Accounting Theory
Accounting Theory
Accounting Theory
THEORETICAL FRAMEWORK
Accounting theory
Accounting theory is the logical reasoning in the form of a set of broad principles that provide a
general frame of reference by which accounting practice can be evaluated as well as guide the
development of new practices and procedures. The function of the theory is to assist in the
resolution of practical problems. The existence of theory would mean that we could say and explain
why a given a number of assumptions method A is to be preferred to method B
REGULATORY FRAMEWORK
In Kenya, the institute of Certified Public Accountants of Kenya (ICPAK) regulates the accounting
profession through the professional standards committee that issues the accounting standards.
In general any regulatory framework derives from several sources. These sources include:
1. Legislation
2. Accounting standards
3. Accounting principles and conventions (or policies)
4. Stock exchange rules
1. THE LEGISLATION
All companies incorporated in Kenya must comply with the requirements of the companies Act
(Cap 486), irrespective of their size. The act imposes a requirement for all companies to prepare
regular accounts and provides detailed rules on minimum information, which must be disclosed
on production of financial reports.
Section 147 of the Act states in part that “every company shall cause to be kept in the English
language proper books of account with respect to:
(a) All sums of money received and expended by the company and the matters in respect of
which the receipts and expenditure takes place.
(b) All sales and purchases of goods by the company
(c) The assets and liabilities of the company
Furthermore, a company must comply with the rules stipulated in the specific Acts under which it
is operating e.g. Banking Act for banking companies, Insurance Act for insurance companies,
Building societies Act for building societies etc.
The accounting obligation imposed upon companies is contained in section 149 of the companies
Act. Every company is required to prepare and submit the following financial statements to the
Registrar of Companies and the general body of shareholders:
1
(a) Profit and loss account or statement of comprehensive incomes
(b) Statement of financial position
Subsection 1 of section 149 (Cap 486) goes on to state that, every balance sheet of a company must
give a true and fair view of the state of affairs of the company as at the end of its financial year
and every profit and loss account of a company must give a true and fair view of the profit or loss
for the financial year.
Accounting is the language of business. To make the language convey the same meaning to all
people, accountants all over the world have developed certain rules, procedures and conventions
which represent a consensus view by the profession of good accounting practices and procedures
and are generally referred to as General Accepted Accounting Principles (GAAP). Accounting
statements are prepared in conformity with these principles in order to place more reliance on
them.
Accounting Principles refer to the fundamental beliefs, guides to action and a settled ground or
basis of accounting conduct and practice.
3. STOCK EXCHANGE RULES
Where companies are listed on the stock exchange, they comply with additional requirements laid
down by the stock exchange. The rules require the provision of both greater and more frequent
information than that required by law e.g. those companies listed on the Nairobi securities
Exchange publish an interim report which contain minimum information. The interim report must
be circulated to shareholders or published in at least one newspaper.
Introduction:
The law by its very nature is not dynamic. It will usually fall behind new ideas and developments
and will not always cover the technical aspects of financial reporting. Thus, in addition to the legal
stipulations, accounting practice is heavily influenced by the pronouncements issued by
professional accounting bodies in the form of accounting standards.
Companies not only need to meet the requirements of the law but must also comply with the
requirements detailed in these statements of Accounting Standards operating in their countries. In
Kenya, these standards were issued by the Institute of Certified Public Accountants of Kenya
(ICPAK) which is also a member of the International Accounting Standards Committee.
However, with effect from 1.1.1999, Kenya adopted International Accounting Standards issued by
the International Accounting Standards Committee.
Definition:
Accounting Standards are methods or approaches to preparing accounts which have been chosen
and established by the bodies overseeing the accounting profession.
They are essentially working rules established to guide accounting practice.
2
These are rules, regulations and guidelines formulated and issued by accountancy regulatory
bodies i.e. International Accounting Standards Committee (IASC) in order to guide accountants in
the preparation of the financial statements. Examples includes IAS, ISA, IPSAS and IFRS.
The purpose of the standards is to reduce the number of acceptable alternative treatment of an
accounting issue and facilitate comparison in financial statements.
The prime objective of accounting standards is to improve the quality and uniformity of reporting
and introduce a definitive approach to the concept of what is true and fair.
Benefits of the Standards
1. Uniformity
The standards promote the harmonization of the information presented in the financial statements
since all accountants prepare such financial statements under the guidance of the IAS.
2. Quality
The standards promotes the quality of the information presented in the financial statements . They
normally takes a lengthy procedure to be formulated which involves a thorough discussion of all
the issues related .The outcome is therefore said to be fairly balanced.
3. Saves time
It is easier and faster to check up in the standards for the best treatment of a problematic issue.
Standards provide reference to the accountants and it therefore reduces the research and reference
time. The financial statements can therefore be prepared and presented to the users in good time.
5. Objectivity
Standards eliminate personal subjectivity to the preparation and presentation of the financial
statements. i.e. the same interpretation and conclusion of the financial statements will be arrived
at by different users or persons.
3
Formulation of the Standards.
This takes a lengthy procedure which involves several stages that ensures the interest of all
interested and affected parties and their views are incorporated in the process. The following
procedure is normally adopted in the formulation of the IAS.
2. Identification and review of all accounting issues associated with the topic.
The committee considers the application of the IAS committee’s framework for all the preparation
and presentation of the financial statements to those accounting policies. The committee also
studies the national and regional accounting requirements and practices that may be appropriate in
different circumstances. It then presents its findings to the board.
4
6. Preparation of the final draft/IAS
After review of the comments from all the interested parties a draft standard is prepared for review
by the board. After final adjustments if any and with the approval of at least three quarters of the
members, the final draft is published and becomes applicable or operational.
(a) They make financial statements more understandable by requiring increasing disclosure of
accounting policies.
5
(b) They are not objective because there is no universally agreed theory of accounting and a
universally conceptual frame work of accounting.
(c) They have improved comparability as they call for consistency and disclosure of the effect
of any deviation from the existing practice or standards.
(d) They help financial statements to be more complete as they call for the production of such
additional figures as those in the cash flow statements, of changes in equity and notes to
the financial statements.
(e) They make information more relevant but some standards are said to make financial
statements less relevant.
(f) They improve reliability of financial statements.
(g) There is now greater consistency in the application of accounting concepts and policies.
(h) They have not improved timeliness of accounting reports and may in fact have largely
contributed to the late production of reports.
(i) They have been criticized by writers as introducing bias into accounts and therefore should
not be regarded as a desired characteristic of financial reports.
(j) They in fact call for extra information and therefore result in extra cost.
On the whole, accounting standard setting is an attempt to improve the reporting system and
generally, the standards have improved the quality of financial reports.
4. Nationalism
Most countries are reluctant to adopt the standards developed by other countries purely because of
nationalism i.e. they consider themselves superior and therefore should set the pace and others
follow.
6
Reasons for change from Kenya Accounting Standards (KAS) to International Accounting
Standard (IAS)
3. Regional pressure
Kenya being a regional player felt the need to harmonize its accounting practice since most of the
countries with in the region were adopting the IAS.
The accounting profession in Kenya began formation when the government established the Kenya
Accountants and Secretaries National Examinations Board (KASNEB) in 1969 to conduct local
examinations for candidates interested in joining the accounting profession. Subsequent
developments culminated in enactment of the Accountants Act (CAP 531) in 1977, forming the
legal framework within which the profession now operates. The following is an outline of the
framework in order in which the pillars came into existence.
Functions of KASNEB
Sec. 17(1) of the Accountants Act, 2008 (Acts No. 15, 2008) of the laws of Kenya defines the
functions of KASNEB. These functions are:
(a) To prepare syllabuses for professional and technician examinations in accountancy,
company secretarial practice and related disciplines.
(b) To make rules with respect to such examinations.
7
(c) To arrange and conduct examinations and issue certificates who have satisfied examination
requirements;
(d) To promote recognition of its examinations in foreign countries;
(e) To investigate and determine cases involving indiscipline by students registered with the
Examination Board.
(f) To promote and carry out research relating to its examinations;
(g) To promote the publication of books and other materials relevant to its examinations
(h) To liaise with the Ministry of Education in accreditation of institutions offering training in
subjects examinable by the Examinations Board and;
(i) To do anything incidental or conducive to the performance of any of the preceding
functions.
8
(c) To promote the international recognition of the institute;
(d) To advise the examinations board on matters relating to examination standards and
policies;
(e) To carry out any other functions prescribed for it under any other written law and;
(f) To do anything incidental or conducive to the performance of any of the preceding
functions.
Conceptual Framework.
There are many ways to explain a conceptual framework. It can be any or all of the following: