Vk ch 10 fix - Summary Accounting Theory PDF

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summary for chapter 10 of accounting theory...

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VK CH 10 ACCOUNTING POINT OF VIEW

Proprietary Theory  Present the logic of accounting based on the “purpose of the firm, the nature of capital and the meaning of the accounts from the owner’s viewpoint”.  Entries are recorded form the point of view of the proprietor Balance Sheet Accounts  Propritorship represents the net worth of the owner in the business, therefore some accountants belive that current value is more relevant than historical cost  Equation : A – L = P  “The balance sheet of proprietorship is a summing-up at some particular time of all the elements which constitute the wealth of some person or collection of persons”, Sprague said. Income  Revenue is the increase in proprietorship; expense is the decrease in proprietorship  Income is the increase in the wealth of the owner in his business during a given period, then all aspects that affect the change in wealth of the owner in that given period should be included in income Effect on Practice  To a large extent, present accounting practice is based on the proprietary theory  In consolidating financial statements, the parent company method is based on the proprietary theory  Under the proprietary approach, it is logical also to consider a decrease in the value of a liability as a holding gain Limitation  The proprietary view of accounting was developed at a time when business firms were small and were mainly proprietorships and partnerships, but with the advent of the corporation the theory proved inadequate as a basis for explaining corporate accounting

Entitiy Theory  The entity theory goes beyond the “entity convention” regarding the separation of business and personal affairs.  From an accounting perspective, an entity can be defined as any area of economic interest that has a separate existence of its own

Two Views of Entity  Two versions of the entity theory exist, but each leads to the same conclusion, that stewardship or accountability is of primary significance : a) The traditional version of the entity theory sees the business firm as operating for the benefit of the equityholders, those who provide funds for the entity b) The newer interpretation sees the entity as in business for itself and interested in its own survival Balance Sheet  The entity is the center of attention, thus owners and creditors are seen simply as equityholder, providers of funds  Equation : Assets = Equities  The balance sheet shows the assets of the entity, which refers to as representing a “direct” statement of value for the entity, and equities, which calls an “indirect” expression of the same total value. Income  For the entity theory, emphasis is on the determination of income, and therefore the income statement is more relevant than balance sheet.  The stress on income is due to two reasons : 1) Equityholders are mainly interested in income, because this amount denotes the result of their investment for the period 2) The firm is in existence to make a profit Effect on Practice  Practice is inconsistent in following the implications of either the proprietary or entity theory  Conventional accounting theory is based on the entity concept, yet the proprietary view seems to have a greater impact on present procedures

Fund Theory  A fund is a unit of operations, a center of interest, with a specified purpose or set of

activities, consisting of assets and equities.  Equation : Assets = Restrictions on assets  Under the fund theory, the balance sheet is considered an “inventory statement’ of assets, and those restricitons applicable to the assets  The fund theory provides the frame of reference for governmental and nonprofit organiztions

Commander Theory  A sole proprietor is a commander. The proprietary theory emphasizes the ownership aspect, but what is overlooked is that the proprietor has control of the resources of his or her firm, and it is his or her ability to command them that generates income  The commander theory has not had a direct effect on accounting practice  However, since the implications of both the proprietary and entity theories exist side by side in practice today, which on first view appear to be contradictory, the notion of economic control, which is emphasized by the commander theory, could be the basis for synthesizing and rationalizing the simultaneous use of procedures related to the proprietary and entity theory

Investor Theory  Staubus argues that accounting function and financial statements should take the point of view of investors  Equation : Assets = Specific Equities + Residual Equity  Investors want information in order to predict future cash receipt as a result of their relationship with a particular firm  Staubus states that the future cash receipts of investors depend on (1) the firm’s monetary capacity to disburse cash, (2) the management’s willingness to pay investors, and (3) the legal priority of the investor’s claim

Enterprise Theory  The enterprise concept is broader than that of the entity, because the former sees the firm as having a role to play in society, whereas the entity theory views the firm as an isolated body seeking to make a profit  Suojanen argues that management today does not consider itself simply as the representative of the stockholders, but as the guardian of the company, responsible for its survival and growth Value-Added Income  The large corporation should be evaluated in terms of its responsibility, which relates to its outpus, because this is its contribution to society so that a value-added approach to income best reveals this contribution. The idea is to determine the value created by the firm in a given period  Value-added is a performance measure, a measure of the value or wealth created by the enterprise in a given period  How should value-added be calculated? The economist views value-added mainly in terms of the determination of national income, and therefore differs from the way an accountant sees it....