An Accounting Theory

1. An Accounting Theory Lectured by Dr. Siriluck Sutthachai Accounting Department Faculty of Management Science Khon Kaen Univeresity Khon Kaen, Thailand

2. Definitions of Accounting Accounting : An art or a science??

3. Definitions of Accounting Accounting is the art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of a financial character, and interpreting the results thereof.

4. Definitions of Accounting Accounting is a service activity. Its function is to provide quantitative information, primarily financial in nature, about economic entities that is intended to be useful in making economic decisions, in making reasoned choices among courses of actions.

5. 1. Objectives of Financial Statements 2a. The Postulates of Accounting 2b. The Theoretical Concepts of Accounting 3. The Principles of Accounting 4. The Accounting Techniques The Structure of An Accounting Theory

6. The Objectives of Financial Statements • The approach in formulating the objectives of accounting • Conflicts of interests • firms: firm-oriented • users: user-oriented • The accounting profession: profession-oriented

7. The Objectives of Financial Statements • Trueblood Committee developing the objectives of financial statements determines: • who needs financial statements; • What information they need; • How much of the needed information can be provided through accounting; and • What framework is required to provide the needed information.

8. The Objectives of Financial Statements To provide information on which to base decision making.

9. Decision Making General users Uses Organizations Society Earning power Accountability Nature of Information: Factual and Interpretative Balance sheet Income statements Financial activities Financial forecasts

10. The Accounting Postulates • Accounting postulates: self-evident statements that portray the economic, political, sociological and legal environments in which accounting must operate. • The Entity Postulate (หลักการเป็นหน่วยงาน) • The Going-Concern Postulate (หลักการดำเนินงานต่อเนื่อง) • The Unit-of-Measure Postulate (หลักหน่วยเงินตรา) • The Accounting-Period Postulate (หลักงวดเวลา)

11. The Theoretical Concepts of Accounting • Theoretical concepts of accounting: self-evident statements that portray the nature of accounting entities operating in a free economy characterized by private ownership of property. • The Proprietary Theory (ทฤษฎีความเป็นเจ้าของ) • The Entity Theory (ทฤษฎีความเป็นหน่วยงาน) • The Fund Theory (ทฤษฎีเงินกองทุน)

12. The Theoretical Concepts • Proprietary Theory • Owner is the centre of attention. • Balance Sheet: • Equation A-L = P • Income: • Income is the increase in the wealth of the owner from business operations during a given period.

13. The Theoretical Concepts • Proprietary Theory • In practice, • Dividends are considered a distribution of earnings rather than expenses because they are payments to owners. • Interest on debts and income taxes are expenses because they reduce the owner’s wealth. • Earning per share • Financial capital concept • Limitations: the development of nature of business and laws

14. The Theoretical Concepts • The Entity Theory • The enterprise is separated from its owners and accounting procedures are conducted from the viewpoint of the entity. • 2 versions of the entity theory: • Traditional view: the business firm operates for the benefit of the equityholders, those who provide funds for the entity. • New interpretation: the entity is seen as in business for itself and interested in its own survival.

15. The Theoretical Concepts • The Entity Theory • Balance sheet: • Equation Assets = Equities • Income: • Income is defined as a change in the ‘net assets’ of the firm rather than ‘capital’. • In practice, • Interest charges should be considered a distribution of earnings rather than expenses. • Physical capital concept

16. The Theoretical Concepts • The Fund theory: • A fund is a unit of operations, a centre of interest, with specified purpose or set of activities, consisting of assets and equities. • Equation: Assets = Restrictions on Assets • The broad concept of fund theory introduce the cash flow statement.

17. The Theoretical Concepts • The commander theory • It focuses on effective economic control of the resources. • People is the centre of actions; people who control over the company’s resources. • The investor theory • Accounting functions and financial statements should take the point of view of investors who are shareholders and creditors. • Accounting equation: Assets = specific equities + residual equities

18. The Theoretical Concepts • The Enterprise theory • It views the enterprise as a social institution where decisions are made that affect a number of interested parties. • Management is viewed as the guardian of the company who is responsible for its survival and growth. Managers act as a mediative function among the various interested parties. • The theory introduces the concept of ‘value-added income’.

19. The Accounting Principles • Accounting principles: general decision rules, derived from both the objectives and the theoretical concepts of accounting, that govern the development of accounting techniques. • The Cost Principle (หลักราคาทุน) • The Revenue Principle (หลักการเกิดขึ้นของรายได้) • The Matching Principle (หลักการจับคู่)

20. The Accounting Principles • The Objectivity Principle (หลักฐานอันเที่ยงธรรม) • The Consistency Principle (หลักความสม่ำเสมอ) • The Full Disclosure Principle (หลักการเปิดเผยข้อมูล) • The Conservatism Principle (หลักความระมัดระวัง) • The Materiality Principle (ความมีนัยสำคัญ) • The Uniformity and Comparability Principles (ความเปรียบเทียบได้) • Timeliness of Accounting Earnings and Conservatism (ความทันเวลาและความระมัดระวัง)