NATURE AND SCOPE OF ACCOUNTING SUMMARY

ACCOUNTING THEORY COURSE

Group 2:
Carina Jesslyn T (041811333085)
Andi Priatama R (041811333058)

1. Definition of Accounting

Definition of Accounting from several perspectives, namely as follows:

 Accounting as an art namely accounting as a field of knowledge skills, expertise, and crafts that
require practice to master it. Accounting demands consideration in its application. Considerations
are guided by experience and knowledge.
 Accounting as science Accounting will discuss many accounting symptoms such as why
companies use certain accounting methods, what factors drive management to manipulate profits,
whether participation in budgeting affects the performance of division managers.
 Accounting as a service Accounting is a service activity that works to provide quantitative
information, especially financial ones, about economic entities that are considered useful in making
economic decisions, in determining logical choices among alternative measures.
 Accounting as a process Accounting is a recording process, which is then classified, and
summarized in an appropriate manner, regarding financial transactions, and interpreting the results.
 Accounting as a business language because it is a tool to convey financial information to those
who need it. The better we understand the language, the better the decisions we make, and the
better we are at managing finances. To convey the information, accounting reports are used or
known as financial statements.

2. Purpose of Accounting
Littleton stated that the main purpose of accounting is to carry out a periodic calculation between costs
(effort) and results (performance). Accounting purposes are as follows:
1. As a reference source of untrustworthy information regarding liabilities, capital and economic
resources.
2. A reliable source of information in terms of changes and comparisons of economic sources after
business activity from time to time.
3. Assist users in reading financial information that is useful for estimating the company's position
and the company's potential in adding new economic sources and profits.
4. Monitor if there is a change in economic resources and liabilities.
5. Delivering detailed data that will be used by users of financial reports both internally and
externally.

General Accounting Purpose

1. Provide information about finances, both company assets and liabilities
2. Provides information about changes in various economic sources (net) of the company
3. Provide company financial information that can assist in estimating the company's profit potential
 4. Provide information about changes in various sources of the company's economy, be it assets,
debt, and capital.
5. Provide other information related to financial reports to help users of these reports

Specific Accounting Purposes

Specifically, the purpose of accounting is to provide information in the form of a report containing the
financial position, results of operations, and other changes in financial position fairly according to
Generally Accepted Accounting Principles (GAAP).

3. Authorities

Ikatan Akuntan Indonesia (IAI) – Institute of Indonesia Chartered Accountants

IAI is a professional organization of accountants that is free and not tied to any association, established in
Jakarta in 1957. IAI's objectives include: Developing research, education, and training as well as
correctional theory and practice of professions and other services related to accounting, in line with the
development of science and its environment Improving the professional proficiency and responsibility of
each member.

Institut Akuntan Publik Indonesia (IAPI) – Indonesian Institute of Certified Public Accountants

IAPI As an independent and independent public accountant professional organization with legal entities
based on Ministerial Regulation no.17/PMK.01/2008 recognizes IAPI as a public accountant professional
organization authorized to carry out public accountant certification exams, drafting and issuing
professional standards and public accountant ethics, as well as organizing sustainable education programs
for all public accountants in Indonesia.

Otoritas Jasa Keuangan (OJK) – Financial Services Authority

An institution under the Ministry of Finance of Indonesia in charge of fostering, regulating and
supervising daily capital market activities as well as formulating and implementing policies and technical
standardization in the field of financial institutions.

Scope US Europe Indonesia

Standard Maker of FASB (Financial IASB (International DSAK (Dewan
Public Company Accounting Standard Accounting Standard Standard Akuntansi
Board) Board) Keuangan)
Standard Maker of GASB (Government IASB KSAP (Komite Standar
Government Accounting Standard Akuntansi
Board) Pemerintahan)
Supervisor of Capital SEC (Securities and IOSCO (International BAPEPAM
Market Exchange Org of Security
Commission) Commission)
Product from Standard GAAP IFRS SAK, SAP, SPAP
Accountant AAA, NAA   IAI KAPD, IAI KAPJ,
Compartment IAI KASP, IAI KASY
 Founders (Penyandang FASB Foundations IFRS Foundations IAI, IAPI, IAMI
Dana)

4. Accounting Theory

Accounting theory is a branch of accounting that consists of systematic statements of principles and
methodologies that differentiate them from practice. Vernon Kam (1986) considers that accounting theory
is a comprehensive system which includes postulates and theories related to it. He divides the elements of
theory into several elements: basic postulates and assumptions, definitions, accounting objectives,
principles or standards, and procedures or methods.

Vernon Kam (1986) suggests the function of accounting theory as follows:

1. As a guide for accounting standard-setting agencies in preparing their standards.
2. Provide a frame of reference for resolving accounting problems in the absence of an official
standard.
3. Determine the limits in terms of making judgment in preparing financial statements.
4. Increase the understanding and confidence of report readers on the information presented in the
financial statements.
5. Comparably improve the quality of reports.

Meanwhile, Hendriksen (1982) argues the usefulness of accounting theory as follows.

1. Provide a frame of reference as a basis for assessing accounting procedures and practices.
2. Provide guidance on new accounting practices and procedures.

5. Efficient Market Hypothesis

The efficient-market hypothesis (EMH) was first developed from a dissertation by a financial expert
named Eugene Fama in the 1960s, which was then widely introduced through a book he also wrote
entitled "Efficient Capital Markets: A Review of Theory and Empirical Work" in 1970.

EMH itself is a hypothesis in financial economics that states that asset prices reflect all available
information. This basically means that all prices are automatically adjusted along with the new conditions
and information available and it is typically used for analysing the capital market, especially in regards to
stock prices.

According to the hypothesis put forward by Fama, an investor may be lucky to buy stocks that provide
large returns in the short term. However, in the long term, these investors will not be able to get a return
that is far beyond the average market return. There are several assumptions that must be fulfilled in this
hypothesis, namely the existence of low transaction costs and no single market player who is strong
enough to permanently affect stock prices. In addition, any information that can affect the share price
must be widely available and accessible to all. Even fellow investors can freely exchange information.

As soon as the information is received, investors will act immediately. This causes the stock price to
immediately adjust. Price changes that occur are independent, and are not affected by other prices and
move randomly. Even today's price changes are not affected by yesterday's prices, but rather by
information just received on the market. If these conditions can be met, then an efficient market condition
can be realized.

There are three types of efficient market forms:

A. Weak Form of the Efficient Market Hypothesis

The weak form of efficient market is often associated with the random walk theory, which states
that stock price movements are random and unpredictable. Past stock prices and the direction of
stock prices or the market as a whole cannot be used as tools to predict future stock price
movements.

The concept of a weak form efficient market was very clearly described by a professor of
economics from Princeton University named Burton G. Malkiel in 1973 in his book entitled "A
Random Walk Down Wall Street". The basic principle in this weak form of efficient market is
that because stock prices move randomly, it will be very difficult to determine price patterns and
profit from these price movements.

In a market where the stocks move randomly, technical analysis is considered inaccurate.
Conversely, fundamental analysis can provide information and help investors make above
average returns in the short term. However, in the long term, fundamental analysis is considered
inaccurate because it produces returns that are not higher than the market average.

B. Semi-Strong Form of The Efficient Market Hypothesis

According to this hypothesis, stock prices are a reflection of all relevant public information. The
current stock price in addition to reflecting historical share prices, also reflects information on the
market, including financial statements and additional information such as financial regulations,
taxation, interest rates, stock beta, including company ratings.

Unlike the case with the weak form of efficient market hypothesis, supporters of the semi-strong
form of efficient market hypothesis argue that investors can benefit by making careful
observations of public information available in the market. In observing a stock, investors can use
technical and fundamental analysis to obtain returns above the market average.

With fundamental analysis, for example, investors can identify a stock through accounting data or
information (financial reports) regarding mispriced conditions. Investors can buy stocks that are
considered undervalued. This strategy is often used by Warren Buffet in determining which
stocks to buy.

C. Strong Form of The Efficient Market Hypothesis

The strong form efficient market is the market with the highest efficiency. In this market share
price reflects all information, both published (public information) and unpublished (private
information).
The movement of share prices in a strong form of efficient market is determined by all relevant
historical information, information circulating in the public, including information known only to
a few parties (insider information), such as management, boards of directors, and creditors.

In an efficient market that is not strong, the use of insider information can help investors get
abnormal returns. However, this does not apply to the strong form efficient market which has the
strictest level of efficiency. The act of trading with insiders (insider trading) is believed to not
generate abnormal returns for investors.

However, insider trading is not allowed in trading activities on the Indonesia Stock Exchange.
This is because insider trading is an unfair trading practice, in which investors have
“confidential” information from people in related companies, but it is not disseminated to
everyone.

Burton G. Malkiel, the man behind the strong form efficient market hypothesis, argues that price
predictions, technical analysis, and the views of financial advisors are "useless". The best way to
maximize profits is to follow a buy and hold strategy.