Financial Accounting Theory: Reducing Balance Method vs. Straight Line Method
The first part of my essay is challenged in various ways. I stated that a true profit may be attained by including non-financial measures to accounting profit (Author, 2013). However, Hines (1988) explained that there is no truth in accounting as it is the outcome of naming and …show more content…
In the next section, I will explore further what accounting profit is. It is a figure derived from a complex process of recording, selecting, counting and so on. The procedure involves judgement by professionals on issues including how to value fixed assets, influenced by various factors including self-interest, as evidenced by the Positive Accounting Theory (PAT) by Watts and Zimmerman (1986). It predicts managers’ actions, with the assumption that people are self-driven (Deegan and Unerman, 2011). For instance, the bonus plan hypothesis states that managers will increase the current period income by choosing accounting methods that shift future periods’ earnings to the current period (Watts and Zimmerman, 1986). One of the criticisms of PAT is that the self-driven individuals’ assumption is too simplistic and may be unrealistic, for instance, if the managers are the relatives of the owner. By learning about PAT, I found that it is almost impossible to state that accounting profit is a measure of true profit of an organisation as the judgement involved may lead to the same economic transaction with different profit figures.
This lead us to discussion on the flexibility in accounting. It has its own benefits and drawbacks. One of the advantages is that it allows