Strengths and Weaknesses of Accounting Concepts and Conventions

Topics: Balance sheet, Income statement, Financial statements Pages: 7 (2065 words) Published: March 9, 2010
Accounting for Managers

Discuss the strengths and weaknesses of the accounting concepts and conventions and of the regulatory framework (SSAPs and FRSs) that govern published financial statements. Do the criticisms of the concept and the regulatory framework mean that published financial statement do not provide investors with useful information?

Introduction

Strengths

Weaknesses

Information needs of investors

Conclusion

Discuss the strengths and weaknesses of the accounting concepts and conventions and of the regulatory framework (SSAPs and FRSs) that govern published financial statements. Do the criticisms of the concept and the regulatory framework mean that published financial statement do not provide investors with useful information?

Introduction

Limited companies are required by law to prepare and publish financial statements every year. The main statements are the balance sheet, the profit and loss and the cash flow statement. The balance sheet shows the financial position of the business at a particular date while the profit and loss shows the result that is profit or loss from operations for the period. The cash flow statement on its side shows the uses and sources of cash over a period of time. The preparation of the financial statements are based on several accounting concepts and conventions and are governed by regulatory frameworks such as accounting standards and the Companies Act 1985 amongst other. The application of accounting concepts for different transactions in different parts of the business is based on the judgement of the accountants. However this definitely leads to subjectivity as every one may have his own personal conclusion. As a result, accounting standards were issued to eliminate this subjectivity to bring about a certain level of uniformity. The standards issued were known as the statements of standard accounting practice (SSAPs) from the seventies to the nineties and is being replaced gradually by the financial reporting standards (FRS’s). On the other hand the Companies Act 1985 came along to regulate the form and contents of the financial statement and to enforce the basis of accounting concepts also known as accounting principles. It is to note that the financial statements are intended to provide useful information to the different users of accounts who have different information needs. Though, the attempts to standardise the practice of accounting concepts and to regulate the accounts of companies have proved to be fruitful, the accounting conventions and standards are not without weaknesses and are still subjects of debate in the accounting world today. The strengths and weaknesses of accounting concepts and the regulatory framework are discussed below.

Strengths

1. Elimination of subjectivity
The main objective of accounting standards is to narrow the areas of difference and variety in accounting practice. As mentioned earlier, there may be differences of opinion or judgement among preparers of accounts in applying accounting concepts for treatment of items, bringing along high subjectivity. Accounting standards attempt to eliminate, or at least reduce, the confusing variations in methods used to prepare financial statements. Also, in order to enable users of accounts have reliable information for sound decisions, financial statements published by companies need to show comparability and consistency as well as faithful representation of the financial position of the business. Adherence to the accounting concepts and regulatory framework enhances such aspects of financial information.

2. User groups
In addition to this, different users groups have different objectives and information needs. The government needs information for taxation purpose while investors need information to know where to put their money. Employees of a company on their side need relevant information to bargain for wage rises. Without a regulatory framework, companies...
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