Profit Is The Firms Revenue Minus The Firms Costs Accounting Essay

Published: Last Edited:

This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.

In simple terms profit is the firm's revenue minus the firms costs; in other words how much is left once everything has been paid. However there are many different accounting policies a firm can use to obtain this figure. Consequently even if two firms have identical revenues and costs the final profit figure could be completely different as there are many different policies that can be applied providing a justification of the policies chosen is given. Profit is a figure that is heavily relied upon by many stakeholders, but they need to look at how this figure has been calculated and what has been included to give this profit figure. Without looking at how this figure is made up it is almost meaningless; therefore accounting profit can only be called true profit when its calculation has been carefully analysed. Creative accounting is a technique that manipulates accounts to give an inflated profit figure; this impresses stakeholders and falsely gives them confidence in the organisation. Furthermore this figure is meaningless alone; comparison is needed in order to measure the organisation's performance; however comparison is only meaningful if it is on a like for like basis. Any accounting figure shouldn't just be taken at face value. The question is: what is 'true profit'?

Through studying different theories and perspectives I now recognise the importance of considering information within its context and analysing it critically. The different ways in which one thing can be interpreted intrigues me; this has caused me to reflect on the issues of judgement and subjectivity and consider how these are controlled through legitimacy and regulation. This has led me to consider the power this gives accountants in terms of portraying true profit; if this exists.

My original answer acknowledged the many choices accountants have and the impact of this. I still see the statements I made as true but can now give more in depth reasoning. Menon & Morgan (1982) consider how individuals viewing the same things in different ways can gain different outcomes. Their idea that certain images constrain understanding made me realise that there's a more appropriate image. I originally used their image of accounting as a historical record; this can be seen through my simple definitions. Many individuals take this view due to the media 'holding profitability out as some ideal in terms of performance' (Deegan & Unerman, 2006, p.45); this has portrayed profit as objective and neutral; its calculation and context are ignored. Accounting as an information system seems more appropriate because it doesn't focus on past figures alone; 'the accountant must choose which information to transmit' (Menon & Morgan, 1982, p.311). Therefore accounts show the accountants choices so users cannot have the full picture, if this exists. Originally I assumed disclosures led to the full picture which now seems na've. The full picture depends on an individual's perception of what the full picture is (Hines; 1988); if an individual feels they have all the facts they'll assume they have the full picture but I feel that there are always further questions to be asked so there cannot be a full picture. Accountants 'make the picture. That is what gives us our power: people think and act on the basis of that picture!' (Hines, 1988, p.254); accountants choose what to make visible and thus what is perceived as the full picture is their judgement. However this power is limited by the social contract and regulation.

The legitimacy theory further explores the extent of subjectivity; following regulation helps meet society's expectations and gain legitimacy. Originally I didn't consider regulation because I took it at face value; I now see that regulatory bodies can provide a false sense of legitimacy due to bias within them which contributes to explaining the non-existing true profit. This issue cannot be solved through de-regulation due to the power of accountants and self interest innate within individuals; this has been proved by the recent financial crisis. This idea furthers my original opinion of false legitimacy ' which can be produced directly and indirectly. This bias arises through former accountants becoming regulators and thus favouring the accountant over than the public. If society are oblivious to this they'll perceive following regulations as complying with the social contract. Even if regulation were unbiased true profit is still an idealisation; it would require everyone haing the same understanding, judgement and aims; which I think is unrealistic. Regulation has led 'to the existence of what has been termed an accounting standards overload' (Deegan & Unerman, 2006, p.63) which has increased subjectivity, surely the opposite was intended. Despite my criticisms I think regulation is necessary but not currently efficient due to the bias embedded within. To move towards true accounting, if this is possible, the culture surrounding regulation needs to shift towards common interest. Despite regulation, biased or not, there are many ways in which the accounts can be manipulated. Accounting policies can be used to turn losses into profits ' 'there is no truth as such, but there is such thing as stretching it too far.' (Hines, 1988, p.256). So even if there was a full picture, could this be the true picture?

My original answer acknowledged that you can't analyse in isolation. If you take a sentence out of its context it can have a completely different meaning; numbers are no different and are still analysed in isolation. As I said 'any accounting figure shouldn't just be taken at face value' (Bartlett, 2010); now I would consider the: origin, computation, intended purpose and the interpretations before drawing a conclusion. You should consider the information that hasn't been given as well as analysing information thoroughly in context. 'Until accountants determine something is worthy of being the subject of the accounting system ' the issue or item does not exist.' (Deegan & Unerman, 2006, p.186). Accountants have the power to rename to give different levels of importance. This power needs controlling; some accountants may use this to an unfair advantage. I hadn't realised the power accountants had before and now question whether the professions aims are aligned with the public's best interest.

After considering how my views have been challenged I am able to consider more deeply why I believe there is no true profit figure. Even if everyone made uniform judgements without the definition of true profit would be influenced by many factors meaning it isn't neutral and cannot be said to be true. 'At the core of the accounting process is an expectation that accountants should be objective and free from bias' (Deegan & Unerman, 2006, p.41); after considering the importance of context figures are more objective when considered in context so at a superficial level there could be true profit. Now I question whether any part of accounting can be truly objective or neutral; however I need to acknowledge that you can question everything, even something as simple as a piece of paper. 'Is it valid or realistic to believe that financial accounting provides an objective perspective of an entity's performance.' (Deegan & Unerman, 2006, p.184). It depends. My opinion is similar Hines' in that if you believe to have all the facts then you have the full picture; however everyone makes different judgements. 'No one image can capture fully the essence of accounting (Menon & Morgan, 1982, p.315). Accounting is in no way simple and hence there is no one true profit.