“The to point out that we have

 “The accounting profit figure is simply a
measure of the true profit of an organisation.” Discuss.

My understanding of accounting profit was developed through
the introduction to financial accounting module in year 1. Accounting profit is
calculated in accordance to the general accepted accounting principles (GAAP).

We Will Write a Custom Essay Specifically
For You For Only $13.90/page!

order now

Profit is the difference between revenue earned and expenses incurred which
include costs such as operating expenses. However, it is crucial to point out
that we have two profit figures, gross profit and net profit. Gross profit is
the profit figure from the trade of the business, and measures the selling
price and purchasing price. Besides, expenses deducted from gross profit are
regular on-going costs of a business, which is referred as overheads, for
example, salaries, rent and insurance. Whereas, the net profit figure measures
the performance of a business. In order to determine the net profit value the
gross profit is deducted from running costs, such as interest and taxes.

Nevertheless, the profit figure can vary from business to business, for example
considering two businesses that have the same costs and revenue; they can have
a different profit figure, as it depends on the accounting policy that has been
used in order to produce the profit figure. This links to techniques
established in creative accounting that allows businesses to manipulate figures
such as profit, in order to gain the confidence of stakeholders. Furthermore,
it is vital to indicate that expenses are matched against revenue earned in a
period, which is identified as the matching concept. For profit, revenues do
not have to be received in the form of cash and expenses do not have to be
paid, but will still be accounted for in the income statement. If we have
established what the accounting profit is, then essentially the question of
matter is what is true profit? (Author 2017, Part 1)

On my journey through this module, I have greatly expanded
my understanding of accounting profit. Initially, my understanding was limited.

I was aware the way in which profit is calculated with regards to GAAP and how
the term is defined. The importance of understanding profit was also apparent
to me but that was the limit of my knowledge at the time. This module has been
a valuable catalyst in helping me to grasp the essence of a variety of
theories, thus allowing me to truly understand different factors that influence
how accounting practises are used but also appreciate what we mean by truth in
accounting. There are two areas that I will focus on to highlight the ‘truth’
in accounting. Firstly, subjectivity, which will discuss the power that
accountants have to manipulate figures such as profit, and the impact this has
on the organisation and stakeholders. Then I will focus on how accounting is
regulated, and how regulators ensure accounting information presents the
‘truth’ (complete, neutral and free from error)

My initial answer touches on the concept of subjectivity in
accounting, an issue that is of particular interest in determining the disparities
between accounting profit and whether it is a measure of the true profit. I
previously mentioned that accounting policy dictates calculation of profit
figures for organisations which, when considered with creative accounting intends
to gain the confidence of stakeholders. Hines discusses how in reality
accountants have the discretion to ‘creating the reality’ of figures in
accounting. (HINES PG 254). It is also worth noting that choices are actively
being made to include or not include information and based on this information users
such as shareholders or potential investors to ‘think and act’ based on the
information presented to them. However, if we defined the rules differently,
such as if we value assets at historical costs as opposed to market value.

Therefore, we end up with a different profit figure, so hence there are range
of possible truths in accounting.  This
leads to identifying the agency theory. Managers having the choice to adopt a
particular accounting policy allows for ‘opportunistic behaviour’. (SCOTT W,
FAT) PG 34 Also, certain figures in annual reports are presented in bold,
colourful and highlighted to attract the attention of the reader. This module
has allowed me to question the information and what judgments were made. In
support of this, one of the Positive Accounting Theory hypotheses, the bonus
plan hypothesis underlines that managers, for self-interest will intend to
adopt certain accounting policies, which conveys strong profits, as managers
will be rewarded if the organisation ‘performs well’. PG 277 Book. A recent
example of Tesco, whom overstated their profits and recognised ‘future periods’
revenue. Another way to examine the issue of subjectivity in accounting is
based on IAS 16 which is based upon the judgement, but also what accounting
policies accountants decide to adopt. IAS 16 highlights the issue of
subjectivity in accounting as figures can be manipulated, when for example,

International Accounting Standards Board (IASB) was founded
in 2010 to overcome the subjectivity in accounting, and prevent different ways
of preparing FS, but more so it was founded in the publics intrest. International
Accounting Standards Board is an organisational responsible for setting
standards, whom intitate rules and conventions that set a procedure for
accountants. In my initial answer I did not consider the point about regulators
and the impact they have on the profession.. which showed my lack of awareness
of the impact

This brings forth the question of the quality of auditing,
as shareholders appoint auditors to ensure that managers are effectively
managing the business, but this leads us to the problem that auditors are given
the information provided by the managers. As mentioned previously regarding
Tescos, the Financial Reporting Council was able to determine that it could not
challenge the auditing firm, or whether it ‘failed to act appropriately on the
information they were given’. (FT) This suggests that. Previously, I believed
that auditing firms were responsible for ensuring that the information is
accurate, but that cannot be achieved to the required standard as they will audit
whatever is disclosed by the organisation.

points why it is impossible for AP to be a measure of true profit.

True profit

Moreover, the problem caused by the level of subkectivity in
accounting is consistency, which causes zzz when comparing financial accounts
with businesses operating in the same market, which essentially questions the
relevance of the information  

decide on a truth, because it has the qualities we are looking for, it is
useful, it is not the singular truth, it is one possible truth/.

Furthermore, understanding subjectivity in accounting
has allowed me to think about the importance of transparency in accounting
information, and if missing, the effect it can have.


I'm Alfred!

Would you like to get a custom essay? How about receiving a customized one?

Check it out