Accounting theory.

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                                                               Accounting theory.

A careful look into the development of the accounting practice over the course of recent time reveals its reactive nature to the various economic forces. Inflation is one of these forces, and as much as accountants have tried to ignore its effects on various aspects of accounting, it is now deemed impossible to do so without affecting the integrity of the practice. Up to the beginning of this century, asset valuation and income measurement took little interest in the impact of economic forces such as inflation. In 1939, Canning suggested the inclusion of the impacts of such phenomena in making asset valuation so that ‘truth in accounting’ could be achieved. His idea was that activities such as asset valuation and income measurement had to include the impact of inflation in order for true values to be established.

After World War 2 came to an end, many economic hardships affected the values of assets and establishment of income. When income ‘at leaving time’ and ‘time of beginning’ were compared, the change in their values was considered the income, but the effects of the surrounding economic conditions – such as inflation – had to be included in the accounting process to establish the true value of the person or organization. This problem became more protracted in business organizations where there were decision-making processes and long term strategy implementation. This is the reason inflation, or a fall in the value of assets, should be factored in asset valuation and income measurement. It is important in establishing the true value of assets and/or income.

According to historical cost accounting, the monetary unit of an asset is its unit of account. Unfortunately, since monetary value is subject to inflation, this exposes crucial accounting processes such as asset valuation and income measurement to errors meaning historical cost accounting is obsolete from an ‘accounting-and-inflation’ point of view.

Political-economic theories of accounting relate to the outer ring of factors that might have a somewhat distant, but direct influence on the accounting practice as well as its results. Political-economic refers to the mix of economic, political, and social influences that surround man and influence, directly or indirectly, his activities (Gray et. al 47). Since economic activity is not exclusive of these three influences, its investigation and analysis in form of accounting cannot feign ignorance to these important factors since they influence not only the investigative (or analytical) process, but all human life.

The product of accounting as a practice therefore take a lot more into consideration than the factors of an organization’s production cycle or accounting period. The resultant reports, though not explicitly, take into consideration the interplay between the organization they represent and it.............