Does Accounting Constructs Reality - Essay Example

Accounting does not communicate reality, it constructs reality” Contents Contents 2 Introduction 3 Discussion 4 Arguments in favour of accounting do not communicate reality it constructs reality 5 Subjective Measurement: 6 Arguments against accounting does not communicate reality it constructs reality 7 Conclusion 10 References 12 Introduction Accounting is considered and defined as the art and science that deals with collecting, analyzing and recording of transactions. Accounting is considered as a very important subject in our modern world. Accounting is an important element of business as it assists in recording and formulating the path in which a business should grow. The scope of accounting is very wide. Accounting is mainly defined as a means not an end as it calculates and determines the financial result and position of an organization (Burchell, Clubb, Hopwood, Hughes and Nahapiet, 1980). Accounting is a language of business through which the information is passed to the users of the financial statement. The users then can on the basis of those information can their own decision and plan of action. Thus it can be defined that accounting is not merely a method of keeping records but a method for taking decision on the basis of the information that is provided by accounting (Bion, 1968). An effective medium of communication is required by the entity handling its employees, clients, suppliers. Accounting is considered as an intrinsic an important element of the entity. Accounting helps the business entity in preparation of budget, reporting and also in recording of income that is required by the managers as well as others. There are different users of accounting which can be mainly classified as the external users that includes investors, taxing authorities, customers and creditors and the internal users that includes the management and the employees (Drury, 2008). Figure 1: Users of Accounting Discussion Accounting mainly communicates variety of information to various parties that are interested in the information supplied by accounting with the help of different mode of communication such as by publishing of annual report, internet, social report and applying various mediums such as by adding pictures, charts, narratives, graphs. The accounting communication is considered as an important aspect as it provides a clear picture to the various things. Accounting communication is verbal as well as non verbal. Accounting communication is required for management accounting. The art of communication applied in management accounting is mainly backed by the need and demand. There are mainly two different ways of communicating financial information is Business Intelligence and costing data (Keele Management School, 2012). Accounting same as that of advertisement can be perceived as mythological and as a metalanguage in which the signs are used to explain the mythical meaning. Accounting myth is generally considered as innocent language not because their intentions are not revealed but they are systematic. The strongest myth in accounting is that it is considered as a language that communicates reality. A balance should be maintained in the management accounting for establishing and building communication between the clarity, timeliness, visual appeal. Individuals in the society establish various relationships with each other. The society is generally grouped into various segments. For the well functioning of these sections, accounting information is needed to be communicated. Therefore accounting helps the user of the accounting information in taking decision and also in allocating the resources efficiently and effectively. Therefore accounting information can be considered as source which influences everybody. Accounting generally communicates information through financial statements that mainly deals with the economic resources in monetary terms under the supervision of the management (Hines, 1988). Arguments in favour of accounting do not communicate reality it constructs reality Accounting is referred to as the art of communicating reality. But there is an obstacle in considering and declaring it as the language of the business. The evidence and the proof is the occurrence of various scams that have taken place. Many measures have been adopted for controlling and stopping the scams by adopting strict rules and regulations. The reason is that the managers and the accountants are not well satisfied with the data and information that is provided and revealed in front of them to evaluate the performance of the management or taking decision. The management accountant now a day’s provides more importance and priority to technical feasibility and validity rather than that of the administrative innovation (Wong, 1988).The main problem with the management accountants is that the management accountant does not provide the information in time, and they prepare the report and analyzes the transaction with the limited resources and information available to them. The accountants generally prefer to prepare the report in the general and the standard format without any changes in the format rather than innovating new format on the basis of the various information available to them and by applying various graphics, charts that will be friendly to the users. The main problem that is faced by the accountant now days is the inconsistent procedure followed by the accountants in accounting the identified intangible assets and also their purchase consideration. The accountants also face the problem due to inappropriate software or hardware. The major limitations can be discussed as under: Subjective Measurement: Accountants have to deal with various monetary transactions. They have to estimate the values for various transactions. The assumption is not always accurate. Since the measurement and assumption of various transactions in monetary term is very difficult. This estimation of value by the management accountants may lead to manipulation. Qualitative Factor: Accountants generally take into consideration only those items that can be measured in monetary terms and generally ignore those items that cannot be valued or estimated in monetary term. Therefore the report that is provided to the users is not always appropriate. Unstable account of unit: Accountants generally value all transaction in one single unit account considering the currency value of one particular country. The value of currency does not remain the same as it changes due to various factors such as inflation deflation. Therefore many entities may face the problem of low book value as the assets of the company are purchased in the past when the economic condition was different. Lack of information about the opportunity cost: The management accountant generally focuses and is concerned about what has already happened rather than concerning on what is likely to happen in future with the full and optimum utilization of resources. The optimum utilization of resources is not done (Banerjee, 2010). These problems are there in the business environment that is surrounded by unpredictable behaviour of the customers, global supply chain, mergers and acquisitions and global supply chains. Arguments against accounting does not communicate reality it constructs reality Accounting is defined as the medium of communication. It is termed as a language for business. It includes the process of reporting, classifying and communicating the business information. As in society and our day to day life a person has to learn language in order to communicate. Accounting is also a language that is to be learnt and practiced in order to converse and communicate the events of the business. The common language and the language of accounting have some common features in the aspects of rules and symbols. The rules for the general language is termed and named as grammatical language and the rules for accounting language is defined as accounting rule. The various types of exhibitions, expressions and presentations of accounting and the data of accounting which includes the numbers and debits and credits are generally regarded as the symbols that are different and unique to the accounting discipline. The most important aspects for considering accounting over other types of information are that it provides measurable data. Accounting reports that are provide by the accountant can be analyzed for providing the management with financial information which is used for running the business and formulating plan in advance to undertake changes in the business entity when the entity is not performing up to its expectations. The objective of accounting is that it is based on Generally Accepted Principles and these are generally treated as standard by the accountant while preparing the reports. The data that is provided by the accountant are generally valid and verifiable it is usually unbiased (Jaara, 2014). Accounting communicates reality can be explained with the following advantages of accounting: Accounting management by assisting them in proper planning controlling and decision making, Accounting helps the management in comparing the results of the current year with that of the previous year. Accounting can be said to as communicating reality with the fact that accounting generally enters into the organizational setting for constituting a particular way to transmit cultural knowledge and creating rationalities which will lead to the achievement of the organizational goals which in away will provide new patterns in respect of organization, its authority, and helps in influencing the concepts of time and different actions (Jack, Davison, Craig, 2013). The topic can be well explained with the help of the model formulated by Brussel Uncertainty of objectives Low High Uncertainty of Cause and effect Low Answer machines Ammunition machines High Answer machines Learning machines Rationalization Machines With the help of this diagram he explains that Answer machine which deals with developing a structured decision making like in case of stock control, credit control. Learning machine also deals with the sensitivity analysis, judgment. Programmed machine which deals with computerized system in lieu of the human intelligence and effort. Ammunition machine which deals with the accounting system that is used for the surveillance system. Rationalization machines which deals with rationalizing the importance of accounting. It can be explained with the model that accounting can neither be treated as communicating reality or constructing reality as both of it has advantage as well as disadvantages. Accounting is very influential in our society as well as for the business entity it not only provides assistance in managing the resources but also designing the organizational pattern, it is very much influential to the capital market. Accounting plays an important role for the state agencies. The roles of accounting are categorized under the following heads: Conventional Role of accounting which deals with providing relevant information for decision making process, allocation of resources rationally, maintenance of stewardship. Contingency theory deals with the accounting that depends on the environment. It also advices it may vary according to different situation. The changes that are bought by the accounting in The New public management are establishing a relationship between output and input. Accounting as a means of communicating reality is considered as a myth because due to its consideration as a medium of communication the several accounting disclosures are not revealed and the transactions are prepared in such a way that it is confusing the users and the assumptions formulated by the economist are exploited. This results in further analysis of the facts and figures. As the application of accounting should vary according to situation and according to entity, but the same individual and standard format is followed for each situation (Hopper, 2012). Conclusion The topic accounting does not communicate reality but construct reality defines that accounting can be both used for constructing reality as well as communicating reality. As accounting is the art and science of recording classifying it helps in communicating information to the business entity. The financial statement of the organization which is considered as an important element in analyzing the financial health of the organization cannot be prepared without the assistance accounting. The users of the financial statement come to know about the various transactions with the help of accounting. It reduces the burden and difficulty of the user in linking and connecting each treatment and explaining the meaning of each transaction. On the other hand accounting is a medium of communication is considered as a myth because the accounting is calculated and prepared with the same format. And it may sometimes miscommunication as the difficulty may be faced while preparing the report for general purpose. It does not provide a clear picture to the decision maker which restricts him from understanding in detail the differences related to each transaction. Thus it can be concluded that it is a never ending debate as both of it has pros and cons so it can be regarded as accounting can be considered as a means of communicating as well as constructing reality. References Banerjee, B.K. 2010. Financial Accounting : Concepts, Analyses, Methods And Uses. New Delhi: PHI Learning Pvt. Ltd. Bion, W.R., 1968. Experiences in groups. London: Tavistock. Burchell, S., Clubb, C., Hopwood, A., Hughes, J. and Nahapiet, J., 1980. ‘The roles of accounting in organizations and society’, Accounting, Organizations and Society. 5 (1). pp. 5-27. Drury, C. 2008. Management of cost accounting 7e. ISBN 9781844805662. Lecture notes. Hines, R. D., 1988. Financial accounting: In communicating reality, we construct reality. Accounting, Organizations and Society, 13(3), pp. 251–261. Hopper, T. 2012. Handbook of Accounting and Development. USA: Edward Elgar Publishing. Jaara, O. 2014. Reality and Accounting: The Case for Interpretive Accounting Research. International Journal of Accounting and Financial Reporting, 4(1), PP-155-168. Jack, L. Davison, J., Craig, R. 2013. The Routledge Companion to Accounting Communication. New York: Routledge. Keele Management School. 2012. Six Top Tips For Reading Academic Articles. Journal of Keele management school. 1(1). pp. 56-59. Wong, P., 1988. Financial accounting: In communicating reality, we construct reality. Tetra carbon: Technology & Business Education, 13(3), pp-251-261. Read More