QUESTION
SOLUTION
1. Introduction
The aim of the paper is to debate and evaluate information perspective to evaluate accounting as a system designed to provide information as well as evaluate the measurement properties of the system. Though accounting is a function of both measurement and information the fine line in between them have been discussed in the paper.
2. The Information Perspective
According to the traditional definition of accounting can be defined by the American Institute of Certified Public Accounting 1941 “ as the art of recording, classifying and summarizing in a significant manner in terms of money transactions and events which are in least part of financial character and interpreting the results the results there of”(Tulsian ,2001). Thus, the very definition of accounting defines accounting as the art of representing and interpreting information in an algebraic form to interpret the value or performance of an organization. All organizations business and non-business or any other organization require money and resources and hence require accounting. Accounting is often called the language of business and the purpose of any language is to enable communication. Thus, accounting effectively communicates the information related to the business to all its stakeholders.
Over the years the meaning and definition of accounting have undergone some real changes owning to changes in the operations of business, the Modern Definition of accounting defines accounting as the dimension of accounting is much broader and the scope of the subject has also been widened. According to the American Accounting Association (1961) “accounting is the process of identifying, measuring and communicating economic information to permit informed judgements and decision making by the users of the accounting system.”
(Tulsian, 2001)
Thus accounting has been designed to communicate information effectively to all stakeholders’ parties to enable sound decision making. The main objective of accounting is to enabling easy accesses to the information related to an organization.
1. Firstly record all the information, the basic objective of accounting is to keep track of all the transactions undertaken by an organization and maintain a systematic record such that information can easily be accessed by the management for the purpose of decision making.
2. Secondly, It is used extensively to communicate information to all stakeholders. The users of the accounting system are both internal and external to the organization. The top management requires accounting information for planning, implementation and the adoption of strategies to enhance organizational performance and efficiency. The accounting system is required internally to control the transactions of the organizations in the form of cash budgets, Production reports, feedback reports etc.
Moreover since the external participants of the business do not have access to the transactions and records of the organization they have to rely on the information communicated by the organization.
There is a clear difference in the perspective of information and measurement. The accounting information provided can be used to make. Accounting also provides information that can be used as base to measures monetary performance to support the decision making for the firm to improve value. For instance, accounting gives the variable cost figures important to measure economic performance which examining whether to sell a product on credit to a group of customers with a low credit rating. Accounting also helps to measure and assess the state of a business at a particular time, for example, to evaluate a consumer’s short-term liquidity (Groth, 2011). Accounting information can be utilised to maintain control in the organization and enable sound decision making. Accounting information also enables the business to provide necessary information to the government to ensure appropriate legal compliance (Rajasekaran, 2011)
But is also important to understand that the accounting definition defines accounting functions both as a tool to measure value as well as provide information. There is a thin line between the both but accounting is a both a function of information and measurement.
3. Measurement Perspective
The measure approach lays stress on the importance of the formal measurement system to measure the value of an organization. The Accounting art was developed with the objective to enable the measurement of value of an organization or any business transactions. Accounting enables the evaluation of the financial performance by the preparation of the profit and loss account and Income statements. It is a systematic approach to measure the performance of a particular business. It also enables the assessment of a financial position of a company or business or a non-government organization through the balance sheet. A balance sheet measures the financial position of the business by highlighting the assets and the liabilities of the business (Tulsian ,2011)
The system enables the measurement of the current and the past values of business and enables the analysis of performance based on algebraic results depicted in the financial statements of the organization.
Therefore it should be clearly understood that accounting is a function of measurement and effective communication of financial information to the stakeholders of a business. This can be understood from the following figure:
Figure 1: Accounting a function of performance and measurement.
4. Relationship between Information and Measurement
It is evident that the information and measurement go hand in hand in the accounting system. It is on the base of the information recorded that the financial performance of a business can be measured and evaluated. Moreover is the firm intends to take up any economic analysis it is based on the information disclosed in the financial statements of the firm. For instance many existing fair value standards are related long term assets and their valuation for example the Financial Accounting Standards No. 121: According to the standard in Deficiency in the disposal of “long livid assets” and their disposal. The SFAS 121 became effective in 1996 which requires that all long term tangible assets may be brought down to fair value whenever the book surpasses the value of the undiscounted cash flows of such assets(Bens, 2005).
The fair value provides information related to the assets and liabilities based on historical values and can be compared also to those. Since fair value reflects the present market conditions, it provides comparison of values of financial instruments attributed at different times. Furthermore, financial disclosures using fair value provide investors with vision into prevailing market values, additionally helping them to ensure the utility of financial statements and reports. Thus, regardless of whether the firm’s financial statements are based on the face value or the fair value it is mandatory to include the fair value foot notes to ensure appropriate legal compliance (The Bond Market Association, 2002).
This is also applicable to large scale company. Warehouse the largest retail chain in New Zealand has formulated its accounts on the basis on fair value reporting. The company has undertaken future expansion plans and a variety of green initiatives based on the fair value information disclosed in the financial statements of the firm (Annual Report Warehouse – 2011 accessed on 19/04/2012).
5. Conclusion
Thus both the measure value and information system form the basis for the accounting system. Both measure and information disclosures go hand in hand. As it is on the basis of the information of the recorded transactions financial performance and be evaluated and accessed. Modern day definition of accounting; lays emphasis on accounting; as a system of both measurement and information. It would not be incorrect to say only if the information is recorded properly that it would enable the accurate measurement of financial performance. The valuation encourages fair value accounting and enables sound decision making based on the accounting measures.
6. References
- Tulsian, P. C.. Accountancy for CA foundation. 3rd ed. New Delhi: Tata McGraw-Hill Pub., 2001. Print.
- Groth, John. “Accounting and Economics—Critical Perspectives.” http://www.qfinance.com 1.1 (2011): 1-2. Print.
- Bens, Daniel A. “The Information Content and Timeliness of Fair Value Accounting: Goodwill Write-offs Before, During and After Implementation of SFAS 142.” http://nd.edu 1.1 (2005): 1-45. Print.
- Lalitha, R.. Financial Accounting. Delhi: Pearson , 2011. Print.
- The Bond Market , Association. “Explanation and Benefits of Fair Value Accounting Prepared.” isda 1.1 (2005): 1-5. Print.
- “Annual Report Warehouse.” http://www.thewarehouse.co.nz. N.p., n.d. Web. 19 Apr. 2012. <http://www.thewarehouse.co.nz/red/menucontent/homepage/investor-centre>.
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