Report on Accounting Theory: Objectives, Elements, and Principles

This report provides a detailed exploration of accounting theory. It begins by defining accounting as a discipline focused on recording, classifying, summarizing, and interpreting financial information to aid in effective decision-making. The report delves into the objectives of accounting, including maintaining systematic records, analyzing financial positions, ascertaining profit and loss, providing information to financial statement users, and assisting management. It then examines accounting theory itself, highlighting its role as a set of methodologies and assumptions used in financial reporting and discussing its ongoing evolution. The report outlines the objectives of accounting theory, such as providing guidance, enhancing business value, and aiding in policy-making. It also details key characteristics like systematic principles, rationalized practices, and dynamism. The report further breaks down the essential elements of accounting theory, including relevance, usefulness, reliability, and consistency, before concluding with a discussion of its core principles. The report aims to provide a comprehensive understanding of accounting theory and its practical applications.

Accounting is an
objective discipline

Table of Contents
INTRODUCTION ..........................................................................................................................3
MAIN BODY...................................................................................................................................3
Accounting: ................................................................................................................................3
Objectives of Accounting:...........................................................................................................4
Accounting Theory: ...................................................................................................................4
Objectives:...................................................................................................................................5
Characteristics:............................................................................................................................6
Elements:.....................................................................................................................................7
Principles:....................................................................................................................................8
Some Limitation of Accounting Theory:.................................................................................10
CONCLUSION .............................................................................................................................11
REFERENCES..............................................................................................................................12

INTRODUCTION
Accounting is an objective discipline states that accounting discipline which helps in
recording, classifying, summarizing and interprets the financial information in terms of the
activities of a concern which helps in taking the effective decisions about the concerns (Xia
Liitiäinen and De Beelde 2019). In this report we discussed about the various accounting theory
elements, objective which helps the business to achieve their target. Accounting also termed as
the language of business because the main accounting purpose is to communicate or report the
business operations results and its other different aspects to various accounting information user.
Also in business, accounting covers a very essential place, in business to sustain for longer
period of time in the market. It helps in measuring the organisational results like economic
activities and carries all this information to diverse stakeholders, together with the regulators,
creditors, management, investors. Accounting classified into various field like management
accounting, financial accounting, cost accounting, tax accounting. Accounting has existed in
different level and forms of sophistication throughout the history of human.
MAIN BODY
Accounting:
It refers to an process which records the transaction of finance in an business. This
process involves summarizing, recording, analysing, and reporting of all the business
transactions. Accounting process is pervasive in nature as every business, company have to
maintain their finance for the smooth function in business. It is essential and helpful for the
business to make effective planning, decisions, to measure the performance of business.
accounting requires in every field it can be maintain in small firms by the accountant or
bookkeeper, or by the finance department in big companies. In business there are mainly two
types of accounting cost accounting and managerial accounting. Both plays an essential role for
the effective and efficient functioning of business. such as cost accounting majorly helps the
business to take decision about the cost like at what cost product should sell in the market and
managerial accounting which helps the whole business management to take effective and
efficient decisions (Alsufy 2019. Haleem 2019). Both of these are an effective and valuable
terms which helps the management to make effective business decisions.

Objectives of Accounting:
Maintain systematic records of business transaction:
In business accounting is basically utilize for keeping a record of all the essential
transactions of finance in a systematic way. for that reason, all the financial transaction are
recorded in the books of accounts in an systematic way in journal, after that records in other
ledger accounts (Maroun and Atkins, 2021).
For analysing the business financial position:
In business systematic records of financial accounting helps the business to analyse the
business financial position. By the systematic accounting of every assets, liabilities, expenses in
the business owner can get the exact figure of their finance in business at a specific date.
For ascertaining the profit and loss of business:
In business profit plays an essential role as every business wanted to earn high profit, if
the business make statement of profit and loss account or profit and loss account by analysing the
record business can check that business either earn profit or loss. As well this also useful for the
financial statements users who are always wanted know about the net results of operations of
business.
Gives information to the financial statement users:
It states that the financial statement users plays an essential role. The statements of
finance of an business can highly effects the process of decision making of the financial
statements users. They also involves in the future of business growth. Giving financial
information to the different interested stakeholders or other parties is one of the major accounting
factor which helps the business in making effective and efficient financial decisions.
Assist the whole management:
It states that accounting effectively manages the day to day operations of business in an
efficient and effective manner as only by analysing and determining the data of finance and
accordingly that gives interpretations which can be in report forms
Accounting Theory:
It refers to an effective tool and set of methodologies, assumptions used in the study and
financial reporting principles applications (ter Bogt and Scapens 2019). Accounting theory study
includes both the accounting practices historical foundation and the way in which accounting
practices changed and includes to the regulatory structure that rules financial reporting and

financial statements. It is an on-going evolving subject, and have to be adopted in business in an
new and effective way, in advance and new technological norms.
Accounting theories are mainly bound by the conceptual structure of accounting. This structured
framework is given by the (FASB) Financial accounting standards board, for both the private and
public business (FASB) is an independent free entity that analyse to make and outline the
essential objectives of financial reporting. Basically theory of accounting is an opinion of as the
logical reasoning that supports in guiding and analysing the practices of accounting. There some
basic accounting theory objectives and principles which helps the organisation as well business
to analyse or understand their business financial direction and accordingly that establish different
effective business strategies that helps the business to survive in the market for long-term
(Herawaty and Solihah, 2019).
Objectives:
Accounting theory main objective is that, full and efficient knowledge of accounting
theories in accountants and corporate management answer and fulfill the requirements of
accounting information users. In many users especially external users, utilize annual reports to
take effective decisions and make investments. Various lenders, creditors and investors have to
defines or evaluate the companies earnings capabilities by analysing and evaluating the various
accounting procedures implications, because all the accounting information users are always
wanted to know or understand the effect of methods of alternative reporting on the basis of their
welfare decision. Such as If the company corporate finance executive wanted to understand
about how the depreciation straight line method affects the depreciation accelerated and their
welfare.
 Accounting theory gives an effective and efficient guidance at the time when the
requirements of new and upgraded application practices arises, and provides most
suitable procedures to include or adopt in the situation. If practices of accounting emerges
or enhance from the application rigidly accounting theory constructed, then the practices
has been tested for usefulness, logic and consistency.
 Accounting theory enhance the business value like if a business is highly thinking about
the value of its market share, the various methods of accounting which effects the price of
share are to be considered and analysed (Coronella and Russ 2019). The companies

corporate executive analyse the theories of accounting which efficiently tells the
relationship between the price of share and annual reports of external.
 In accounting theories the reporting methods and accounting alternative procedure effects
the other various variables and profit of business which are not determine or analysed by
the observations and are highly complex. Like the change in price of share not always
due to change in procedure of accounting but may be due to change in some other event.
In such situation, changing the procedure of accounting may not essentially produce
effect of share price. In such experiences and conditions require accounting theory that
determines the value of specific variables and relation between the variables.
 Accounting theories is also helpful for the persons who are involve in making the
accounting policies, and always devoted in establishing the information of accounting
useful and efficient. For investigation, researchers and evidence can be utilize, accounting
theories are useful as they report makers of policy for the major issues.
Accounting theories main aim to offer various practices even when it upgraded and effective
reasons against a familiar practices. An effective and efficient accounting theory knowledge
decorate and fit up a person to practise the self independent judgement with the confidence
instead of enabling to react as per the circumstances (Hutahayan 2020).
Characteristics:
Systematic set of Principles:
It states that accounting theories gives an systematic set of principles and sequential
postulates which are given in order to offers a ground work for the logical reasoning to the
current practises.
Rationalized the practices of accounting:
It is one of the most essential factor that effective practices of accounting theory gives
and rationalized a logistic structure to the accounting practices which not only provide references
of general principle for guiding and analysing the current practices of accounting but also helps
in preparing updates and advance practises as an effective solution to the changing issues of
environment (Laguecir, and Kharoubi 2020).
Predictions:
It states that prediction is one of the essential element to test of an effective theories of
accounting. It help in govern or predict the accounting behaviour and accounting events.

Originates and Describes practices:
It states that for explaining and originating accounting practices, accounting theory plays
an significant role. Current issues and practices offers as the main base for the establishment of
fresh and new theories. As well as accounting theory also make efforts to describe the logic
behind the current practices.
Dynamism:
This states that dynamism is one of the essential tool as it refers that any theory would
not flourish or recognised until and unless it has dynamism in it. Dynamism in accounting theory
are effective build which helps them to establish accounting practises in the dynamic
environment of business.
Tested and verified by practices:
It states that for evaluating and analysing the accounting practices accounting theories are
verified and tested to analyse whether there are any changes of deviation in the accounting
practices and theories or not, if there is any deviation case then the accounting theories are
retested, modified (Кравченко, and Пастернак 2020).
Elements:
There are key four elements of accounting theories, these are all in which accounting theories are
based on, as these all are the outcomes that accounting theory established to achieve. These five
essential elements are discussed below:
Relevance:
It states that the information regarding the accounting should be relevant to the needs of
accounting users, in case when the information impact the users economic decisions. This
includes reporting specific relevant information, and also the information whose misstatement
and omission may effects the users economic decisions. It states that the information shall be
capable of analysing and making a difference which helps the business to take effective
decisions. The gathered information by the user must be relevant according to the purpose not
with the unnecessary information (Persso, and Dean 2018). This will decreases the uncertainty
regarding the information and helps the user to analyse the facts which helps the business in
timely completion of goal
Usefulness:

It states that accounting information became useful when information created in accurate
way, it refers that the accurate and essential information that effectively report about whole
information to the users about whole financial situation of the entity that is by providi9ng
information that helps the users to take effective decisions regarding investment and establish
business accurately and efficiently. Information which is reliable helps the business to judge the
earning financial and earning potential of business (Mangala and Dhanda 2018).
Reliability:
It states that the information for the user must be reliable, biased, error free and not create
any misleading. The whole information must be relevant and trustfully shows all the transaction
and other particular related events, shows the prime material of the events, and carefully shows
uncertainties with the help of effective disclosure and estimates.
Consistency:
It states that the identical items must be provided identical accounting treatments. like
consistency needs that business financial information must follows the same methods, practices
from one period of accounting to other.
Comparability:
It states that there should be a comparison between information with the financial
information shows for other period of accounting, because it helps the users to analyse and
identify the reporting entity financial positions as well as the performance trends
Principles:
There are some basic principles of accounting theory which indicates in which manner the
accounting and information of accounting should be done in an organised and effective manner.
The discussion of this 6 accounting theory principles are as below:
Consistency Principle:
It states that there should be consistency in adaptation of new techniques, methods. Once
a accounting system has been adopted must be followed in all the transactions of business, early
or rapidly changes in systems can adversely effects the overall whole accounting system. Only
changing when there is need of change whether in some method or principle, or if some new and
updated version introduces which can improves the results of financial reports only then changes
are acceptable (Napier and Stadler 2020). But this principle repeatedly ignored by the business

manager when they try to make high profits and revenues and that can be done through a strict
accounting standards interpretations.
Cost Principles:
It states that the timely and accurately recording of all the liability, assets or investment
of equity at the actual cost of acquisition (Hermawan, and Junjunan, 2021). According
accounting theory of cost principle, all the liability, assets must be recorded as possible as they
required. As well as day to day acquired assets, liabilities should be recorded. Recording of
acquisition cost also done as some of the assets depreciated over the period of times, which differ
their cost, the the recording of that cost must be done. Accurate Recording of every information
like sales, purchases supports the business to keep their overall expenses in a well organised
manner.
Materiality principle:
It states that only the transactions which in monetary term which are completed shall be
recorded. Transactions which are non-monetary can be recorded in report but all are excluded
from the data which is actual. As per this principle if it impact on the small books which are
enough that any person can reviewing the book not mislead than recording of that expense can be
avoided, the materiality principle is important at the time when the decision taken about
transaction recorded as a part of closing process, since ignoring some of transactions can initially
decreases the time amount need to issue financial statements. As there are no particular guidance,
it is the responsibility of the accountant to careful decide what can recorded or avoided.
Matching Principles:
It states that the expenses and revenues should match in a same accounting period. This
principle basically considered that the transactions completed under a specific period revenue
type as a single units. The requirement of revenue and any other expenses should be analysed
both together in the similar reporting period. This concept plays an vital role in accrual basis
accounting as it essential that the whole transaction effect must be recorded within the same
reporting period (Alshirah and Mohammed 2021). By doing this makes that the profit reporting
is not delayed or artificially accelerated in any period of reporting. when all the revenue are
reported, all the other expenses which are associated should be reported at the particular time.
Conservatism Principle:

This principle states that consideration of liabilities and expenses as earlier as possible
when there is doubt for the result. All the potential and current liabilities should be considered or
recorded instant for their preconisation. It is an effective way which helps the business to plan
for their future expenses, and to analyse the recognizing estimates. This will supports the
business to maintain an sufficient amount of cash for the payment out of their debts. This
principle is the base for the lower cost which refers that company can record stock at lower, at
current value of market and at acquisition cost.
Time-Period Principle:
This principle states that the business operation outcomes should be reported over a
standard period of time. This time period basically monthly, quarterly and annually. This
principle main aim to create a variables sets for the comparison over a period of time. If the
companies want to produce financial statements for the comparison with the outcomes reported
for previous years then high and effective degree of consistency is needed for the same period of
time. This principle is an effective tool to analyse the trend.
Some Limitation of Accounting Theory:
There are high numbers of advantages and benefits of accounting theories for its users,
but also there are some of the reasons which universally stops the acceptability of accounting
theories. As per the accounting theory person should know and keep in mind that the theories of
accounting highly effected and influenced by the various practices of accounting and also
effected by practices and institution which the society followed, all these customs and practices
may get different according to the region wise thus it stops or limit these theory of accounting to
get acceptable wider. There is also one of the major factor which effects the accounting theory is
that some of the alternative treatment and conflicting theories are available which makes issues
for the accountant for the selection, because these theories makes rise opacity and inconsistency
in accounting practices, which can create a problems for the accounting users. Other than various
legal requirements and policies of government effects the acceptance and establishment of
accounting theories.
It does not shows all its practices. In accounting theory due to functional nature of accounting,
most of the accounting principles and conventions have been build in regards of expediency
rather than logic rule. It's concepts are not rigorously explained along with this most of
fundamental assumptions are not realistic Accounting theory faces internal consistency as for

example, concept of entity, which is a fundamental postulate of accounting theory, accounting
statements must be set to show the entity activities rather than the groups attach with it.
CONCLUSION
It is concluded from the above report that both the accounting and accounting theory plays an
essential role. As accounting helps the business in recording, analysing, summarizing, and
interpretation the data in an systematic manner which helps the business to take effective
decision regarding the business finance. If business wanted to sustain in the market for longer
period of time it has to be maintain their business finance because accounting covers an essential
role in business. Accounting theory also plays an essential role as it is an effective tool which
also helps the business to make an effective decision in terms of their business finance. In
business it is the responsibility of accountant that with the help of effective analyses and
interpretation of accounting theory accountant can create accurate financial statements. Their are
various accounting theories elements like relevance, comparability, reliability, usefulness all
these signs the rules of producing effective and reliable financial statements. Both the accounting
and Accounting theory provides an effective structure with the controversial meanings and
categorization which includes various principles and concepts. In lack of agreement about their
precise meaning has included the establishment of theories for the concepts, principles of
financial accounting which are still highly accepted as a rule that underlie or found the
presentation and preparation of financial statement. The framework which is received from the
various structure and elements of accounting theories, includes the various principles used in
interpretation and analysing the accounting standards.

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