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Financial Accounting Theory: Reducing Balance Method vs. Straight Line Method

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Accounting is a multifaceted discipline. It is neither a dull profession nor a simple practice as how it has been viewed by lay people. This essay demonstrates the side of accounting that is complex and intriguing. It is structured in the following way: firstly, how my view of accounting is developed throughout this module will be explained. Next, the issue of what accounting profit is and whether it is a measure of true profit of an organisation will be tackled.
The first part of my essay is challenged in various ways. I stated that a true profit may be attained by including non-financial measures to accounting profit (Author, 2013). However, Hines (1988) explained that there is no truth in accounting as it is the outcome of naming and counting by the professionals who create the truth. For instance, what can be included in revenue and when to realise them is decided by accounting professionals, whereas ordinary people will accept this as they view the professionals as a legitimate body in the field. By reading his paper, I can conclude that there is no such thing as the true profit since there is no truth in accounting. Adding non-financial measures may give a better picture of an organisation, but there is no full picture as this is subjective (ibid.).
Accountants will make sure that they are operating within what is acceptable by the society to maintain their legitimacy in the profession and preserve the power they have, as in the legitimacy theory (Deegan and Unerman, 2011). It is important to note that being legitimate does not mean that someone is doing the right thing but he is doing what is perceived to be socially right (Suchman, 1995). The boundaries may change with time as in the case of pollution (Hines op.cit.). Pre...


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FIELDS, T.D., LYS, T.Z. and VINCENT, L. (2001) Empirical Research on Accounting Choice. Journal of Accounting and Economics, 31 (1–3), pp. 255-307.
HEALY, P.M. and PALEPU, K.G. (2003) The Fall of Enron. Journal of Economic Perspectives, 17 (2), pp. 3-26.
HINES, R.D. (1988) Financial Accounting: In Communicating Reality, We Construct Reality. Accounting, Organizations and Society, 13 (3), pp. 251-261.
LEFTWICH, R. (1980) Market Failure Fallacies and Accounting Information. Journal of Accounting and Economics, 2(3), pp. 193-211.
SAMUELSON, P.A. (1954) The Pure Theory of Public Expenditure. Review of Economics and Statistics, pp. 387-389.
SUCHMAN, M.C. (1995) Managing Legitimacy: Strategic and Institutional Approaches. Academy of Management Review, 20(3), pp. 571-610.
WATTS, R.L. and ZIMMERMAN, J.L. (1986) Positive Accounting Theory. New Jersey: Prentice-Hall.



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