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Complete 12 page APA formatted essay: Financial accounting Master.Download file to see previous pages In order to look at how accounting theories impact practicing accountants today, this paper will g
Complete 12 page APA formatted essay: Financial accounting Master.Download file to see previous pages
In order to look at how accounting theories impact practicing accountants today, this paper will give an extensive discussion of how the history of accounting thought evolved in order to form a conceptual framework that is currently utilized in the business world. Throughout history, the need of a single and unified conceptual framework which will embody the needs of business organization for financial reporting has been a pressing concern. The lack of established accounting theory to support the reporting of financial transactions and production of financial reports called for the foundation of financial reporting. Without accounting theory, accountants grapple with the difficulty of producing reports which will clearly represent the company's performance. Comparison and benchmarking cannot be accomplished since reporting is not supported by the same foundation. The need of a conceptual framework is even highlighted by the era of globalisation which aims the creation of a single global village. However, it should also be noted that the usefulness of accounting theory is limited by the adherence of accountants which utilizes it. The financial fiascos that shook the global community highlights the need of a more stringent control and adherence to the reporting process in order to produce financial reports which fully embodies the financial position of a business organization.
The Normative Era
In the early 1800's, accounting theories were random and ill-defined. Development was unstructured and the formalisation of existing practices was still in the very preliminary stages. Scientific development was also quite ad hoc and inconsistent, yet 42 bulletins were already developed before 1970. These facts help magnify the importance of having a united adaptable system for the accounting profession to work consistently from. The normative period began to emerge in 1956 and developed until 1970. This stage allowed the development of a set of norms for accounting practices and the commencement of the conceptual framework for accounting. It was divided into two dominant groups-the conceptual framework and the critics of historical cost. As the normative era was not being successfully accepted by the community the period ended as an availability of financial theories, and computer databases led to empirical research.
The Positive Accounting Theory Era
In response to the early dissatisfaction to the normative theory, the positive accounting theory era began in 1977. This theory reached its plateau of popularity in the 1980's, under the Regan and Thatcher administrations. The theory assumed that every individual is a rational wealth maximiser whose main goal is to generate the highest return given his limited resources. This lead to three different scientific conclusions:
1) the Bonus plan hypothesis which assumes that all individuals were wealth maximisers.
2) The debt to equity hypothesis. and
3) The political cost hypothesis.
The critical perspectives of this train of thought highlighted that accounting could not be separated from its societal context (Cooper &. Shearer, 1984). The aim was to stress inequities and pursue social justice thus, putting an end to exploitation.