Table of Contents
Introduction Misconceptions Regarding the Characteristics of Accounting Identify and evaluate the conceptual framework for communication References
Introduction
Accounting is the process of preparing and disseminating financial information, typically in monetary terms, about a corporate entity to external users, such as shareholders, and internal users, such as managers or prospective workers. Accountancy is defined as a mathematical science that is useful in establishing the causes or factors contributing to the success and failure of a particular business entity, while the art lies in selecting the information that is relevant to the user and reliable for decision making to suit the entity; in simple terms, science seeks to establish the relationship between cause and effect, while art is the application of knowledge based on some accepted theories and rules.
According to Earnest (1913), the concepts of accountancy are applied to business entities through three branches of the practical arts: accounting, bookkeeping, and auditing. American Institute of certified Public Accountants (AICPA) defines accounting as “the art of recording, classifying in desired categories, and summarizing in a significant manner and in terms of money, transactions and events which are, at least in part, of financial character, and interpreting the results thereof in a manner suitable to the concerned persons for their benefit” (Swahla, 1913); however, accounting consists of rules, principles, and practices.
The debate over whether accounting is an art or a science is based on two misconceptions. First, the authors have a misunderstanding of the nature of science in that they seem to believe that in order for a discipline to be scientific, it must consist of immutable laws and absolute truths. However, even in the most precise sciences, laws are subject to change. Einstein's recent rejection of the Newtonian rules of physics is a case in point (Karl, 1961).
If laws were unchanging, scientists would refer to them as "definitions" rather than "laws" (Karl, 1961). In accounting, laws are considered as unchangeable, and it is believed that there are no natural laws, only conventions confirmed by experience, estimations derived from human judgements, and rules produced by professional institutions that control accounting (Karl, 1961).
Inaccuracies Regarding the Nature of Accounting
Accounting has typically been referred to as more of an art than a science, which can be attributed to the methods used in both fields; for instance, accounting has to be based on conventions as opposed to the laws that are fundamental in science; the conventions form the basis of the standards that must be adhered to during the reporting and presentation of accounting information. These conventions have helped to the development of conceptual frameworks with the purpose of establishing viable and acceptable standards. Due to the fact that accounting is founded on conventions or agreed-upon rules, there is a high probability that uncertainties are unavoidable; hence, accountants have categorized accounting as an art.
However, this may not be sufficiently justifiable due to the fact that if science were comprised of absolute truths, there would be no reason for scientists to continue their research, a clear indication that there are also uncertainties in science; therefore, whenever accountants define accounting as an art due to uncertainties, the definition can be categorized as being based on a misunderstanding of science.
The second fallacy is that accounting is inherently unscientific; the fact that accounting is currently dependent on conventions rather than laws is the current state of accounting, but it is not a necessary condition (Bloomfield et al, 2010). As an example, compare the primitive medicine man to the modern medical scientist; both study illness, so it could be said that they have the same subject matter, but they approach that subject matter differently: one performs artistic rituals designed to exorcise demons, while the other performs the arduous scientific task of searching for empirical generalizations and laws. Thus, the difference between them is not the nature of the subject but rather their approach to that subject (Bloomfield et al, 2010).
Once the medicine man characterizes disease as the result of the inexplicable caprice of demons, he is trapped since the problems will remain unresolved because he has characterized them in a manner that renders them inherently unresolvable (Bloomfield et al, 2010). This analogy fits accounting (Bloomfield et al, 2010).
There is nothing in our subject matter that needs it to be based on conventions rather than laws. It is based on conventions for the sole reason that we describe it that way. Therefore, there is nothing necessarily unscientific about accounting, and a scientific approach is conceivable (Elliot et al., 2004).
Similarities
As science includes the acquisition of knowledge through study, practice, investigation, and careful observation with the goal of learning general truths about the already established laws of operation, particularly through tested means, so does accounting, which includes observation, investigation, and identification through testing and collection methods with the goal of drawing conclusions from particular established data. Before a professional can formulate a hypothesis and make conclusions or even judgments based on careful investigation, documentation, and research, extensive study and training are required in both disciplines. However, in accounting, book entries are the accepted method of recording and classifying data (Elliot et al., 2004).
Identify and Calculate
In accordance with the principles of science, in order to be referred to be a scientist, one must identify a research issue with ingenuity, conduct exhaustive analysis or measurements, and document the results in a manner that would please everyone precisely. In a comparable fashion, accountants identify, measure, evaluate, and report data for trustworthy decision making. "Accounting transactions are identified and recorded using a double-entry bookkeeping accounting system that includes a set of accounts; this information is subjected to auditing, which entails testing the accuracy of accounting practices, carrying out specific tests, and conducting exhaustive measurements to ensure accurate and satisfactory results" (Elliot et al., 2004).
After all that has been accomplished, one would deem the results to be subjective based on the individual's judgment when measuring the liabilities and asset values of a firm, a factor that is also permitted when conducting scientific measures.
Communication
For the effective use of any information, including accounting, elaborative and understandable communication to those receiving it is essential; this principle applies to all scientific research, and it is noteworthy that scientific information must be relevant and understandable, or it would be deemed useless. According to Elliot et al. (2004), in accounting, "the accepted methods of communicating financial data in an understandable and summarized format include preparing financial reports such as the general ledger, balance sheets, income statements, and cash flow statements, as well as accepted measurements that must be used to analyze the data contained in these forms."
Accountants examine the calculations and analyze the data in order to provide approved versions of presentations such as inventory turnover ratios, Debt-to-Equity Ratio, and Operating Margin. The fact that the data collected and the analysis tools recommended are widely accepted and must adhere to certain established standards enhances the reliability of this information for decision making, ultimately reducing the uncertainty that could have arisen if there were no standards to be adhered to in the first place.
Conceptual Structure
Considering the economic consequences of financial information, reporting should be done properly, and users of financial statements want relevant and trustworthy data. With this in mind, a conceptual framework for financial accounting and reporting has been designed. The definition of a conceptual framework is "a coherent system of interrelated objectives and fundamentals that can lead to consistent standards and that prescribes the nature, function, and limits of financial accounting and financial statements" (Storey, 1998).
Development of a conceptual framework for setting standards to build on and relate to an established body of concepts and objectives; a soundly developed conceptual framework would enable FASB to issue more useful and consistent standards over time; increase financial statement users' understanding and confidence in financial reporting, enhance comparability among companies' financial statements, and aid in swiftly resolving new and emerging practical problems by increasing comparability among companies' financial statements (FASB, 1980).
Although one could claim that its creation would aid in the advancement of accounting, there have been counterarguments, which are stated as follows by Anthony (1983, pp. 11–15):
That the project is unfeasible; there have been reservations over the viability of building an adequate framework, and this has been perceived as a defeatist attitude. There have been issues with the assumption that the sole purpose of accounting is to measure true income and the claim that this cannot be accomplished since no one understands what true income actually entails (p. 12), That the development should be delayed and completed only when accountants have established why accounting is what it is, why accountants do what they do, and what effect this phenomenon has on people and resource utilization, it was argued that users of accounting information wanted nothing less than perfection, which would be difficult to attain, and a guide would have assisted in resolving important outstanding issues (pp. 12 – 13). This accounting would be considered political in the sense that concerns would be settled in favor of the majority, rendering a conceptual framework superfluous; yet, if a conceptual framework existed, there would be norms to fight political forces. That development of a conceptual framework would lead to rigidities that could make accounting conservative and therefore unable to embrace the modernity and dynamisms of the society necessitated by technological advancements that have made real-time reporting possible; however, this may be less severe than the alternative of developing standards without a framework (p. 15), There was a notion that entities may offer raw data and let users to arrange data as they saw fit (p. 14); this would eliminate the need for a conceptual framework entirely.
It is important to note that "standardsetting is inevitably dealing with compromises and trade-offs, despite the fact that little is known about the effects of these and their costs and benefits" (Schipper, 2010; cf. Gwilliam et al., 2005); hence the challenges on acceptance and compliance of the existing conceptual frameworks.
Conclusion
The arguments against the development of conceptual frameworks may not have prevailed, but they likely explain why they have had little practical impact; the main purpose may have been operationalization of accounting theory, but the greatest challenge was undoubtedly agreeing on the nature and scope of this theory, a factor that has led to claims that the conceptual frameworks may be built on shifting sands, hence the ongoing debate on the objectives of the frameworks.
Given the enigma surrounding the definition and classification of accounting as a science or an art, one could argue that the development of conceptual frameworks on accounting was immature. However, it would be important to determine the real measurements of accounting in light of intuitive arguments that there is no ideal practical measure of income that does not involve estimation of the future (Edey, 1970).
References
Bloomfield, R. J., T. E. Christensen, K. Jamal, S. R. Moehrle, J. A. Ohlson, S. H. Penman, G. J. Previts, T. L. Stober, S. Sunder, R. L. Watts, and R. H. Colson (2009). A Framework for Financial Reporting Standards: Considerations and a Proposed Model. Web.
The nature of profit was authored by H.C. Edey in 1970. The first volume of Accounting and Business Research.
Elliot, Barry & Elliot, Jamie (2004). Financial accounting and reporting, London, England: Prentice Hall, page 3.
FASB, Statement of Financial Accounting Concepts No. 4, "Objectives of Financial Reporting by Non-Profit Organizations," page 22 (1980).
Karl, R., Popper (1961). The Reasoning Behind Scientific Discovery. 40-42. New York: Science Editions, Inc.
Schipper, K. (2010). How can the costs and advantages of changes to financial reporting requirements be quantified? Accounting and Business Research, 40(3) (Special Issue), pages 309 to 313
Storey, K., Storey, S., and Storey, K. (1998). Special Report, "The Framework and Concepts of Financial Accounting" Norwalk, Conn.: FASB, Pp. 85–88.
Wahla, S. (1913). Terminology committee of the AICPA. Review and Summary of Accounting Terminology Bulletin No.
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