixed in any permanent sense. The generally accepted accounting standards and international accounting standards are based on years of painstaking scrutiny and revision by different accounting experts. Consequently, accounting principles are proposed, studied, debated, approved for implementation, disapproved, watered down, and superseded by a later accounting standard. Accounting takes into consideration the culture and history of the organization. In addition, the company’s environment, community, and other factors influence accounting (Dillard1988, p.3).
Likewise, Glee emphasized that institutional structures, including the International Accounting Standards Board, are instrumental in the drafting, approving and superseding the accounting principles and standards. The implementation of the standards increases the usefulness of the accounting reports. In addition, the power relations within the organization and the external forces contribute to the success in the implementation or cancellation of accounting principles.
The social reality of accounting includes compliance with the environmental and government benchmarks. The environmental protection agencies use the financial statements for their own subjective needs. This social reality of accounting shows that the environmental agencies use the accounting reports to determine if enough money was allocated for the protection of the environment. For example, the accounting reports will indicate if the company allocates funds to avoid polluting the rivers (Glee2006, p.5).
Further, Hines proposed that the social construction theory of accounting includes the presenting the company’s economic reality. The accountant is trained to use technical terms to convey a real picture of the company’s historical business transactions. In turn the readers of the accounting reports must have adequate accounting knowledge to understand the accounting reports. The accounting principles are the law –like procedures that must be implemented to present a true and fair presentation of the company’s revenues, expenses, assets, and other assertions (Hines1988, p.251).
Furthermore, McSweeney confirmed that the continuing drive of accounting experts to eliminate the ambiguity in preparing accounting reports is very difficult. The efforts can be evidenced by the continuing changes of the prior accounting principles with current ones. The current accounting principles are made to replace the outmoded principles (McSweeney 1997, p.691).
BRIEFLY, the resources above persuasively prove that accounting enhances the decision activities of accounting report users. There are different images embedded within the arguments about construction of reality. The images are influenced by social reality issues. Accounting enhances consumption decisions. An accounting report indicating large idle cash may persuade management to approve a company-wide summer vacation to the United States. The accounting report helps investment decisions. Accounting vividly offers valid and relevant information to enhance the measurement of income and wealth. The value of financial statements and accounting depends on the users of the accounting reports.
The public commodity image focuses on information that is bought and sold. Accounting should be reporting true and fair assertions grounded on the neutrality. Accounting is social science representing the social reality of the business environment. The social construction theory of accounting includes presenting the company’s economic reality. The continuing drive of accounting experts to delete the ambiguity in the preparation of accounting reports is very difficult. Indeed, contemporary debates within the essentially subjective accounting environment revolve around the advocacy of competing images and the way accounting is implicated in the construction of social reality.
References
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