AC 301

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AC 301

• THE NATURE OF ACCOUNTING

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AC301 The Nature of Accounting

• Accounting is A Social Science
• It is shaped by social forces
• History and Culture
• Institutional structures
• Power relations
• Politics and conflict
• Accounting functions in a law-like manner
• Accounting is central to capitalist operations
  and shapes social antagonisms

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AC301 The Nature of Accounting

• Accounting emphasizes property rights (e.g.
  through balance sheet)
• It celebrates victory of capital over labour.
• Accounting shapes distribution of income and
  wealth by defining 'income', 'wealth', 'profit',
  'assets', and 'liabilities'.
• It influences tax liabilities
• It provides information to financial markets,
  assessing the health of companies, influencing
  security prices and regulating the flow of
  investment funds.

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AC301 The Nature of Accounting

• Accounting provides numbers to support price
  increases
• Wage Negotiations
• Privatization of public assets
• Sale of companies
• Value of pension schemes
• Bonuses on insurance policies, units trusts,
• Executive pay, performance related pay

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AC301 The Nature of Accounting

• Accounting provides the basis for cost-plus
  contracting governing the actual profits made by
  government contractors
• Royalty payments
• Share Options
• provides input to government economic statistics
  on rates of profitability, company liquidity and
  investment, tax liabilities
• It influences transfers of wealth among and
  between the corporate sector, citizens and the
  state.

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AC301 The Nature of Accounting

• Accounting shapes accountability
• Where resources came from and how they have been
  used
• Whether some laws have been complied with
• Perceptions of efficiency
• It is part of corporate governance

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AC301 The Nature of Accounting

• Images that Have Shaped Accounting
• The Historical Record Image
• Stewardship Role
• Historic Cost Accounting
• Events Accounting
• Things can be measured exactly.

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AC301 The Nature of Accounting

• The Economic Reality Image
• Report market values
• Report Fair Values
• Financial statements try to replicate markets
• Influence consumption and investment decisions
• Focus is on measurement of income and wealth

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AC301 The Nature of Accounting

• The Information Processing Image
• Focus on production of information for decisions
• Behavioural Accounting Research
• Security price research
• Human Information processing
• Information Inductance

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AC301 The Nature of Accounting

• The Public Commodity Image
• Information is bought and sold
• Competition for information
• Information Economics industry
• Agency Theory Approaches
• Information as a way of holding agents
  accountable
• Social Welfare Consideration

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AC301 The Nature of Accounting and Reality

• Example 1 Maggie runs a market stall. She buys
  100 pineapples for 1 each and sells them for
  1.50 each. What is her profit?
• Under the historical cost accounting model - one
  answer may be as follows
• Sales 150
• Less Cost of Sales 100
• Profit 50

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AC301 The Nature of Accounting

• Example 2 Maggie still wishes to sell only
  pineapples from her market stall. However, she
  has now learnt that the replacement price of each
  pineapple has risen to 1.25. She wonders what
  her profit is.
• Sales 150
• Less current cost of sales
• (100 X1.25) 125
• Profit 25

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AC301 The Nature of Accounting

• Example 3 Maggie buys 100 pineapples for 1 each
  and sells them for 1.50 each. Maggie is facing
  an inflation rate of 10 per annum.
• Sales 150
• Cost of Sales (100 X1.10) 110
• Profit 40

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AC301 The Nature of Accounting

• Example 4 Suppose Maggie's great uncle Dennis
  had lent her 50 to start the business of buying
  and selling pineapples. We will assume that
  Maggie is concerned with safeguarding her
  personal purchasing power.
• Sales 150
• Less cost of sales in current s 110
• Operating Profit 40
• Gain on Borrowing 5
• Profit 45

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AC301 The Nature of Accounting

• Example 5
• Sales 150.00
• Less Current Cost of Sales 125.00
• Operating Profit 25.00
• Gearing Adjustment 12.50
• Profit 37.50
• Gearing Adjustment
• Current cost on the income stat 125
• Historical Cost of Stock 100
• Additional cost 25

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AC301 The Nature of Accounting

• Which profit figure is Factual and Why?
• Which profit figure is acceptable?
• Example 1 Profit 50.00
• Example 2 Profit 25.00
• Example 3 Profit 40.00
• Example 4 Profit 45.00
• Example 5 Profit 37.50

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AC301 The Nature of Accounting

• Accounting is based on theories
• Numerous assumptions are made
• Theories emphasise welfare of capital
• Anything about labour, society?
• Capital maintenance is central to accounting
• Accounting privileges the interest of capital
• It reflects and shapes dominant power relations

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AC301 The Nature of Accounting

• Accounting is a political activity
• Standard Setting what kind of theories are
  privileged?
• Choices affect distribution of income and wealth
• Choices affect perceptions of risks.
• Lobbying Industry
• Information industry
• Social conflict therefore cant provide
  permanent solutions.

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AC301 The Nature of Accounting

• Accounting is not value free
• Objectivity compliance with the rules
• Accounting enables us to label things (RD,
  Goodwill) and thus enables us to talk about them.
• Whatever gets reported depends on politics of the
  time
• The state is a key actor.
• Globalisations complicates policymaking

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AC301 The Nature of Accounting

• ACCOUNTING COULD BE INTERESTING!