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Accounting theory elaborates imagery. Working within a framework defining a numerical view of reality, accountants draw on different images of the accounting process to elaborate different theories of accounting. This essay examines how different images have shaped developments in financial accounting and considers the implications for future theory and research. This essay will be exploring the images which have shaped accounting theory and how contemporary debates in the field of accounting revolve around the advocacy of competing images. The first part outlines the four principal images that dominate the theory and practice of financial accounting. The second part assesses the impact the images have on accounting practices and consider alternatives to using different images. The third part concludes the essay by summarising and discussing the arguments.
Accounting is Essentially Subjective
Competing Images of Accounting
Of the many images that have shaped accounting, numerical reality has been the most important. While accountants generally take the concept of number as an objective, value-free phenomenon, the use of numbers depict various aspects of the organisational world rests on an important act of social construction: when we characterise the size of a corporation in terms of the number of employees, total assets, or annual sales, or the success of a corporation in terms of rate of return on investment, growth in profits, etc., we abstract from a more concrete reality.
The assumption that numbers help to shape reality defines the basic framework of accounting and provides constraints upon accounting. The framework has developed a view in which accounting theory and research has developed in a number of ways, "drawing on specific kinds of imagery as a basis for detailed theorising". This has been the case in financial and managerial accounting, which has developed debates about their visions upon numerical reality. The four principal images illustrated by Morgan (1982) will now be discussed.
The four principal images that have shaped the development of financial accounting are historical record, current economic reality, information system and a commodity. The last three images have been developed recently, influenced by factors developed in other regulations.
The second image of financial accounting is concerned with portraying the current economic reality. This image was recognised by theorists whilst training in economics (e.g. Canning, Paton). Theorists identified that the behaviour of businesses were influenced through current and future prices. In addition, these prices were reflected in the balance sheet and income statement, rather than the historical prices. It has been suggested that "the balance sheet should show the financial position or wealth of the firm by using economic values of assets and liabilities" (Morgan 1982). Respectively, income is defined as changes in the wealth of a business over a certain period of time.
Need to discuss third and fourth images
Historical Record image: stewardship role, historic cost, events accounting
Economic reality image: market values, fair values, financial statements try to replicate markets, influence consumption and investment decisions, focus is on measurement of income and wealth
Information Processing image: focus on production of information for decisions, security price research, human information processing
Public commodity image: information is brought and sold, competition for information
Summary of four images:
It can be suggested that the "subjective nature of images leads us to believe that no one image can capture fully the essence of accounting". This highlights the view that new images will be developed in the future, adding new notions to the idea of accounting and to meet changes in its contexts. In essence, accounting aims to achieve the requirements of the context in which it is set. Summarising, the historical record stemmed from the demands of stewardship, however over time refined to meet the demands of capitalism. The economic reality image developed from the notion of scarcity. The third image, information systems developed with the ongoing advances in technology, as well as organisations giving higher attention to the flow and structure of information within the business. Finally, the commodity image developed through the context of a regulated environment.
Does SSAP 13 encourage investment in R&D? (No, not really)
Example of Oil Company - do you account for 1 out of 10 oil companies in balance sheet and the other 9 are written off or account for all 10, but amortise during the next nine years
Accounting calculations are based on assumptions
Accounting is not 'value free'
Objectivity - compliance with the rules
Accounting enables us to label things (R&D, Goodwill)
Accounting in the Construction of Social Reality
Summary and Discussion
Reality does not exist independently of accounts of it. As Meyer ( 1983, p.236 ) states, an organization, "is in fact a sprawling, complex institution, with multiple purposes and disconnected programs (technologies), of unknown production functions, of competing and autonomous subordinate units". But accounting imposes a conceptual boundary on it: "the accountants settle the matter by definition, and acquiring boundaries means, for an organization, acquiring reality" (p. 236). Hines (1986b) shows how the financial accounts of an organization do not merely describe, or communicate information about, an organization, but how they also play a part in the construction of the organization, by defining its boundaries. An organization is not a concrete thing, but a set of interrelationships, and if it is to exist, then it must somehow be bounded or defined. Financial accounting controversies are controversies about how to define the organization. For example, what should "assets" and "liabilities" include/exclude: at what point does an asset/liability become so intangible/uncertain /unenforceable / unidentifiable /non-severable, etc., that is ceases to be considered to be a "part" of an organization? The answers to questions such as these, define the "size", "health", "structure" and "performance", in other words, the reality of an organization.
When the constructed nature of social reality is recognized, it becomes readily understandable why, for example, the Financial Accounting Standards Board (FASB, 1984) was unable, in its Conceptual Framework, to divorce measurement from recognition. It is difficult to "measure" something, before it has been made real, that is, "realized"!
The themes in this paper emphasize the constructionist view of society, because it has not generally been acknowledged in mainstream financial accounting research, that social reality, whilst tangibly pre-existing the individual, arises interactively with social action. It is therefore in an effort to partially redress this imbalance, that the constructed nature of social reality has been emphasized in this paper.
Various critiques have been made of the constructionist viewpoint for its neglect of social structure (for example Giddens, 1976 ). However, the present paper, whilst emphasizing that people construct social relations and social structure in an ongoing fashion, also recognizes that social structures, such as organizations, pre-exist the individual. As the title of this paper
reflects, social reality exists tangibly, and accounting practices communicate that reality, but in so doing, such practices play a part in creating, shaping and changing, that is, in constructing reality. Thus the overall theoretical position of this paper corresponds more to the position of Berger & Luckmann (1966) or Giddens (1984) [although these are not unproblematic perspectives-- see, for example, Smith & Turner ( 1986)].
It is demonstrated by Hines (1988 p251-261) that accounting is seen as being socially constructed, in that it is practiced by people for people, implying accounting is more of an art than a science. In addition, accounting has evolved through little or no theoretical knowledge in comparison to other professions, which helps to underpin its values, functions and practise.
Accounting traditionally played a stewardship role as portrayed by Morgan (1982) when he uses the image of accounting as a historical record to illustrate that accounting can be 'as the extension of the owner's personal memory'.
The image of accounting as a historical record has been used by Morgan (1982) to illustrate accounting 'as the extension of the owner's personal memory' to help depict the notion that accounting traditionally played a stewardship role.
Accounting traditionally played a stewardship role as depicted by Morgan
It has been viewed by Morgan (Morgan et al, 1982, p309)
layed a stewardship role as portrayed by Morgan (Morgan et al, 1982, p309), when the historical record image
It can be agreed that accounting can be seen as entities providing historical records of its activities. This implies that entities must maintain a 'true and fair view' of its actual events in their financial reports, ensuring the information is reliable, consistent and quantifiable for its users.