The Foundation of Financial Accounting.

Abstract

Over the years a framework of theory and a body of practice have evolved for recording and communicating the financial and economic relationships of people and firms.In spite of advances made in these areas, the profession cannot claim an authoritative structure of accounting theory and an uncontradictory body of practice built upon that theory.That integrating force between coordinated theories and sound practices seems to be lacking in the current structure of accounting.This dissertation proposes an enterprise financial accounting structure built upon the integrating force of the social concept of "fairness to all parties."Such a struc ture is characterized by successive levels of abstractions, the broadest being the objective.Successively narrow propositions implementing the objective include principles, rules, and procedures.These must continually meet the test of "fairness" to be included within the structure.The investigation is limited to studying the "foundation" of that structure: the objective, basic standard of "fair ness," and broad principles.As a basis for the analyses, the literature of the field was researched.A broad objective of all accounting is formulated, xi based upon the conviction that accounting responsibilities transcend service to the owners of firms to the service of society.From this social concept and an analysis of related disciplines, a definition and objective of enter prise accounting, and objectives for its managerial and financial areas are derived.The objective of the latter area serves as the basic proposition of the structure.The determination of net income as the current objective of financial accounting is discussed as an alternative to the formulated objective.The basic guideline to attaining the objective is the postulate; together, these serve as a framework for formulating principles, rules, and procedures.The guide line of "fairness to all parties" is judged the most pertinent to our social concept of accounting as well as to the environment of accounting.Several possible alternative postulates are considered, including "usefulness in the situation," "justice," and "truth.""Fairness" is a social concept rooted in ethics, finding its expression in laws, customs, business conduct, administrative decisions, religious beliefs, and in other forms depending upon the time and place.Under the pro posal, the profession would adopt the collective opinion of society about its concept of fairness, as officially inter preted by an authoritative body established within the profession.That concept then would be applied in the accounting for and reporting upon the various entities in xii society to the holders of the economic rights and interests in those entities.An ethically fair portrayal of the society segments' interests through the media of financial statements would serve as the basis for judgments and actions relative to their interests.The society segments include stockholders, management, labor, creditors, cus tomers, government, and general public.The final section of the study applies the concepts above to a number of currently generally accepted accounting principles.After separate analyses, it is concluded.thatthe "coordinating principles" of the business entity, perio dicity, materiality, consistency, full disclosure, and objectivity produce results which cannot be considered unfair to all parties.However, the principles of conserva tism and stable dollar are judged to produce unfair results.Some "application principles" are also tested: principles underlying the income statement which are concluded to be fair to all parties are those of matching revenues and expenses, realization of income, and separation of ordinary 4 f from unusual items in calculating net income.Two princi ples underlying the balance sheet are also discussed, con cluding that the principle concerning liabilities is fair, whereas the effect of the unstable dollar renders the cost principle unfair to all society segments.xiii CHAPTER I INTRODUCING THE STUDY Introduction We, and accounting, live in a world of interdepend ence, of mutual responsibility, and of mutual account ability.The profession of accountancy was originally established to deal with this concept of accountability in the area of financial and economic relationships.Collec tively, accountants are responsible to all segments of our society for fairly establishing and communicating the existence of and change in economic resourcesFor every resource, there is a claim to that resource; there is a moral and legal claim which is given effect either in common law, statute law, or moral law.Accountants discharge their responsibility to measure and communicate financial and economic relation ships through a framework of interrelated theory and practice.For the most part, emphasis has heretofore been ^See John L. Carey, "Responsibilities of Certified Public Accountants," The Ohio Certified Public Accountant.VII (Autumn, 1948), 11-18; and Lloyd F. Morrison, ''Some Accounting Limitations of Statement Interpretation," The Accounting Review.XXVII (October, 1952), 490-495. 1 nonprofit enterprises?There is a pressing need for clarification and agreement about the definition, nature, and scope of accounting principles.There is likewise a need for the development of a sound and coherent body of accounting theory. Obligation of the Accounting ProfessionWhile terminology is a challenge, the real chal lenge is to develop a framework to provide a proper basis for determining appropriate accounting practices But why must we develop this framework now?The answer is implied in a statement by Arthur Cannon:Accounting needs a logical unifying basis of postulates and a superstructure of internally consistent principles.These will make it easier to solve the knotty day-to-day prob lems, and to reduce the areas of inconsistency that permit similar events in similar situa tions to be accounted for in a variety of ways.We really must stop this business of pretending that 2 plus 2 may be "fairly pre sented'^ by anything from 3 to 5.7 A framework must be developed to provide a 5See George R. Catlett, "Factors that Influence Accounting Principles," The Journal of Accountancy.CX (October, I960), 45. ^Cannon is referring to the standard wording of the auditor's short-form report.For the complete report:, see the American Institute of Certified Public Accountants, Codification of Statements on Auditing Procedure (New York: American Institute of Certified Public Accountants, 1951), p. 16. ^Arthur M. Cannon, "The Privates," The California CPA Quarterly (September, 1959), as-quoted in The Journal of Accountancy.CIX (February, 1960), 33.framework.We may outline that structure In a form such as It appears on the following page.Referring to the outline, the discipline of account ing, as viewed by this writer, is basically an information system.As such its nature is determined by economics, statistics, law and government, and social and moral atti tudes.The discipline of economics provides the data and relationships with which accounting is concerned.The methods to manipulate these economic data are provided by the discipline of statistics.Law and government provide the guidelines in manipulating the data.And a perspective on the modes and customs is provided by the social and moral attitudes of the segments of society.Accounting as an information system may be based on any one of a number of viewpoints.There may be the view point of a personality-either real or fictitious--or there may be a viewpoint void of personality, such as a fund.Other viewpoints, such as an "activity concept"*^ or an "operations concept"*® or an "organization theory"*^ have been advanced.A brief elaboration on the first three *^See Helmi M. Nammer, "An Activity Concept of the Business Enterprise and Its Implications in Accounting Theory" (unpublished Doctoral dissertation, The University of Illinois, Urbana, 1957).*®See Suthee Singhasaneh, "The Concept of 'Opera tions' in Accounting and Its Influence in Income Determina tion and Income Theory" (unpublished Doctoral dissertation, The University of Illinois, Urbana, 1957).

Cite this work

No public copy is stored for this record, so only the metadata is cited.

Stored only when both papers are in the corpus — 16 citations exist upstream.

Papers that cite the same references — the relational fallback while embeddings are still backfilling.