Essay Sample on Accounting Theory and Its Application to Financial Reporting

Accounting theory is a set of hypothesis and methods utilized in the submission of financial reporting concepts (Scott, 2015). The concept is used to illustrate the available practices and processes to acquire a good comprehension and to offer an articulate set of logical assumptions that formulates the basic frame of reference for the analysis and establishment of better accounting operations (Smith, 2017). Financial accounting concept focuses on providing reasons as to why business deals are reported in a particular method (Bublitz, Philipich and Blatz, 2015). The study of accounting concept includes a review of the methods in which accounting operations are altered and the historical establishment of accounting functions. It also reviews how accounting concepts are added to the control framework that administers both financial reporting and financial statements.

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Key Elements of Accounting Theory

According to Jones, (2015 accounting principle is massively qualitative. It is used as a channel for appropriate financial reporting and accounting. The most significant element of accounting concept is usefulness. This principle states that all financial statements are liable for providing significant information that can be utilized to generate knowledgeable business resolutions (Nasi, Saccon, Wustemann and Walton, 2014). The element of usefulness further states that accounting principle is deliberately elastic so that it can offer appropriate financial data regardless of alterations resulting from the legal environment. Additionally, accounting principle states that all accounting data should be consistent, comparable, relevant and reliable. The concept means that all financial reports should be correct and hold on to the basic acknowledged accounting concepts.

Concepts of Accounting

According to Otley,(2016) accounting principle consist of four main theories. First is the theory of transaction. This theory can be described as a substitution of commodities between agencies or it is an exchange of one commodity for another of the same agency. The description of transaction as a substitution of commodities of a particular period often lays three primary questions (Parker and Fleischman, (2017).The first question objects to ascertain if the description is confined within the exchange of commodities only between agencies. The second question seeks to provide clarity on whether the preferred commodity positions are arrived at through a variety of deals. The last question focuses on the introduction of multiple standards as well as concept of consistency and materiality. The second concept is the principle of accounting period.

This principle says that the life of business is alienated into suitable portions for analyzing the outcomes illustrated by the business after every division. It defines that a duration ranging from a single day to many years can be selected and powerful cases can be generated for each period. However, a single year is primarily and broadly acknowledged. Third is the concept of realization. This principle is well associated to the question asked in relation to the theory of transaction. Finally is the principle of full disclosure. This concept includes aggregation, efficient summarization, classification and illustrations with item of presenting a fair and true perspective of business operations. This principle connects stage by stage with materiality, actuality, consistency and objectively to acquire a fair and true perspective of business functions thus, it is a complicated process.

Importance of Accounting Theory

According to Semanyuk (2017) accounting theory rests on a group of suppositions that financial report consumers expect when acquiring income report as well as balance sheet (Martinez, Garcia and Cuadrado 2015). Comprehending the assumptions of accounting helps entrepreneurs to ensure that their firms' financial reports are organized in a way that authorities require and in the way that investors expect. Through the entity assumptions, entrepreneurs are capable of looking at their businesses objectively. Accounting theories help in inspecting for accuracy, aids in implementing financial statements as well as performing the processes of aggregating account operations (Francis, Hasan, Park and Wu, 2015).

Effects of Accounting Theory on Financial Reporting

Accounting theories have positive effects on financial statements of every enterprise (Li, 2015). The accounting principle ensures quality financial reporting determined by various models of conditional conservatism, value relevance, timeliness as well as profit control through the data reported on financial records. Accounting theory directly affects the financial records in that it is the interplay between business functions, daily operations, and organizations (Belal, 2016).

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