Accounting: The Process of Preparing and Communicating

Introduction

Accounting is the process of preparing and communicating financial information generally in monetary terms about a business entity to users both external who would include shareholders and internal like managers or employees both existing and potential. Accountancy is defined as a mathematical science that is useful in establishing the causes or factors contributing to the success and failure in a particular business entity while the art lies in selecting the information that is relevant to the user and is reliable for decision making to suit the entity; in simple terms science seeks to establish relationship of cause and effect whereas art is the application of knowledge comprising of some accepted theories and rules.

According to Earnest (1913) ‘‘the principles of accountancy are applied to business entities in three divisions of practical art, namely accounting, bookkeeping, and auditing”. American Institute of certified Public Accountants (AICPA) have defined accounting as “the art of recording, classifying in desired categories, and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of financial character, and interpreting the results thereof in a manner suitable to the concerned persons for their benefit” (Swahla, 1913); but when you think about it, accounting comprises of rules, principles, concepts, conventions and even standards which are acceptable forms of knowledge recognized all over the world thus classification as a science.

The debate whether accounting is an art or a science is based upon two misconceptions, first, the authors have a misconception of the nature of science in that they seem to believe that in order for a discipline to be scientific, it must consist of immutable laws and absolute truths but in contrast, the fact is that in even the most exact sciences, laws are mutable a case scenario is the recent overturn of the Newtonian laws of physics by Einstein (Karl, 1961).

To a scientist, laws are subjective generalizations that must be continually subjected to empirical challenges and if they were immutable, scientists would call them “definitions,” not “laws (Karl, 1961). In accounting laws are conceived as immutable and believe there are no natural laws but only conventions validated by experience, estimates born of human judgments and guidelines developed by professional societies governing accounting (Karl, 1961).

Misconceptions About the Nature of Accounting

Accounting has mostly been refered to be more of an art as opposed to science and attribute this to the methods used in both; for example accounting has been necessarily based on conventions as opposed to the laws which are key in science; the conventions form the basis of standards which have to be adhered to during reporting and presentation of accounting information. It is this conventions which have contributed to development of conceptual frameworks aimed at establishing workable and acceptable standards. Due to tha fact that accounting is based on conventions or agreed standards there is a strong likelihood that uncertanities may be unavoidable; this uncertainities have compelled accountants to classify accounting as an art.

However, this may not be sufficiently justifiable due to the fact that if at all science was made of absolute truths, then there would be no reason for scientists to continue with their research, a clear implication that there are uncertainities also in science hence every time accountants define accounting as an art because of uncertainities, the definition can be categorised to be based on misconception of science.

The second misconception is that there is something about accounting that makes it inherently unscientific; the fact that accounting is based upon conventions instead of laws is the present condition of accounting, but it is not a necessary condition (Bloomfield et al, 2010). For a case scenario, compare the primitive medicine man to the modern medical scientist; both study illness one would say they have the same subject matter but they differ in their approach to that subject matter: one performs artistic rituals designed to exorcize demons while the other performs the arduous scientific task of looking for empirical generalizations and laws; thus the difference between them is not the nature of the subject but rather their approach to that subject (Bloomfield et al, 2010).

Once the medicine man defines illness as the product of the inexplicable caprice of demons, he is trapped since the problems will remain unresolved because he has defined them in such a way as to make them in principle unresolvable (Bloomfield et al, 2010). The first step toward science is to change the definition of the problem; the modern medical scientist faces a host of uncertainties, e.g., the cause of cancer, but he does not fall into the trap of defining the problems so that they are in principle unresolvable; this analogy fits accounting (Bloomfield et al, 2010).

There is nothing about our subject matter that requires that it be based upon conventions instead of laws; It is based upon conventions for the simple reason that we define it that way thus there is nothing inherently unscientific about accounting that has been unscientific and it is possible to adopt a scientific approach (Elliot et al., 2004).

Similarities

As science would include acquisition of knowledge through study, practice, investigation, and careful observation aimed at gaining knowledge of general truths about the already established laws of operations, especially through tested means, so is accounting which also includes observation, investigation, and identification through testing and collection methods with the aim of drawing conclusions about particular established data. It has been established that in both disciplines expansive study and training are crucial before a professional is able to formulate an hypothesis and make conclusions or even judgments based on careful investigation, documentation, and research though in accounting, the book entries are the accepted methods of recording and classifying data (Elliot et al., 2004).

Identify and Measure

Principles of science stipulates that to for one to be called a scientist, witty identification of a research a topic, extensive analysis or measuring, and recording results in a manner which would precisely satisfy everyone are the most and vital steps which have to be adhered to. In the same way, accountants identify, measure, analyze and report data in a satisfactory manner for reliable decision making. “Accounting transactions are identified and recorded using a double-entry bookkeeping accounting system that includes a set of accounts; this information is subjected to auditing which involves testing for accuracy of accounting practices, carrying out certain tests and thorough measurements aimed at providing accurate and satisfied results” (Elliot et al., 2004).

After all that has been achieved one would judge the results to be subjective depending with the individual’s judgement when carrying out the measurements on the business liabilities and asset values, an aspect which is also allowed in carrying out scientific measurements.

Communication

For effective usage of any information including accounting, ellaborate and understandable communication to those receiving it is vital; this principles holds true with any scientific research and it is conspicously notable that scientific information has to be relevant and understandable otherwise it would be branded useless. According toElliot et al.(2004), in accounting, “the accepted methods of communicating financial data in an understandable and summarized format include preparing financial reports such as the general ledger, balance sheets, income statements, and cash flow statements and also accepted measurements which have to be used to analyze the data that these forms contain”.

This information is finally subjected to accountants in order to study the formulas and interpret the data to produce accepted versions of presentations like inventory turnover ratios, Debt-to-Equity Ratio, and Operating Margin. Reliance on this information for decision making is boosted by the fact that the data collected and the analysis tools recommended are wordly accepted and have to meet certain established standards ultimately reducing the uncertainty which could have arised if there were no standards to be adhered to in the first place.

Conceptual Frame work

Considering economic implications of financial information, reporting should be done effectively, users of financial statements need relevant and reliable information. It is with this in mind that a conceptual framework has been developed to guide financial accounting and reporting. A conceptual framework is like a constitution and it has been defined as “a coherent system of interrelated objectives and fundamentals that can lead to consistent standards and that prescribes the nature, function, and limits of financial accounting and financial statements” (Storey, 1998).

Development of a conceptual framework aimed at setting standards to build on and relate to an established body of concepts and objectives; a soundly developed conceptual framework would enable FASB to issue more useful and consistent standards over time; increase financial statement users’ understanding of and confidence in financial reporting, enhance comparability among companies’ financial statements and help in quickly resolving new and emerging practical problems by referring to an existing framework of basic theory (FASB, 1980).

Though one would argue that its development would assist in advancing accounting, there have been arguments against and Anthony (1983, Pp. 11 – 15) summarized them as follows:

• That the project is infeasible; there have been doubts on the feasibility of developing an acceptable framework and that has been considered to be a defeatist attitude,
• There have been problems with the assertion that accounting is only aimed at measuring true income and the claim that this cannot be achieved because no one knows what true income really constitutes (p. 12),
• That the development should be delayed and completed only when accountants have established why accounting is what it is, why accountants do what they do, and what effect this phenomena have on people and resource utilization, it was argued that users of accounting information wanted nothing less than perfection, which would be not easy to achieve and a guide would have helped whether perfect or not in resolving important outstanding issues (pp. 12 – 13),
• That accounting would qualify to be political in the sense that majority would have issues resolved in their favor rendering a conceptual framework irrelevant, however, if a conceptual framework was in existence then there would be some standards to counter political pressures,
• That development of a conceptual framework would lead to rigidities which may render accounting to be conservative hence fail to embrace modernity and dynamisms of the society necessitated by advancements in the technology which has made it possible for real time reporting; but when you think about it, this may be less grave than the alternative of developing standards without a framework (p. 15),
• There was a suggestion that entities could present raw data and allow users of the information to arrange data in whatever way they felt fit (p. 14); this would definitely obviate the need for a conceptual framework.

It would be important to note that “standardsetting is inevitably dealing with compromises and trade-offs, albeit in a world where little is known about the effects of these and their costs and benefits” (Schipper, 2010; cf. Gwilliam et al., 2005); hence the challenges on acceptance and compliance of the existing conceptual frameworks.

Conclusion

The arguments against development of the conceptual frameworks may not have prevailed but would probably explain why they have had little practical impact; the main motive may have been operationalization of accounting theory but the main challenge was definitely agreeing on the nature and scope of this theory an aspect which has led to arguments that the foundations of the conceptual frameworks may be built on shifting sands hence the continued debate on the aims of the conceptual frameworks and objectives of financial statements.

One would say that development of conceptual frameworks on accounting was immature going by the mystery surrounding definition and classification of accounting on whether a science or art but it would also be important to determine the real measurements of accounting considering there have been more intuitive arguments that there can be no ideal practical measure of income which should always involve estimation of the future (Edey, 1970).

References

Bloomfield, R. J., Christensen, T. E., Jamal, K., Moehrle, S. R., Ohlson, J. A., Penman, S. H., Previts, G. J., Stober, T. L., Sunder, S., Watts, R. L. and Colson, R. H. (2009). ‘A Framework for Financial Reporting Standards: Issues and a Suggested Model’. Web.

Edey, H.C., (1970).’The nature of profit’. Accounting and Business Research, No. 1.

Elliot, Barry & Elliot, Jamie., (2004). Financial accounting and reporting, Prentice Hall London, England. p. 3.

FASB, (1980). Statement of Financial Accounting Concepts No. 4, “Objectives of Financial Reporting by Non business Organizations” pg. 22.

Karl, R., Popper, (1961). The Logic of Scientific Discovery. New York: Science Editions, Inc., pp. 40-42.

Schipper, K. (2010). How can we measure the costs and benefits of changes in financial reporting standards?’ Accounting and Business Research, 40(3) (Special Issue): 309-327.

Storey, K., Storey, S., (1998). Special Report, “The Framework of Financial Accounting and Concepts” Norwalk, Conn.: FASB, Pp. 85–88.

Wahla, S., (1913). AICPA committee on Terminology. Accounting Terminology Bulletin No. 1 Review and Résumé.