The philosophy of accounting encompasses the general rules, concepts, and ideas surrounding the preparation and auditing of the accounts and financial statements of individuals or companies. Due to the legal ramifications of inaccurate or falsified financial documentation, one of the most fundamental parts of the philosophy is the need for transparency. Being transparent is vital, as fair and accurate documentation and accounting of income and expenditures are crucial. It is particularly true for publicly traded corporations.
Key ideas involved in the philosophy of accounting include fairness, honesty, transparency, equity, and justice. What do they mean in a practical sense? They mean that accountants must provide a fair and honest representation of all the numbers documented in their accounting records, not skewing any of the numbers to make a company look better or worse than it truly is. They cannot hide or fail to document any information (transparency).
In order to be fair across the board, documentation and reporting procedures must be the same for every company.
The philosophy of accounting involves the general rules and ideals that surround the auditing, preparation, and release of financial information.
There are a number of issues and different schools of thought when it comes to how to treat and report financial information.
In order to maintain a fair and accurate collection, analysis, and documentation of financial information, governing bodies – such as the FASB – establish principles and rules which are to be used universally when it comes to financial information.
Issues with the Philosophy of Accounting
The philosophy of accounting is, of course, an ideal or a set of ideas and standards that should surround the practice of accounting. However, there are several issues that arise with trying to implement these philosophical concepts in a practical way. Such issues include:
The basis for ethically and morally disclosing financial facts and figures while maintaining some sort of discretion regarding a company’s – or an individual’s – private information
The practical challenge of establishing and maintaining a true and fair valuation of an enterprise and the assets it owns
Laws and standards, and the ability to make them equally applicable across the board – satisfying the needs of not only investors but employees and other types of stakeholders as well
Schools of Thought
Listed below are the different schools of thought relating to accounting:
Technocratic accountants subscribe to the idea that there is a rational approach to the best methods to accurately and fairly account for the financial doings of a client. Technocratism is the general belief that a solid technical understanding and application of accounting practices provide the best basis for handling a client’s financial records. In other words, rational rules are the best means for governing accounting practice.
On the other side of the spectrum, there is the pragmatic school of thought. Pragmatic accountants subscribe to a broader view of accounting that relies on professional and personal judgment rather than solely on a set of rules. Additionally, the necessary judgment skills are only acquired through years of practice and experience.
Regardless of the specific school of thought that an accountant subscribes to, they are all still ethically and legally bound to the generally accepted accounting principles that govern how a client’s financial records are accounted for.
Generally Accepted Accounting Principles (GAAP)
Generally accepted accounting principles (GAAP), the guiding set of core principles that govern accounting practice in the United States, are, in summary, the rules that help keep a level playing field when it comes to corporate accounting. The principles help ensure that there is fair and accurate reporting of financial doings of companies.
GAAP is the foundation for the methods and practices that the Financial Accounting Standards Board (FASB) approves when it comes to the collection, analysis, and public documentation of a company’s financial records.
In the United States, there are ten basic principles (or ideals) incorporated in GAAP that every accountant must adhere to when dealing with a publicly-traded company and its financial information:
Consistency – A consistent set of standards are applied throughout the entirety of the reporting process.
Sincerity – A commitment to being impartial and accurate.
Regularity – A strict adherence to rules and regulations that have already been established (referring to the best practices published by the FASB).
Prudence – The accountant’s personal/professional speculation has no bearing on how financial data is reported.
Permanence of methods – A consistent set of procedures is used throughout the preparation of financial reports.
Non-compensation – A company’s financial information is fully and accurately recorded; the accountant receives no compensation for inaccurately representing or skewing financial records.
Continuity – A company’s assets are valued with the assumption that the company will continue to operate.
Materiality – All financial reports fairly disclose all relevant factors affecting a company’s monetary situation.
Periodicity – A company’s revenue is systematically divided into standard accounting time periods that have been previously established, i.e., fiscal years, fiscal quarters.
Utmost good faith – All parties involved in the accounting process (the company, records holders, and everyone who handles the financial data) are presumably acting in an honest way.
CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA)® certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful:
Learn accounting fundamentals and how to read financial statements with CFI’s free online accounting classes.
These courses will give the confidence you need to perform world-class financial analyst work. Start now!
Building confidence in your accounting skills is easy with CFI courses! Enroll now for FREE to start advancing your career!