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The Demand for and Supply of Accounting Theories

Updated September 10, 2022
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The Demand for and Supply of Accounting Theories essay

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In This Journal, I analyzed there is a demand-side in two different situations, namely the unregulated economy, which is without government intervention, and the regulated economy, which includes government intervention. unregulated economy. Voluntary audited corporate financial statements are produced before the government mandate. Watts [1977] states that the original promoter of the company or, furthermore, the company manager has an incentive to contract to supply audited financial statements The agreement to supply financial statements is included in incorporation articles (or law) and private loan contracts between companies.
Agency costs arise because the interests of male agents (agents) do not have to be by the interests of shareholders or bondholders (the principals). For example, the manager (if he owns shares) has an incentive to turn the company’s assets into dividends, leaving the bondholders with a corporate ‘shell’. Similarly, managers have an incentive to transfer wealth to themselves at the expense of shareholders and bondholders (for example, through perquisites).
Bondholders and shareholders anticipate manager behavior and approach the price of bonds or shares when issued. Therefore, the promoter (or manager) of the new company receives less for the shares and bonds he sells than if he can guarantee that he will continue to act like him when he owns the company (that is if there are no shareholders or shareholders) outside). This difference in the market value of securities is part of the cost of agent relations, this is part of agency costs, and is borne by the promoter (or less).
The element of agency costs is the utility of the increase in perquisites, wealth transfers, etc., the manager receives because of his actions as an agent. Equilibrium occurs when the net costs of an agency relationship, agency costs, are minimized by trading a decrease in promoter utility (or manager) due to residual losses, monitoring and binding of expenditures, and utilities that increase because perquisites increase.
Watts [1977] analysis of agency theory relationship shows that the function of audited financial statements in an unregulated economy is to reduce agency costs. This theory predicts that accounting practices (for example, form, content, frequency, etc., external reporting) will vary between companies in an unregistered economy depending on the nature and magnitude of agency costs.
Previous analysis shows that accounting theory will serve three loading functions in an unregulated economy. Pedagogic Demand. Accounting procedures are designed to reduce contract agent fees. Because these costs vary across companies, accounting procedures will vary, giving rise to a variety of techniques formats, etc. However, diversity in accounting procedures reduces difficulties in teaching accounting practices. As a result, accounting teachers develop pedagogical tools (practical rules) to help learn and compile variations found in practice.
Information Demand. In an irregular economy, there are demands for writers to do more than just describe variations in accounting practices. There is a demand for predictions of the impact of accounting procedures on the welfare of managers and auditors through exposure to lawsuits. Auditors are bound by shareholders to monitor management, and he is legally responsible if he fails to report a breach of agreement in the company’s articles or legislation. Furthermore, the demand for certain auditor services is a function of auditor efficiency in monitoring management.
Justification Demand. Early Accounting Textbook warns that managers will use accounting to serve their own interests at the expense of shareholders. Accounting texts (and theories) which detail how managers try to manipulate profits and consequences due to manipulation of shareholders and bondholders not only increase the auditors’ ability to monitor these behaviors but also provide an argument ready to the auditor to counteract them.
The Demand for accounting theories in a Regulated Economy, This section extends the previous analysis of the demand for theory to understand the effects of government. Accounting and Political Processes Agricultural subsidies, tariffs, welfare, social security, and even regulatory commissions 2 are examples of special interest laws that transfer wealth. The business sector is the source (through taxes, anti-trust, affirmative action, etc.) and recipients of many of these assets (through tax credits, tariffs, subsidies, etc.). The financial accounting statement that performs a central role in this wealth is inherent and directly and indirectly, affected by the political process. My Securities and Exchange Commission (SEC) regulates the contents of financial statements directly (revaluation of fixed assets is not permitted, reports on changes in the financial position must be prepared, etc.). The Federal Income Act also affects the content of financial statements directly (eg, LIFO). In regulatory settings (eg public utility boards, various banking and insurance commissions, Intercountry Trade Commissions, erger Fed Trade Commissions) often affect the contents of financial statements.
Effects of Government Intervention on Demand Accounting Theory Rules and regulations resulting from government regulations on business increase pedagogical and information demand for accounting theory. In fact, starting from accounting textbooks report the requirements for income tax to be paid; LIFO, depreciation, etc. Practitioners request detailed texts that explain SEC requirements (eg, Rappaport [1972]), tax regulations, and other government regulations. The demand for certification for theory also develops with regulations. The policy process in the U.S. is marked as an advocacy process. Supporters and opponents of special interest legislation (or applicants before regulatory and administrative committees) must provide arguments for the positions they want. If this position includes changes in accounting procedures, accounting that serves as a useful justification.
Rationality or ‘Illusion Theory’. Until now, it was popular in the economic literature to assume politicians, elected officials, bureaucrats, and others, acted in ‘public interest’. (For our benefit) .34 To determine what actions are in the public’s interest, politicians need a theory that impacts change. Politicians/bureaucrats oriented to the public use the most predictive theories (ie the ‘best’ theory) and the implementers of these theories will be impacted. Main articles in litera accounting implicitly on the premise of public interest.

The Demand for and Supply of Accounting Theories essay

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The Demand for and Supply of Accounting Theories. (2020, Sep 18). Retrieved from https://samploon.com/the-demand-for-and-supply-of-accounting-theories/

FAQ

How many types of accounting theory are there?
2 Types of Accounting as per Accounting Theory.
What are the four approaches to the development of accounting theory?
Approaches to the formulation of accounting theories are following such as; positive approach, predictive approach, human information processing approach, behavioral approach, events approach, new approaches, regulatory approaches, traditional approaches, non-theoretical approaches, theoretical approaches.
What are the main theories of accounting?
The six basic principles of accounting theory are: Cost Principle. Matching Principle. Materiality Principle. Conservatism Principle. Time-Period Principle. Consistency Principle.
What are the two different types of theories in accounting?
Two of the most common and influential theories are positive accounting and normative accounting .
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