ACCOUNTING THEORY

 

Accountants first learn the accounting equation and how movement of assets and liabilities lead to revenues and profits. At the end of a business period there is basically a loss or gain. These are the most basic concepts.

 

Stakeholders want to know if there is a profit and whether by continuing the business, a profit can be maintained. It is also important for auditors, investors, employees, suppliers and creditors to know if there are any indicators that the company is experiencing problems of "going-concern". This is really a matter for experts and auditors since a more in-depth study of the firm or organization´s assets and liabilities are required.

 

In today´s day and age when stocks are traded in different markets, it is extremely important to understand the financial reports, their terms and their meanings. This is one reason why IFRS has been adopted as the primary generally accepted accounting standards (GAAP) for publicly traded companies.

 

Many companies still do report using multiple GAAP. eg. UGB (AT), or FASB (US) together with IFRS. Every country normally can be expected to have it´s own GAAP. Independent GAAP for any one country will vary it´s rules surrounding treatment of balance sheet or income statement items in one accounting period.

 

An accounting period may be defined as one month, one quarter or one year, depending on the reference used. It is however, most important to ensure that reporting is completed for one business year. A firm may vary the starting date; however, must end, one year later. This is because referencing is done in a systematic way and there must be a way to compare companies accross time intervals as well as industry. Accounting theory is really the set of principles and some rules which accountants use to value a firm.

 

Accounting theory also holds some views regarding actions taken by management that need to be considered when valuing a firm. Accounting methods can be subject to manipulation in order to show higher performance than should be. Examples include use of certain depreciation methods or exclusion of costs in an attempt to alter the perception of assets (revenue generating ability) or reduction expenses (overstate profits).