This document discusses some important matters and aspects about financial accounting theory. As herein provided, it could be noticed that importance is given emphasis on the understanding of the definition, objective, and application of financial accounting. Given these, one would be able to determine and conclude that financial accounting does not only concern more on figures, but its principles and standards are also based and founded upon the basics of accounting theories, or financial accounting theories.
Defining Financial Accounting Theory encompasses a broad sense of applicability of its context. The term basically attributes a system, financial accounting. Since it is a theory, it must be a theory which defines, deals, or relates to the system of accounting applied in a particular area of business dealing more on the financial aspects. It is always important and significant to understand financial accounting theory so as to properly determine the specific objective of every application in the system.
The reality and applicability of financial accounting theory is basically introduced and understood in its objective. The statement of the objective explains how the theory is applied, and up to what extent it could be beneficial and significant. Thus, accounting students would be able to observe and understand the scope and coverage of the accounting principles and standards by basically analysing the theories that framed them.
Critical evaluation of information source – article suitability
Financial accounting is one of the most important areas in accounting. In operating a business, financial aspects are given much attention by management, as it is in this area where business feasibility is being measured the most. As such, it is always considered as a major component of the accounting system. Thus, financial accounting exists, and everything therein is embodied in financial accounting theory.
In the study of accounting, students should understand the concepts of the various theories deemed to be the fundamental basis of the generally accepted accounting principles and standards. Of these various theories, financial accounting theory is an essential part in the formulation of concepts, standards, and principles in structuring an appropriate accounting system that could provide the needs of accurate information due to an organization, especially for a corporate business organization.
Adaption of accounting theories were made after some series of works of researchers had been submitted with stages of developments. There were various researches which were grouped as positive and normative researches. But the end of all of these was the formulation of accounting theories.
Accounting theories were built and structured on the basis of reasoning. These were inductive and deductive reasoning. Researchers were divided in formulating their theories. Some believed that accounting theory is to prescribe an approach of a certain perspective, and some believe that an accounting theory is to explain and predict accounting-related phenomena. As such, stages of development continued to exist on the works of the researchers in the field of accounting.
There were factors early researchers considered in their researches. Since financial accounting is a human activity, human limitation is one of the considerations. Approaches, perceptions, predictions, explanations are in the human nature. They are within the ideas that could be created and developed with the rational mind. Whereby reasons and logic are essential in answering the questions on why theories are there, as the product of the studies and researches for this particular human activity.
The role of accounting theory as different researchers define or use it in either of their perspectives is of significant effect in every activity, especially the financial. And as it is considered to be so, business organizations are the most which are in need of these accounting information. Financial activities of businesses need to be accounting-processed. As mentioned earlier, some researchers consider accounting theory to prescribe certain accounting-related approaches. Some also deem it to explain and predict accounting-attributed phenomena. In most recent perspective, accounting theory or financial accounting theory deals with explaining and predicting accounting practices. Giving further consideration to this argument, financial accounting theory is on the emphasis of focusing mostly on projections. The concept of bottom-line management is best applicable when the projected operation is given in the most accurate numerical presentation. And this is done only with the appropriate financial accounting system. And appropriate financial accounting system is attained also with the appropriate financial accounting theory to produce the accurate financial analysis.
Observance of proper accounting practices is adhered to in most business organizations, as the basis of implementing and attaining an accomplished business operation. It is not enough that management is running the business organization by itself alone. It must be that accounting is providing the needed information or data, especially in the aspect of projections. In this idea, it is not just plain management, but an accounting management or financial accounting management. It does imply only that financial accounting theory is deemed to cover the entire business process from the creation or inception of the business idea, implementation, actual operation, generation and calculation of profits, to the extent of allocating further appropriations for the expansion of the business operations.
Financial accounting theory is not limited on explaining the actual present operations or the results of what has been projected, but it goes further from projections of data to financial predictions. On the basis of the appropriate interpretation of the financial accounting theory, accurate financial analysis is done for management to be accurate ad determined for the targeted projections, and for such, be confident with their financial predictions.
Business organizations are addressing concerns of their operations on the basis of interpreting accounting theories that would provide solutions to their concerns, as well as the concerns of their businesses. Before they could properly and finally analyse the financial figures of their operations, they must have to set their operations back to the basic accounting theories for appropriate solutions or decisions management would be able to do. Thus, profitable business operation is always in agreement with financial accounting theory. And as a role of accounting theory, in relation to everything in the operation of a business organization must be explained thoroughly. The basis and the objective of a certain perspective in establishing a business must get through the system of the company’s financial accounting, from theory to actual implementation.
Part B - Practical Application of Financial Accounting Theory
(i)-Understanding Financial Accounting Theory
As discussed from some information of related articles and references, and the sources, financial accounting theory is essentially significant in almost all human activity. Even in one’s household simple activities, accounting is present, evidenced and applicable. From ordinary transaction to the most sophisticated deal, accounting is applicable and acceptable, proper and appropriate in its process and usage.
The importance of accounting theory in its general perspective is usually proven after producing beneficial results. Thus, accounting theory is almost always relative to everything done, being done, and to be done. And for one to be able to use or apply accounting theory, he must have enough knowledge of the basis of these theories. And not just the theories, it would also be the digested ones in the forms of accounting principles and standards.
Accounting theory relates to every individual. While it is affected by human factor, it also benefits human limitations. Though how limited a person is, accounting could always be adjusted to fit in every limitation and every situation. Every transaction could be covered by accounting. So that, accounting theory and its implementation is always acceptable. It used to make everything and every situation with a system. Logically, with the proper interpretation of an accounting theory, apply the same in the appropriate way, all things could be set with decency and done in order.
Applicability and usefulness of accounting theory in business organizations is of prime financial importance and significance. Whatever design or form a business is adapted or organized, accounting must be the system that enables the entire organization to operate properly. Every area in a business organization is connected to each other with and through an accounting system.
In a single proprietorship, a business is owned and managed by the owner. With the help of an accounting system, the owner would be able to identify and classify transactions of his own, and that of his business. Though most people who are doing business this way, usually incorporate their day-to-day activities and transactions, those of their own and those of their business, it would still be easy for them if they classify their transactions. These things are most properly explained in the sets of accounting theories.
For business organizations organized as partnership, accounting theory would properly explain the way their operations are done. The entity a partnership is formed is totally separate from the owners, and an accounting system must be installed for the appropriate management of the operations of these kind of businesses. Different owners would like to demand for submission of financial information of the results of operations. And all of these information or reports are done as in forms of financial statements which are produced through the company’s accounting system.
Corporate business organizations operate in some diverse ways. These are owned by many individuals called to be the stockholders. They can be numbered by hundreds or even thousands. With the operations of corporate businesses, accounting is of utmost importance. It is in this aspect that accounting theory or financial accounting theory is to be dealt with more appropriate interpretation for the proper and accurate application and implementation.
Installation of accounting system for most businesses, especially those organized as corporate is an essential component of the corporate management responsibility. Every area, department, or division is placed to function properly with the proper accounting system installed in the business organization. Devising or designing the accounting system that would fit to the requirement of a company or a business organization, would be properly installed through the proper interpretation of the financial accounting theories applicable to explain the recent criteria that would be satisfied by an appropriate accounting system.
The relationship of every department of a company is observed to be harmonious and functioning properly with connectivity, as they are linked together by an accounting system. Each employee is also functioning well on consideration of each one’s accountability. Everyone’s accountability is an idea denoted from accounting theory. And once it is related to money matters or finance, it becomes financial accounting theory.
Understanding everything about financial accounting theory helps everyone to appreciate and acknowledge his or her own accountability. This is the very basic of an accounting theory. This basic idea is just expanded to become organized to fit to the needs of an individual organization, especially a corporate entity. This implies an understanding that basics of an accounting theory are the source of the generally accepted accounting principles, standards, and practices. In some other way, it prescribes certain approaches. And in most cases, it explains and predicts accounting-related phenomena. It gives an utmost understanding of every business situation which may either be critical, and management would be able to come up with a solution or decision based on the explanation provided with the proper interpretation of financial accounting theories.
(ii) An Overview of an Application of Financial Accounting Theory, Considering the Task of an Installation of an Accounting System
In every business organization, it is important to install accounting system, especially for corporate business organization. The significance of which is for the proper administration and operation of the company or the business. Right from the start of the business, a study has to be done. There must that instance of instituting a project study. And in most cases, project or feasibility studies are framed up on the basis of expected profitability, which involves the study of the market and related aspects which would even entail a lot of computations. In so doing, accounting is deemed to be the primary instrument in formulating business project or feasibility studies. And in this context, understanding and interpretation of accounting or financial accounting theory are of utmost considerations.
Once a business is organized, it would now create a system that would run its operation. And that system would primarily be financial-related or financial accounting system that would possibly entail a lot of considerations on every aspect of its operation which then be accounting-related situations. It would be that different areas or department of the organization be equipped and conversant of those generally accepted accounting principles and standards, and they must understand every accounting theory that relates to every situation.
People in the organization could only be functional and productive in their assigned works if they work through a system based on what has been considered accurate, acceptable working processes and conditions. If accounting system is installed based on properly interpreted accounting theories, there is no question to doubt on how would different individuals in an organization work with coordination.
The system of reporting is also an element or part of a properly installed accounting system. Periodic reports are done and submitted on time, because the working force of the company is aware of their individual accountability. Every department and the respective department heads lead their teams with propriety in their work assignments arranged through a properly installed and diligently managed operation of the business organization. These are done, and at the same time explained by the applicable accounting theory.
With the installation of an accounting system, management could function well as they are fully provided with information that would lead them in performing their task well. Proper information of accounting reports are the basis of management in making their decisions. If these are done the appropriate way and are properly applied in business operation, everything would possibly end up a productive and profitable business operation.
Understanding financial accounting theory and observing its proper application and implementation would provide management and the people therein, the readiness in doing their respective obligations and responsibilities, as they know it to themselves that they are also accountable. From accounting theory to its implementation and converting the theory into figures is an aspect or a situation properly explained through the accounting theory. It is not only limited to the current numerical presentations, because these accounting theories are also able to establish predictions. Succeeding operations could already be projected, as provided for in the applicable accounting theory.
(iii) Financial Accounting Theory in Relation to the Findings in the Event of the Installation of the Accounting System
Financial accounting theory explains the importance of the installation of every accounting system to every business organization, especially that of the corporate business organization. There is no difference between each form of organization as to their need of an accounting system. All of them need to be properly managed, and that can be done the most with an accounting system. And the installation of this accounting system is properly understood as explained in the accounting theory.
Proper division of labour and functions are attributed to the proper installation of an accounting system. From top management down to rank and file employees, everything goes smoothly with a system. So that, it is deemed proper that a business organization must subscribe for its own system. Most of the information gathered in this paper suggested on the adherence to accounting theories and proper observance of the same, so as to apply and implement a system that would be coherent to financial accounting theory.
Areas which need to be provide with the proper accounting information, are those people in top management, the stockholders, suppliers, clients or customers, government offices, investors, and many more. They need this accounting information for each of them to decide properly and to protect their individual interest.
Top management needs to be providing with accurate financial reports for them to be able to evaluate the results of the business operation and measure the efficacy and efficiency of their function in the management. In addition to this, this would be the basis in making decisions for the succeeding operation. This embodied the task of an accounting theory in explaining and predicting.
The stockholders need to be provided with the most appropriate financial reports for them to know and come up with financial analysis, so as to decide whether or not to continue his or her investment in a certain business organization. They would like to know also the status of the company as to profitability. The interests of the stockholders are always at stake on how the company is operated. So that, they must be provide with the most timely and accurate accounting or financial reports.
The government agencies are also interested in monitoring the operations of the business organization. Thus, they are also provided with financial statements or financial reports. These are the basis of the continuance of the issuances of permits and licenses. Government agencies which are in-charge of monitoring employee benefits are also provide with most recent financial statements.
Customers are also concerned on the status of the business operations as they also interested in availing the goods and services offered by the company. Some of these customers might also be doing business from the goods they availed of from the company.
Suppliers are also of most interest with the company, as they the ones involved in delivering goods and services for the operations of the company. They also make profit out of it. There are suppliers on credit. And these suppliers are of more sensitive relationship with the operations of the company, as they have the existing collectibles that might be at stake in case of unfavourable results of operation.
Investors are monitoring profitability of the company for any possible investment opportunity. Everything about these discussions is considered in the formulation of accounting theory or financial accounting theory.
The employees are also of great concern on how the business organization is managed. It is where they earn their living for their families. Responsible employees are protecting the interest of the company or the business organization. Their knowledge of the applicable accounting theory would always lead them to consider working, defending, and being loyal to the business organization where they are working. As they think of their families, they also think of their jobs, and as they think of their jobs, they would always think and remember the responsibility and accountability attached to their work.
Applicability of financial accounting theory, understanding the same, observing its role in every business organization is something denoted with prime consideration. The role of the accounting department and the assigned accountant therein is to provide the needed timely financial information for the use of everybody in the organization, especially for those in the top management for decision making purposes. And for the employees, the appropriate financial information is an assurance of their continued stay in the workplace of the company.
Summing up in conclusion, presentations of financial information or financial reports are most understood, if someone is conversant with the proper interpretation, application, and implementation of the most appropriate accounting theory. To be able to do this everyone, students, laymen, businessmen, professionals, especially accountant should understand with observance to generally accepted accounting principles and standards stipulated out of appropriately formulated accounting theories. These theories are then used to prescribe certain perspectives, and in most cases explain and predict accounting-related phenomena.