Meaning Of Accounting Theory

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Accounting Theory can be define more clearly if we define the two words separately and link it at the end. As quoted below “…the process of identifying, measuring and communicating economic information to permit informed judgement and decisions by users of the information.” (Smith, 1990) Accounting is the practical work of an accountant; recording of information from source documents, analysing it and making a report useful to stakeholders to help them make good decision. And theory is the explaining and predicting why practical accounting practices of book keeping procedures. It is the idea set up to guide the action taking place. Accounting is a profession of collecting data in source documents, analysing it into a report and presenting it…show more content…
(Paragraph 25) Not any resource is an asset, there are criteria or standard a resource must have to be recognise as an asset for the entity. Firstly, it must be controlled by the entity, the entity must have the power of control over the resource. For example, a motor vehicle is a resource, the entity have control over it when it is bought or on lease, as long as the entity can control the it, by controlling the fuel consumption, the mileage each day, where to go or whatever way it can to make that resource profitable to the entity. The second criteria for asset recognition is the resource is the result of the past event or transaction of the particular resource. Meaning resource is the result of what have happen in the past. For an example The resource must also be recognise as an asset by high expectation of producing future economic benefit to the entity. Example the motor vehicle is used to transport goods faster and safer, thus sales is increasing and good…show more content…
The two components that defines or recognise liability is when there is an existence of a present obligation, requiring a future settlement. It simply means the entity having an agreement to settle it’s required obligations in the future, and it can be either short or long term, it depends on the agreements. And also it is a result of a past event. Which means this obligation is derived from past events or past transaction. For example: My entity made a bank loan, now the bank is my liability, I owe the bank money and need to settle it. Thus my present obligation is paying back money due to me loaning as past event. Also decrease my economic benefits as a result of repayments of money going out. Equity is the difference between assets and liabilities, Accounting theories can be constructed according to their approaches to explaining and predicting actual

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