The Nature and

Uses of Accounting
 Cici Salfitri - 1642009
Dwi Wulandari Fidya Hadi - 1642027
Verla Fransiska - 1642042
Filia Jesica Deviana - 1642047
Mia Anggraini - 1642182
Kezia Ezrani V.P - 1642183

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1. Definitions and
Role of Accounting

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× Accounting is can be also defined as the
process of identifying, measuring, and
communicating economic information to
permit informed judgments and decisions by
users of the information. Defined with
reference to the concept of quantitative
information is a service activity. Its function is
to provide quantitative information, primarily
financial in nature about economic entities that
is intended to be useful in making economic
decisions, in making resolved choices among
alternative courses of action.
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Definitions of Accounting
× The Committee on Terminology of the
American Institute of Certified Public
Accountants defined accounting as art of
recording, classifying, and summarizing in a
significant manner and in terms of money,
transactions and events which are, in part
at least, of a financial character, and
interpreting the results thereof.

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× These definitions refer to accounting as
either an ‘art’ or a ‘service activity’ and
imply that accounting encompasses a
body of techniques that is deemed useful
for certain fields. For example: financial
reporting, tax determination and
planning, independent audits, data
processing and information systems, cost
and management accounting, national
income accounting and management
consulting.

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Accounting: An Art or
A Science?
× Those who argue that accounting is an art or a trade
suggest that the accounting skills necessary to be a
good tradesman should be taught and that a “legalistic”
approach to accounting is warranted.
× As a science suggest instead the teaching of the
accounting model of measurements to give the
accounting students more conceptual insight into what
conventional accrual accounting is attempting to do to
meet the general objectives of serving user’s needs and
to provoke critical thought about the field and the
dynamics of change in accounting.
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The Virtues and Role
of Accounting
× Honesty
× Concern for the economic status of others
× Sensitivity to the value of cooperation and
conflict
× Communicative character of accounting
× Dissemination of economic information

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But the realization of these virtues is
sometimes stalled by the obstacles of:
× The dominance of external rewards

× The corrupting power of institutions

× The failure to distinguish between

virtues and laws

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 INFORMATION SPECTRUM
All information useful for investment, Credit and Similar Decisions
(Concepts Statement 1, paragraph 22' partly quoted in footnote 6)
Financial Reporting (Concepts Statement 1, paragraphs 5-8)
Area Directly Affected by Existing FASB Standards
Basic Financial Statements
(In AICPA Auditing Standards Literature)

Scope
of Recognition and
Measurement
Concept Statement Notes to Financial
Statements (&
parenthetical Supplementary Other Means of
Financial Statements disclosures) Information Financial Reporting Other Information
Examples: Examples: Examples: Examples:

<Statement of <Accounting Policies <Changing Prices <Management

<Discussion of
Disclosures (FASB Coompetition and
Financial Position <Contingencies Discussion and
Statement 33 as Order Backlog in SEC
<Statement of Analysis
<Inventory Methods amended) Form 10-K (under SEC
Earnings and
<Oil and Gas <Letters to Reg. S-K)
Comprehensive <Number of Shares
Reserves Information Stockholders
Income of Stock Outstanding
(FASB Statement 69)
<Statement of Cash <Alternative <Analysts Reports
Flows Measures (market <Economic Statistics
values of items <News Articles
<Statement of
carried at historical
Investments by and About Company
Distributions to
cost)
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Owners
2. Measurement
in Accounting

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Nature of Measurement in
Accounting
ᵡ Accounting is a measurement as well as a
communication discipline. By measurement
is meant “the asssignment of numerals to
objects or events according to rules”. The
first step in accounting is to identify and
select these objects, activities, or events and
their attributes that are deemed relevant to
users before actual measurement takes
place.
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× Naturally, limitations of availability of
data as well as specific charateristics of
the enviroment. Notwithstandign
these contraints, measurement in
accounting traditionally involves the
assignment of numerical values to
objects, events or their attributes in
such a way as to insure easy
aggregation or disaggregation of the
data.
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Types of Measures
Various types of measures are possible in
accounting:
× Direct or Indirect
× Past Measure, Present measure or Future
measure
× Retrospective measure, Contemporary
measure, or Prospective measure
× Fundamental or Derived
× Made when confirmed empirical theories may
be used to support their existence or Made by
fiat, based on arbitrary definition. 14
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Types of Scales
Scales can be described in general terms as nominal, ordinal,
interval or ratio
× Nominal assists in the determination of equality, like the
numberings of footballers
× Ordinal assists in the determination of greater or lesser,
like grades of wool or street number
× Interval assists in the determination of the quality of
intervals or difference like temperature and time
× Ratio assists in the determination of the equality of
ratios, with the additional feature of the existence of a
unique origin, a natural zero point, where the distance
from it for at least one object is known.
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× Double-entry accounting achieved its most serious
notoriety with Friar Luca Pacioli’s treatise on
bookkeeping. The assertion that a transaction or flow
has basically two dimensions: an aspect and a counter-
aspect (to avoid the terms input and output which have
too concrete a flavor of the term debit and credit which
have too strong a
× Double-entry accounting consists of two kinds: a
classificational double-entry accounting and a causal
double-entry accounting.
 Classificational double entry : Assets = Liabilities +
Owner’s Equity
 Causal double entry

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 3. The Rationale
Behind Double-Entry
Accounting

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 4. Generally
Accepted
Accounting
Principles (GAAP)

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The Meaning of GAAP
× Accounting is practiced within an implicit
framework. This framework is known a
generally accepted accounting principle
(GAAP). They are a guide to the accounting
profession in the choice of accounting
techniques and the preparation of financial
statements in a way considered to be good
accounting practice.

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Skinner argues that the accounting method must
meet at least one and usually some of the following
conditions, to qualify as generally accepted:
× The method will be in actual use in a significant
number of cases where the circumstances are
suitable
× The method would have support in the
pronouncements of the professional accounting
societies, or other authoritative bodies such as the
Securities and Exchange Commission in the
United States
× The method would have support in the writing of a
number of respected accounting teachers and
thinkers
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Other common sources of GAAP are:
× AICPA industry audit and accounting guides and

statements of positions and AICPA accounting

interpretations
× Other identified publications of the FASB

× Publications of the securities and Exchange

Commission (SEC)
× Recognized and prevalent practices

× AICPA issued papers, FASB concept statements,

textbooks, and articles

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 House of GAAP

APB AICPA issues Other professional FASB concepts Textbooks and

Fourth Floor
statements papers pronouncements statements articles

AICPA accounting
Third Floor FASB technical bulletins Prevalent industry practices
interpretations

AICPA industry accounting

Second Floor AICPA industry audit guides AICPA statements of position
guides

FASB AICPA accounting

First Floor FASB interpretations APB opinios
statements research bulletins

Includes the going concern assumption, substance over form, neturality, the accrual basis,
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Foundation
conservatism, materiality
What should it be? GAAP, Special GAAP,
or OCBOA?
There is a change of perception of the GAAPs.
They are not seen as being a rigid set of
measurement rules. Their numerous applications
differ, in fact, depending on the circumstances. We
also have various and different special GAAPs,
such as the GAAPs for governmental
organizations, the GAAPs for regulated business
enterprises, the GAAs for non-profit organizations,
etc. There is also more interest in alternatives to
the GAAP, basically on financial statements
prepared in accordance with other comprehensive
bases of accounting (ACBOA).
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Little GAAP vs Big
GAAP
Little GAAPs for smaller and/or closely held
businesses and a big GAAP for large
companies. Differences between large and
small business:
× Total Revenues
× Ownership
× Capital Structure

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To be classified as OCBOA, one of the following four
criterias must be met:
× Necessary to meet regulatory requirements
× May be used for income tax returns
× Based on cash receipts and disbursements with or
without some accrual support
× Resulting from the application of a definite set of criteria
× The use of OCBOA statements presents more problems
to both users and CPAs:
× To the users: not appear as an acceptable or known
alternative to GAAP. May be aggravated by the
requirement that the auditor’s report includes.
× To the practitioner: lack of comprehensive guidance
similar to the one available for the GAAP statements. 26
In 1982 the committee issued its report that recommended
changing or eliminating eleven accounting and disclosure
requirements that the committee believed either should not
apply to private companies or do not sufficiently benefit the
users of private companies financial statements’ to justify their
costs. The eleven issues are:

× Deferred income taxes × Business combinations

× Leases × Troubled debt restructuring
× Capitalization of × Research and development
interest costs
× Imputed interests × Discounted operations
× Compensated balances × Tax benefit of operations
× Investment tax credits

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But, most of the objections to having/creating “little GAAP”
would be practically and logically unsound, most of the
objections are:
× Improvements in reporting to one group of users should
result in improving the reporting to other groups.
× All companies operate in the same environment, face
similar economic conditions, and could have the same
types of transactions.
× Most companies belong tot either trade associations or
industry groups that typically summarize financial
statements of companies in the association or the group
and different accounting requirements for different
companies within the same group could distort financial
comparisons.
× Most private companies would eventually become public.
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5. Accounting Policy and
Changes

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Accounting Policy and Changes
× The accounting policies of a reporting entity are the specific
accounting principles and the methods of applying those
principles that are judged by the management of the entity
to be the most appropriate in the circumstances to present
fairly financial positions, changes in financial position, and
results of operations in accordance with generally accepted
accounting principles and that accordingly have been
adopted for preparing the financial statements.
× Firms also make accounting changes as part of their
accounting policies. The general belief is that firms make
accounting changes to mask performance problems. This
will talked in detail in Designed Accounting part.
Accounting regulators have tried to limit management’s
ability to use accounting changes to increase or decrease
net income. 30
SEC Chairman Arthur Levitt contended that public companies
have used six accounting practices to manage corporate
earnings:
× Overstatement of restructuring changes
× Classification of significant portion of the price of an
acquired entity as Research and Development
× Creation of large liabilities for future expenses
× Use of unrealistic assumptions to estimate liabilities for
items
× Intentional inclusion of errors in the company’s books and
justifying the failure to correct the errors by arguing
materiality
× Recognition of revenue before the earnings process is
complete
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6. Designed
Accounting

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Designed Accounting
× If someone from outside of accounting
establishment tempted to see more of various
deliberate attempts to choose accounting
techniques and solutions that fit a pre-
established goal to be conveyed as
representative constructions of realities. This
phenomenon may be labeled as designed
accounting as it contrasts with a choice of
principle-based techniques and solutions.

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Aspects of designed accounting included different
concepts such as:
The selective financial misrepresentation hypothesis
× A manipulation of accounting information provides
decision-makers with the opportunity of sending
the kind of signals that shape people’s perception
of managerial performance, which is made possible
by arbitrary, complicated and misleading rules. The
motivation to support standards that selectively
misrepresent economic reality when it suit their
purpose, it applies to managers, shareholders,
auditors and standard-setters.

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× Manager prefers “loose” reporting standards over
tight standards because it allows (a) a shifting of
income between years more favorable to bonus
attainment, (b) impressing the shareholders and (c)
protecting their jobs by forestalling takeovers.
× Shareholders also got benefit from the loose
standards given that the smoothing of reporting
earnings by managers lowers the volatility of
reported earnings, lowering the market’s perception
of default risk and increasing firm value

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Income Smoothing
× Income smoothing definition is “moderates year-to-
year fluctuation in income by shifting earnings from
peak years to less successful periods”. Intentional or
designed smoothing refers specifically to the
deliberate decisions or choices made to dampen
earnings fluctuations around a desired level.
Therefore intentional or designed smoothing is
essentially an accounting smoothing that uses the
existing flexibility in generally accepted accounting
principles and the choices and combinations available
to smooth income.

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× Auditors may prefer the same reporting rules
that distort economic reality for client harmoy,
or rigid rules when they present a convenient
shield to hide behind
× Standard-setters may favor the self-
mispresentation hypothesis for both self-
protection and altruism.
× Academics may favor the selective
misreprestation hypothesis as it provides
them with the opportunity of providing
theories and proposals in exchange for more
remuneration and prestige.

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Earning Management
× Managers have the flexibility of choosing between the
alternative ways to account for transactions as well as
choosing between options within the same accounting
treatment. This flexibility, which is intended to allow
managers to adapt to economic circumstances and
portray the correct economic consequences of
transactions, can also be used to affect the level of
earnings at any particular time with the objective of
securing gains for management and the stakeholders.
This is the essence of earnings management, which is
the ability to “manipulate” the choices available and
make the right choices that can achieve a desired level
of income. 38
Fraud in Accounting
Fraud is intentional deception of another person by lying
and cheating for the purpose of deriving an unjust,
personal, social, political, or economic advantage over
that person. It is definitely immoral.
× Corporate Fraud
× Fraudulent Financial Reporting
× White Collar Crime
× Audit Failure

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7. Technical and
Ideological
Proletarianization
of Accountants

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Creativity in Accounting
Creativity in accounting implies a liberal
interpretation of accounting rules allowing
choices that may result in a depiction of financial
situations that are more or less optimistic than the
real situations, known as:
× “Big bath” accounting
× Creative accounting

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× Accountants as professional employees in accounting or
non accounting organizations are considered members
of the new class of salaried professionals. The growth of
accountants followed the need for more advanced
accounting technologies to deal with requirements of a
more sophisticated production apparatus.
× The proletarianization of accountants reflected a shift
of control toward employers or management and a loss
of the creative freedom accountants enjoyed as self-
employed professionals. Thus, the change in accounting
technology forced a change in the structure of the
accounting labor process and put the accountants in a
new form of “proletarian class”, subordinated, like
craftsmen before them, to capitalist management.
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8. The Manufactured
Consciousness of
Users

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× In addition to technical proletarianization, the
emergence of the “new working class”, or “professional
managerial class”, led also to an ideological
proletarianization, which refers to the appropriation of
control by management for capital, over the goals and
social purposes to which work is put. These changes
have led to a decrease in the number and quality of
people going into accounting programs. The accounting
profession lacks “glamour”, and survey results suggest
that accountants come from poorer socioeconomic
backgrounds than attorneys and physicians. The lack of
glamour may force the profession to offer high entry-
level salaries.
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Capitalist domination of information can be
expressed in three propositions:
× The class rule of management appropriates the
information product they create
× Maintained by the state’s enforcement of
contractual arrangements, protection of
property rights, and maintenance of public
order
× Information tools at the disposition of
management, such as annual reports and press
releases

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9. Ethical
Perpective in
Accounting
The three prepositions amout to three forms of
domination:
× Market Exploitation
× Legal Coercion
× Ideological Domination
They allow the management to convey its belief to the
users and in the process shape their consciousness about
the firm. What the users acquire is a manufactured
consciousness compatible with the expectations of
management. Sometimes, in the process leading to the
“manufactured consciousness”, management may
substitute a “false consciousness” through a process
researchers have identified with various labels, from
income smoothing to mere fraudulent financial reporting.

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× In performing their roles, accountants face formal
or legal rules of behavior but also moral elements
created by specific situations. By accepting
certain roles, accountants accept at the same time
the resulting obligations and moral
responsibilities of roles.
× By ethics is meant the concern with the moral
judgments involved in making moral decisions
about what is morally right and wrong or morally
good and bad. This assumes the existence of moral
standards that affect our human well-being, are
not established or changed by decisions of
authoritative bodies, are intended to override
self-interest, and are based on impartial
considerations. 48
Deontological Ethics
An approach to resolving moral issues is also known as rule-based
morality. The approach considers an action as morally right if it
conforms with a proper moral rule. An action that violates the rule
but results in beneficial actions is still considered wrong. The
sources of the rule could be either theological in the sense that the
actions are stipulated as moral by a religion, or societal in the sense
that they are the result of a social consensus as to whether they are
right or wrong.
Because of the limitations of these two sources, criteria have been
adopted based on either the consequences of adopting a particular
set of moral rules, or our supposed faculty of moral intuition.
× Differs from the act consequentialism
× The intuitionist approach holds that our special faculty of moral
intuition tells us with actions have the inherent properties of
being morally right.
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Utilitarian Ethics
× An approach to resolving moral issues is also known as
consequentialism. Considers an action as being morally
right or wrong based solely on the consequences that
result from performing it. The right action is the one that
brings the best consequences, or the greatest amount of
utility. The advantages of utilitarian ethics are related to:
× The goal of morality
× The process of moral reasoning
× Flexibility and exceptions
× Avoiding rule conflict
The difficulties with utilitarianism relate to:
× The objection from special obligation
× The objection from rights
× The objection from justice 50
10. Conclusions

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The notion of Fittingness
× Because of strengths and limitations of both ethics
above, a suitable compromise would be ideal.
Fittingness may be used to evaluate the morality of
actions by a reference to whether they are appropriate
and proper with the ethos shared by the individual and
the society.

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Thanks!
Any questions?

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