Accounting Theory - Paper

Topics: Finance, Corporate finance, Investment Pages: 13 (4583 words) Published: August 16, 2012
Executive Summary1
Theories of Accounting2
Public Interest Theory2
Private Interest Theory2
Regulatory Capture Theory3
Is accounting Needed (GPFR)?3
What does the financial department (accounts) do?3
Why public disclosure became so serious?4
Principal Agent Outlook4
Agency Cost- Critical Reason for accounting frauds6
Three Essential Accounting Areas7
Capital Budgeting7
Capital Structure11
Trade off theory12

Executive Summary
In this paper our objective is to understand the concept and theories of accounting. The paper explores public interest theory, private investment theory and regulator capture theory. After this our paper focusses on three key accounting areas. These areas are capital budgeting, capital structure and various investments made by the company. This will help us evaluate how the structure of accounting helps in these public disclosures. We also look into General Purpose Financial Reporting (GPFR) and whether at it is important for accounting world. In our analysis we came out with a conclusion that GPFR is actually important, because its keeps all the stakeholders of the current condition of the company.

In this paper we look at various theories about accountancy. We also look at how these theories have shaped up the accounting world. We analyses this on the basis of few critical business decisions. These decisions are capital budgeting, capital structure & various investments based by the company. We have chosen these three areas on our paper as these are the ones which are very critical to any business decision in the financial world. These three factors impact the accounting and its methodology the most. We also have a look at GPFR (general purpose financial reporting). This gives us the insight whether at all GPFR is necessary in business world. (Harris, 1998) Theories of Accounting

Public Interest Theory
Public interest theory of accounting is concerned with achieving desired financial results which the majority of the public wants the firm to achieve. Generally these results are not achieved as no firm is free of markets. It is the set of market inefficiencies which cannot be solved by regulators that does not help the case of the firm’s commitment to achieve desired financial results. Private Interest Theory

Private Interest theory of accounting is concerned with achieving financial results which the private sector or private group of individual wants to achieve. This is something which generally happens but the regulators are looking at methods to stop it. They want to stop it because this will be bad from the shareholders perspective.

Regulatory Capture Theory
Regulatory capture theory helps in managing the accounts on the basis of the regulators of accounts of the company. This is actually the way the corporate structure and the regulators work together. This framework helps in establishing the real accounting world and its controls. Is accounting Needed (GPFR)?

It is very important that GPFR takes place otherwise all the stakeholders will never know about the performance of the company. Many predictions required for a serious analysis of an investment cannot only be done by the authority of the financial function (financial department or, management controller). That must be made by departments which are directly concerned by the project, with necessary information (sales department, production or scheduling). At this level, the role of the financial department is simply to force the relevant departments to provide forecasts expressed in monetary terms in time.(Harris, 1998) Once in possession of all required information, the financial function analyzed in depth it in order to quantify the financial impact, to calculate the total cash flow forecasts and if the project is likely to be released. Various rates of return and various dead spots are also...
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