Third homework

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Advanced Studies in Corporate Reporting ACCT 510

Instructor: Khalid R. Al-Adeem, Ph. D.

Name of student: Shorog fahd Almosa

Master of Science in Accounting

ID Number: 443203404
Q1: In an essay, talk about the conceptual framework (CF) of
financial accounting around these lines:

A conceptual framework is a collection of concepts and goals that contribute

to the development of a consistent set of standards.It defines as a cohesive
system of interconnected aims andfundamentals that can lead to uniform
standards and thatdefines the nature, purpose, and boundaries of financial
accounting and financial statements (Nikolai, Bazley, & Jones ,2007).A
conceptual framework is similar to a constitution in that it is a cohesive
system of interconnected aims and fundamentals that can lead to uniform
standards and that defines the nature, purpose, and boundaries of financial
accounting and financial statements (Kieso,Weygandt ,&Warfield ,2008)
.Many observers feel that the true contribution of standard-setting bodies, as
well as their continuing existence, is dependent on the quality of the
conceptual framework (Kieso et al. ,2008).They are determined by economic
and political environments, as well as the habits of thought and practices of
all segments of the business community time (Kieso et al. ,2008). It will
serve as the foundation for the Institute's complete the future accounting
declarations, to which each new release should be related.Thus was
established the first institutional program to construct a conceptual
framework based on postulates (Zeff,1999).

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 The need for the CF
The accounting profession relies on the conceptual framework to support
financial reporting requirements and to assist accountants' decision-making
when implementing these standards.Also, the profession relies on standard
setters to get the rights to the conceptual framework as a starting point
(Kieso,Weygandt ,&Warfield ,2008). As a result, the standard-setting process
should be based on a pre-existing set of concepts and objectives.
Furthermore, standard setters can then release new helpful and consistent
standards throughout time (Kieso et al. ,2008). Secondly, by referring to an
established framework of basic theory, new and developing practical issues
should be solved more rapidly (Kieso et al. ,2008). Standard setters find it
difficult, if not impossible, to immediately define the correct accounting
procedure for very complicated circumstances. On the other hand,
Accountants must deal with such issues on a daily basis (Kieso et al. ,2008).
It is intended that accountants would be able to swiftly reject certain options
and focus on a logical and appropriate solution by utilizing sound judgment
and a widely agreed conceptual framework because they are all constructed
on the same basis, the end result is a consistent set of norms and
regulations(Kieso,Weygandt ,&Warfield ,2008). It is critical that such a
framework improves financial statement users' knowledge and trust in
financial reporting, as well as the comparability of financial statements from
various firms (Kieso et al. ,2008).

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 Some history of the CF
Paton and Canning made the first attempts in the accounting literature to
establish a conceptual framework.Canning was the first to create and propose
a conceptual framework for asset assessment and evaluation based on future
predictions (Zeff,1999).The tentative statement of accounting principles
affecting corporate reports is the first effort to prepare the structure for a
conceptual framework, it approved in 1936 by the executive committee of the
American Accounting Association (AAA) and nd released in The Accounting
Review (Zeff, 1999:90).The primary objective for producing the “Tentative
Statement, to historical cost accounting, was to offer authoritative direction to
the newly created Securities and Exchange Commission (SEC)”
(Zeff,1999:90).In 1966, “an American Accounting Association committee
produced an impactful report which it proposed a decision usefulness
approach. All of this formed the foundations for the Financial Accounting
Standards Board's conceptual framework initiative (FASB)“
(Zeff,1999:95).The APB reacted in 1960s to a aspecialized ccommittee's
suggestion that the board "enumerate” and explain the important aspects to
which accounting principles should be directed and define the accounting
principles to which practices and processes should comply (Zeff, 1999:95).
Accounting practice has evolved significantly during the last 40 years.
Haskins & Sells was commissioned in 1935 to offer authoritative advise on
optimal accounting practice to the embryonic SEC, which had expressed an
interest in dictating the form and substance of financial statements in

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registration statements (Zeff 1972 as cited in Zeff 1999 ).In interval (1938-
1939), the AIA increased its involvement in advising the SEC by authorizing
its Committee on Accounting Procedure (CAP) to produce Accounting
Research Bulletins(Zeff ,1999).There were suggestions to create a collection
of fundamental accounting principles. Several times over the CAP
existence.Nevertheless, none of these proposals were adopted by the
committee as part of its work agenda(Zeff 1972 as cited in zeff
1999).Accounting difficulties such as deferred tax accounting, historical cost
vs. current value, the appropriateness of general price-level adjustments, and
the treatment of unexpected items in the profit and loss statement emerged
during that time period.Therefore, The committee suggested establishing the
Financial Accounting Standards Board (FASB) as a full-time, independent
organization under the authority of a new Financial Accounting Foundation
(Zeff ,1999 ).The Trueblood Committee proposed the core objectives of
financial statements to guide financial reporting improvement. It was
intended to generate a normative statement rather than an inference based on
practice(Zeff ,1999 ).

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 The role of the CF for the profession in general and, more
importantly, for the accountant her/himself while practicing
accounting

Financial accounting and reporting unlike physical sciences ,are not founded
on natural principles, but rather on a set of conventions or standards meant to
fulfill what are believed to be the desirable objectives of financial accounting
and reporting (Zeff,1999).It is intended that accountants would be able to
swiftly reject certain options and focus on a logical and appropriate solution
by utilizing sound judgment and a widely agreed conceptual framework
because they are all constructed on the same basis, the end result is a
consistent set of norms and regulations(Zeff,1999). It is critical that such a
framework improves financial statement users' knowledge and trust in
financial reporting, as well as the comparability of financial statements from
various firms (Kieso et al. ,2008). The conceptual framework is necessary for
accountant. Firstly, accountants use a conceptual framework that guides
financial accounting and reporting to produce relevant and reliable
information for the users of financial statements (Kieso et al. ,2008). Also,
need to follow the general practice of providing information that is important
enough to influence an informed user's judgement and decisions (Kieso et
al. ,2008). Therefore, the conceptual framework its emerge to assist
accountants' decision-making when implementing these standards (Kieso et
al. ,2008).The Past history tell us in the absence of a conceptual framework,
accounting standards were often produced that had serious
defects(Zeef,1999).
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 The component of the CF: the cohesiveness among its element.
Depicting the third level of the CF "measurement and recognition
concepts" (that is, Demonstrate the third level of the CF
graphically)

The goal of financial reporting, according to the conceptual framework, is to

transmit information that is valuable to investors, creditors, and other users
(Kieso et al. ,2008). Financial information is helpful in deciding how to
distribute resources. A bank, for example, may require information in order
to determine whether to lend money to a firm or not. Therefore, an investor
may want information on a company's profitability in order to decide whether
or not to invest in it (Kieso et al. ,2008). Management stewardship refers to
how well management uses entity resources to produce and sustain value. As
a result, businesses must disclose information regarding their financial
situation, changes in financial position, and performance (Kieso et al. ,2008).
They should also demonstrate how efficiently and successfully management
and the board of directors have carried out their obligations to make smart
use of the entity's resources. Companies give this information to financial
statement consumers in the form of general-purpose financial statements
(Kieso et al. ,2008). These are basic financial statements that provide
information that is relevant to important consumers. The statements are
designed to offer the most helpful information feasible in a way that benefits
outweigh costs for the various types of consumers (Kieso et al. ,2008(.

The qualitative characteristics of useful accounting information. Above of all,

the term understandability refers to the ability of information to be
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understood by external users who have a reasonable understanding of
business and economic operations (Nikolai et al. ,2007). Secondly, decision
usefulness it means the information should be beneficial in the decision-
making process of external users (Kieso et al. ,2008). Subsequently, the term
of relevance refers capacity to make a difference in a decision that includes
predictive value which means enables more accurate forecast of outcome of
past or present events, the feedback value which means enables decision
makers to confirm or correct prior expectations, and timeliness it means
availability of information before it loses its capacity to influence decisions
(Nikolai et al. ,2007). Finally, the terms of reliability refer reasonably devoid
of mistake or prejudice, and authentically portrays what it is meant to convey
which included are verifiability which means the ability of measurers
accountants to agree that measurement results can be duplicated,
representational faithfulness it means the degree of correspondence between
reported measurements or descriptions and economic resources, obligations,
transactions, and events causing changes in these items, and neutrality which
means the absence of bias and the completeness of the data (Nikolai et
al. ,2007).Therefore, the secondary qualities of qualitative characteristics in
accounting information its Include two components. firstly, comparability
which allows users to find and explain differences and similarities between
two or more pieces of information which also includes consistency it means
the information that is consistent from one time to the next (Nikolai et
al. ,2007). Secondly, the terms of constraints refer restrictions on identifying
valuable accounting information which included several thing are benefits
larger than expenses. So, the benefits gained by information consumers must

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be greater than the costs of supplying information, and materiality. Also, the
monetary effect of the information must be significant enough to influence
decision making (Nikolai et al. ,2007).

The Elements of Financial Statements it refers to the language of accounting

and business develop many terms that have useful meaning. There is a
massive element of financial statement such as assets, liabilities, equity,
revenues/income, expenses, and gains/losses and each of these categories
have subcategories (Nikolai et al. ,2007). The conceptual framework
identifies the main items presented on the financial statement of corporation.
The element of financial help to measure the company performance and
financial position” (Kieso et al. ,2008:12).

The fourth level includes four accounting assumptions from which four
accounting principles are formed and restricted by four constraints. It
includes the important principle that achieve the mine objectives of first
level. These concepts help explain which, when, and how financial elements
and events should be recognized, measured, and presented/ disclosed by the
accounting system (Kieso et al. ,2008). There are four accounting
assumptions. firstly, “the entity assumption which means the information is
recorded and reported about each separate economic entity. Secondly, the
going concern assumption which means the company is assumed to continue
future operations, unless substantial contrary evidence exists. Subsequently,
monetary unit assumption which means the national currency of company is
used as stable unit of measure in preparing financial reports. Finally,
periodicity assumption which means the information is reported in a

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company’s financial statements at least on an annual basis” (Nikolai et
al. ,2007:2).

There are four Principle in accounting. Firstly, “the cost principle which
means the transactions are initially measured at the amount of cash or cash
equivalents that was paid or received or the fair value that was ascribed to the
transactions when they took place” (Kieso et al. ,2008:26). Secondly,
“revenue recognition principle which means the collectible revenues are
recognized when performance obligations are settled. There is a presumption
that the contract is measurable. Revenues are realized when products ,
merchandise, or other assets are exchanged for cash. Revenues are realizable
if the assets received or held can be readily converted into cash or claims to
cash. Assets are readily convertible if they can be sold or inter- changed in an
active market at prices that are readily determinable and there is no
significant additional cost”(Kieso et al. ,2008:21).Subsequently, “matching
principle which means the assets such as property, plant, and equipment
contribute to a company's ability to generate revenues. Therefore, accounting
attempts to match these costs with the revenues that they produce. This
practice is called matching because it dictates that effort (expenditures) be
matched with accomplishment (revenues) whenever this is reasonable and
can be done. It also illustrates the cause-and-effect relationship between the
money spent to earn revenues and the revenues themselves” (Kieso et
al. ,2008:22). Finally,” full disclosure principle which means the accountants
follow the general practice of providing information that is important enough
to influence an informed user's judgement and decisions. This is called the

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full disclosure principle. The principle recognizes that the nature and amount
of information in financial reports reflects a series of judgmental trade-offs”
(Kieso et al. ,2008:29).

There are four Constraints in accounting. Firstly, “the cost/benefit approach it

means the accounting information is a commodity. Unless the benefits
expected to be received from a commodity exceed its costs, the commodity
will not be sought after. The company initially incurs the costs of providing
financial information and then passes the costs on to consumers especially
external users. These costs include the cost of collecting, processing,
auditing, and communicating the information. The costs also include those
associated with losing a competitive advantage by disclosing the information.
The benefits are enjoyed by a diverse group of investors and creditors, by
customers because they are assured a steady supply of goods and services,
and by the preparer itself for use in internal decision” (Nikolai et
al. ,2007:43). Secondly, “materiality it refers to the magnitude of an omission
or misstatement of accounting information that makes it likely the judgment
of a reasonable person relying on the information would have been
influenced by the omission or misstatement. Materiality and relevance are
both defined in terms of the influences that affect a decision maker, but there
is a difference between the two terms. A company may make a decision to
disclose certain information because users have a need for that information it
is relevant and because the amount is large enough to make a difference it is
material. Alternatively, a decision not to disclose certain information may be
made because the user has no need for the information it is not relevant or

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because the amount is too small to make a difference it is not material”
(Nikolai et al. ,2007:44).Finally, the industry practices constraint, asserts that
the nature of particular industries and their procedures may necessitate a
divergence from standard accounting theory. In other words, certain sectors
have procedures that are unique to them and need specialist accounting or
reporting. The industry practices restriction enables certain industries to
deviate from standard accounting rules as long as it is rare and justified
(Nikolai et al. ,2007).

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.

Q2:compare the theatrical concept that is deemed suitable for

viewing corporation in:

 the standard for presentation and disclosure issued by SOCPA,

 the framework issued by IASB and

 the Statements of Financial Accounting Concepts (SFACs) issued

by FASB.
In addition to the reading, for this question you need to upload the
related standards and statements by visiting the related websites.

The standard for presentation and disclosure issued by SOCPA

This standard defines the requirements for presentation and disclosure in the
financial statements for non-profit enterprises as well as the requirements for
presentation and disclosure in respect of consolidated financial statements
and financial statements of enterprises still in the process of being
established, and determines how processing accounting changes, potential
gains or losses are to be addressed. Furthermore, it sets out the disclosure
requirements for the accounting unit definition and its nature and the nature
of each financial statements, accounting policies, engagements and
subsequent events the preparation of the financial statements
(SOCPA,1428).This standard applies to the financial statements for non-
profit enterprises regardless of their form of regulation or the nature of their
activity. In addition, this criterion contains specific considerations of relative

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importance that must be taken into account when deciding whether items,
parts or groups to be presented in the financial statements (SOCPA,1428).

General basics to present the financial information are selecting format, using
terminology and categorizing the elements of the financial statements in a
way that facilitates absorb the important information. Non-significant items
should be grouped with the items they represent. Also, all values in the
financial statements should be shown to the nearest Saudi riyal. Also, the
comparative financial statements should be presented, and the notes should
contain information related to all the financial periods included in those
statements. Explanation and clarification of any changes in the basis for the
presentation of the elements of the financial statements from one financial
period to another (SOCPA,1428).

Moreover,give a title to each note attached in the financial statements and nu

mbering these notes. The disclosure standard set requirements in financial
statements which are the notes attached to the financial statements should
include a brief description of the accounting unit activity. Secondly, the
financial statements must include a clear and concise description of the
significant accounting policies followed by the accounting unit. If there is a
change in a particular accounting policy, the new accounting policy should be
applied retrospectively. The financial statements for all previous financial
periods should be modified for comparative purposes in order to reflect the
impact of the new accounting policy on the related periods. Also,
the effect of a change in a particular accounting estimate should be highlighte

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on the financial period in which the change occurs,and the upcoming
financial periods (SOCPA,1428).
Also, it should be disclosed in the notes attached to the financial statements
about the nature of the change and its impact on both net income before gains
and losses. The potential loss must be recorded if two conditions are met,
which are if it is expected that future events will confirm that a particular
asset has decreased in value or the accounting unit has incurred a liability at
the date of the financial statements, and if the value of the loss can be
reasonably estimated. Lastly, the events that occur between the date of the
financial statements and the issue date of the financial statements to trade
must be disclosed (SOCPA,1428).

The presentation and disclosure standard requirements for consolidated

Financial Statements are the consolidated financial statements should
disclose the policy followed by the holding company for preparing the
consolidated financial statements for its subsidiaries, and this disclosure
should be part of the clarification of the important accounting policies. As
well as, the percentage of ownership equity of the holding company in the
subsidiaries should be included in the consolidated financial statements. The
percentage of ownership equity of the holding company in the subsidiaries
that are not included in the consolidated financial statements. Finally, the
basis of accounting for subsidiaries that are not included in the consolidated
financial statements (SOCPA,1428).

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Presentation and Disclosure Standard Requirements for Companies under
construction are. The financial statements of the company that is still in the
construction phase should disclose the following which are the financial
statements relate to a company in the construction phase. Also, a description
of the activities of the construction phase that the facility is going through
(SOCPA,1428).

The framework issued by IASB

“The conceptual framework was issued by the IASB in September 2010. It

superseded the framework for the preparation and presentation of financial
statements. This conceptual framework sets out the concepts that underlie the
preparation and presentation of financial statements for external users. The
purpose of the conceptual framework is to assist the Board in the
development of future IFRSs and in its review of existing IFRSs .also, to
assist the Board in promoting harmonisation of regulations, accounting
standards and procedures relating to the presentation of financial statements
by providing a basis for reducing the number of alternative accounting
treatments permitted by IFRSs; to assist national standard-setting bodies in
developing national standards; to assist preparers of financial statements in
applying IFRSs and in dealing with topics that have yet to form the subject of
an IFRS; to assist auditors in forming an opinion on whether financial
statements comply with IFRSs; (f) to assist users of financial statements in
interpreting the information contained in financial statements prepared in
compliance with IFRSs; and to provide those who are interested in the work

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of the IASB with information about its approach to the formulation of
IFRSs”( IASB,2013:5).”This conceptual framework is not an IFRS and hence
does not define standards for any particular measurement or disclosure issue.
nothing in this conceptual framework overrides any specific IFRS. The board
recognizes that in a limited number of cases there may be a conflict between
the conceptual framework and an IFRS. In those cases where there is a
conflict, the requirements of the IFRS prevail over those of the conceptual
framework. As, however, the board will be guided by the conceptual
framework in the development of future IFRSs and in its review of existing
IFRSs, the number of cases of conflict between the conceptual framework
and IFRSs will diminish through time. The conceptual framework will be
revised from time to time on the basis of the board’s experience of working
with it” (IASB,2013,1428:6).“The objective of general-purpose financial
reporting forms the foundation of the Conceptual Framework. Other aspects
of the Conceptual Framework a reporting entity concept, the qualitative
characteristics of, and the constraint on, useful financial information,
elements of financial statements, recognition, measurement, presentation and
disclosure flow logically from the objective “(IASB,2013:7).” The rely on
general purpose financial reports for much of the financial information they
need. Consequently, they are the primary users to whom general purpose
financial reports are directed. The Board, in developing financial reporting
standards, will seek to provide the information set that will meet the needs of
the maximum number of primary users “(IASB,2013:7). “Throughout this
conceptual framework, the terms qualitative characteristics and constraint
refer to the qualitative characteristics of, and the constraint on, useful

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financial information. If financial information is to be useful, it must be
relevant and faithfully represent what it purports to represent. The usefulness
of financial information is enhanced if it is comparable, verifiable, timely and
understandable. Therefore, relevant financial information is capable of
making a difference in the decisions made by users. Information may be
capable of making a difference in a decision. The financial information is
capable of making a difference in decisions if it has predictive value,
confirmatory value or both“(IASB,2013:13).”To be useful, financial
information must not only represent relevant phenomena, but it must also
faithfully represent the phenomena that it purports to represent. To be a
perfectly faithful representation, a depiction would have three characteristics.
It would be complete, neutral and free from error “(IASB,2013:14). “The
financial statements are normally prepared on the assumption that an entity is
a going concern and will continue in operation for the foreseeable future.
Hence, it is assumed that the entity has neither the intention nor the need to
liquidate or curtail materially the scale of its operations
“(IASB,2013:20).”The elements directly related to the measurement of
financial position in the balance sheet are assets, liabilities and equity. The
elements directly related to the measurement of performance in the income
statement are income and expenses. The statement of changes in financial
position usually reflects income statement elements and changes in balance
sheet elements; accordingly, this Conceptual Framework identifies no
elements that are unique to this statement. The elements directly related to the
measurement of financial position are assets, liabilities and equity
“(IASB,2013:20). “Profit is frequently used as a measure of performance or

18
as the basis for other measures, such as return on investment or earnings per
share. The elements directly related to the measurement of profit are income
and expenses. The recognition and measurement of income and expenses,
and hence profit, depends in part on the concepts of capital and capital
maintenance used by the entity in preparing its financial statements
“(IASB,2013:24).

The Statements of Financial Accounting Concepts (SFACs) issued

by FASB.

“The FASB issued six Statements of Financial Accounting Concepts, known

as concepts statements, The conceptual framework is a coherent system of
interrelated objectives and fundamentals that is ex- pected to lead to
consistent standards and that pre- scribes the nature, function, and limits of
financial ac- counting and reporting. It is expected to serve the public interest
by providing structure and direction to financial accounting and reporting”
(Zeff,1999:105). “Statements of Financial Accounting Concepts do not
establish standards prescribing accounting procedures or disclosure practices
for particular items or events, which are issued by the Board as Statements of
Finan- cial Accounting Standards. Rather, Statements in this series describe
concepts and relations” (Zeff,1999:106).” Objectives of Financial Reporting
by Business Enterprises, Financial reporting should provide information to
help present and potential investors and creditors and other users in assessing
the amounts, timing, and uncer- tainty of prospective cash receipts from
dividends or interest and the proceeds from the sale, redemption, or maturity
19
of securities or loans”(Zeff,1999:107).”The needs of users could be satisfied
through disclosures, possibly even separate from the financial statements, that
business enterprises had a responsibility to society and not just to their
stockholders, the board’s statement on objectives substantially confines its
atten- tion to the needs of investors and creditors, barely rec- ognizes the
needs of managers, and ignores altogether the interests of other groups with
an interest in enter- prise productivity, such as labor and the tax authorizes.
Qualitative characteristics of accounting information, defining the
characteristics of useful financial information was the least controversial of
the conceptual framework projects, in part be- cause readers did not see
implications that portended current value accounting.” (Zeff,1999:108). “The
explained a hierarchy of qualities of accounting information. relevance and
reliability were the two pillars in qualities of accounting information. The
reliability was supported by representational faithfulness and verifiability.
Representational faithfulness, which was defined as “correspondence or
agreement between a measure or description and the phenomenon it purports
to represent , was a more elegant and comprehensive concept than freedom
from bias” (Zeff,1999:109).Finally, “comparability was introduced as a
desideratum, and it was stated that accounting decisions must satisfy a
materiality screen or threshold “(Zeff,1999:110).”The elements of financial
statements for business enterprises, It sets forth the definitions of assets,
liabilities, equity, investments by and distributions to owners, and
comprehensive income and its components (revenues, expenses, gains, and
losses) that are collectively the elements of financial statements. This is the
statement in which the board made known its preference for the asset and

20
liability view over the revenue and expense view for defining earnings. While
the board did not actually discuss the two views in the statement, one notices
that revenues, expenses, and gains and losses were defined in terms of assets
and liabilities. Hence, revenues were defined as inflows or other
enhancements of assets of an entity or settlements of its liabilities or a
combination of both” (Zeff,1999:111). “The recognition and measurement in
Financial Statements of Business Enterprises “(Zeff,1999:113).” The
recognition criteria and guidance in this Statement are generally consistent
with current practice and do not imply radical change. Nor do they foreclose
the possibility of future changes in practice. The Board intends future change
to occur in the gradual, evolutionary way that has characterized past change.
Also, make a decision on the preferred measurement attribute. The board
enumerated the attributes that are used in present practice, historical cost,
current cost, current market value, net realizable value, and present value of
future cash flows. Rather than attempt to select a single attribute and force
changes in practice so that all classes of assets and liabilities use that
attribute. The information based on current prices should be recognized if it is
sufficiently relevant and reliable to justify the costs involved and more
relevant than alternative information “(Zeff,1999:114). As the choice of
measurement attribute could not be disengaged from the income reporting
implications of unrealized holding gains and losses, this compromise was
necessary for Statement 5 which was recognition and measurement in
financial statements of business enterprises to survive “(Zeff,1999:115).

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In conclusion, “national standards that are closely converged with full IFRSs
as issued by the SOCPA are IFRSs with some options removed and some
disclosure requirements added as well as additional standards and
pronouncements endorsed by the SOCPA for matters not covered by IFRSs
but that are relevant in Saudi Arabia (for example for religious reasons)”
(SOCPA,1428). Similarly, “additional disclosure requirements have been
added to the IFRS for SMEs. The qualitative characteristics of useful
financial information, results from FASB’s collaborative work with the IASB
and their respective qualitative characteristics. the conceptual framework is
that the FASB states historical cost as the basis for recording financial
instruments as opposed to the IASB using fair value as the cost basis for
recording the transaction”( IASB,2013).

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Q3: Different views of the firm yield different accounting theories
(different ways to theorize financial accounting).
What do you think about this statement? Support your answer from
the assigned readings.

Accounting has always been built on a concept framework. That is, there are
thinking patterns underpinning the accounting process that provide
reasonable explanations for the specific approach that eventually evolves. All
accounting principles, in that sense, have a logical underpinning
(Chatfield,1977). Proprietorship was a key component in the development of
double entry bookkeeping. The idea of capital aided in bridging the gap
between the logic required in basic personal debt records and the Venice
approach, which included an integrated real and nominal account
(Chatfield,1977). Each business event has to be treated as a separate issue.
Almost all books produced before the eighteenth century were simply
explanations of which diary entries were suitable to specific transitions
(Chatfield,1977).” The technical improvement of accounting was left almost
entirely to practitioners, who had the advantage of describing actual business
situations and were at least compelled to deal with reality”
(Chatfield,1977:220).” Theoretical concepts, or views of a firm “(Chatfield,
1977:217–231),“are a key aspect of accounting theory” (Belkaoui 2004 as
23
quoted in Chatfield 1977), “and include proprietary, entity, enterprise,
residual equity, commander, and fund theories” (Belkaoui 2004 as quoted in
Chatfield 1977).However, Only one theoretical idea can be applied to the
theory's body or structure when developing accounting theory
(Chatfield,1977). “The proprietary theory It was a theory centered on the
purpose of the firm, the nature of capital, and especially on the meaning of
accounts from the owner’s viewpoint. Out of this attention to owners’ equity
came the proprietary and entity doctrines which still serve as rationalization
for bookkeeping methodology and as an integrating framework for
accounting theory. The first accounting theory emphasized the distinction
between a stock of wealth (capital) and its flow (income). the corporate
accountants were given the tasks of calculating retained earnings available
for dividends, and of making sure that invested capital was maintained intact
while fixed asset balances were converted to expense. For these and other
reasons (capital)became associated with ownership rather that being simply a
residual balance” (Chatfield,1977:220). “The account classifications should
be derived from the two essential purpose of bookkeeping profit finding and
the inventorying of asset. Theses produce real and nominal accounts, in effect
two independent accounting systems side by side. double entry is the merger
into one system of the property bookkeeping and the results bookkeeping of a
business firm” (Chatfield,1977:222). “The proprietor is the center of
accounting interest. accounting records are kept and statements prepared
from his net worth. Asset represent thing owned by proprietor or benefits
accruing to him. Liabilities are his debts. Capital shows the firms value to its
owner. Revenues immediately increases proprietorship expenses decreased

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it.net profit accrues directly as wealth to the owner” (Chatfield,1977:223).”
The entity theory it means the corporation was legally distinct from its
owners and managers and corporate proprietorship typically involved a
constantly changing group of shareholders. Asset could not realistically be
thought of as belonging to these people because the law recognizes prior
claims of creditors and preferred stockholders in liquidation. Nor, because of
limited liability, did investors personally owe the firms debts”
(Chatfield,1977:223). “Income distributions no longer resulted from the type
of informal decision involved in proprietary withdrawals. Financial statement
were now communication devices between management and outsiders who
had no practical access to the books and little detailed knowledge of
operation. The essence of double entry lay not in in the equilibrium of debits
and credits but in the keeping of statistical economic record which allowed
proper accounting for business assets. Separation of the modern company
from its owners and concluded that within business firms, not with the affairs
of proprietors as such. business assets were debts of the firm to its owners;
liabilities were claims of the firm on its owners. Profit or loss measured the
value of the proprietor’s services, and first existed in bookkeeping sense at
the time of settlement between the firm and its ownership group. While
accounting technique had developed to meet corporate needs, theory still
assumed that disclosure of proprietor’s capital was the main accounting task”
(Chatfield,1977:224).” The entity theory emphasizes corporate income and a
more nearly economic idea of income measurement. Revenues and expenses
are no longer simply increases or decreases in stockholder’s equity. revenues
are compensation for service provided by firm. Expenses measure the cost of

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services consumed in obtaining these revenues. Profit accrues to the
corporation, not to its owners or creditors. Its disposition is up to the entity:
income taxes, and distribution is distinct from income finding. interest
payments, income taxes, and dividend are distributions of profit rather than
proprietary withdrawals of capital. retained earnings represents an
undistributed allocation of income to stockholder .Asset are considered
deferred costs available for future conversion rather than objects intended for
liquidation to satisfy creditors” (Chatfield,1977:225).”The enterprise theory
derives from the view of the large corporation as asocial institution
influencing society as whole, operating for the benefit of many interested
groups, and having a reporting obligation to each of the major parties affected
by its actions income logically claims against dividends paid because it
implies a social commitment over and above any responsibility to owners ,the
enterprise theory dovetails nicely with regulatory policies of the past forty
years which view the corporation as part of a larger system coordinating its
activities with national goals”(Chatfield,1977:228). Owners’ equity is the of
it and the grand amie of double entry is, to ascertain the true state of the
stock(capital)account.

“The first theories of account aimed only to justify the rules of double entry
and to help students and practitioners understand and apply these, even in
difficult or unexcepted situations where rote teaching methods failed. The
corporation as living entity with company to its owners. But business
operations are too complex to be described realistically in such simplistic
terms, and these theories also lacked sufficient breath of application.one the

26
whole they failed to adjust to changes in the business conditions which first
gave them validity. The accounting in the business firm remains essentially,
catering to economic realities of the moment rather than being based on
ultimate truths. Despite all their limitations, these theories provided a sense of
direction which helped double entry bookkeeping expand to encompass
industrial development” (Chatfield,1977:228).
Reference

Chatfield, M. (1977). A history of accounting thought. Krieger Pub Co.

chapter 16.

Kieso , D. E., Weygandt, J. J. and Warfield, T D. (2008). “Intermediate

Accounting (12th ed.).” New York, NY : J. Wiley.

Nikolai, L. A., Bazley, J. D. and Jones, J. P. (2007). “Intermediate

Accounting (10th ed.).” Mason, OH: Thomson Higher Education. (You can
deem this reference as elective) .

Zeff, S. A. (1999). The evolution of the conceptual framework for business

enterprises in the United States. The Accounting Historians Journal, 89-131.

The Saudi Organization for Charted and Professional Accountants

(SOCPA),1428, financial accounting standards: Riyadh.

The International Accounting Standards Board (IASB), 2013.

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