Abstract

Accounting frameworks follow stipulations of existing Accounting Theories. This exploratory research sets out

to trace the evolution of accounting theories of Charge and Discharge Syndrome and the Corollary of Double

Entry. Furthermore, it dives into the theories of Income Determination, garnishing it with areas of diversities in

the use of Accounting Information while review of theories of recent growths and developments in Accounting

are not left out. The method of research adopted is exploratory review of existing accounting literature. It is

observed that the emergence of these theories exist to minimize fraud, errors, misappropriations and pilfering of

Corporate assets. It is recommended that implementation prescriptions of these theories by International

Financial Reporting Standard Committee and Practicing Accountants should be adhered to and simplified so as

to avoid confusing and scandalous reporting of financial statements.

Keywords: Review of Accounting Theories, Financial Reporting, Corporate Reports, Financial Statements,

Developments in Accounting.

1. INTRODUCTION

The International Accounting Standards Board (IASB) was formed in 2001 as a successor to the former

International Accounting Standards Committee (IASC), which was established to formulate and publish, in the

public interest, International Accounting Standards (IAS) to be observed in the presentation of published

financial statements and to promote their worldwide acceptance and observance (International Financial

Reporting Standards - IFRS, 2007). International Accounting Standards Board (IASB) is responsible for

establishing, monitoring and giving acceptable interpretations of the provisions of International Financial

Reporting Standards (IFRSs). IFRS since inception has introduced numerous new useful, complex, confusing

and/or expanding existing accounting frameworks. Frameworks of Accounting are raised from existing

Accounting Theories.

Accounting theory is a material field in Accounting. Historically, accounting predates monetary economy. This

was precisely, in the era of barter economy (i.e. exchange of goods for goods) when transactions were not only

pre-determined by measurement but also by exchange values. The precept in which goods were exchanged at

arms-length through concerted efforts of gathering, determining and measuring values are both pre and postante

accounting. The Trade by barter period was characterized by measurement inequality, cumbersome in

terms of production variety and coupled with the problem of coincidence of wants, were all-inherent in barter

economy. However, the development of accounting theory was to ameliorate the inherent problems encountered

in barter economy, unlike monetary economy. It is pertinent to understand the meaning, scope and application

of a theory in humanities and management sciences in order to appreciate the work of accounting theory.

A theory according to American Institute of Certified Public Accountants (AICPA), (1970) is a structure that

unifies the underlying logic or system of reasoning. Such theoretical structure, though abstracts from the

complexities of the real world is designed to achieve a level of simplicity necessary for analysis. However,

theory is useful in explaining, evaluating and predicting the phenomena associated with a given field of thought

like in the case of accountancy. Osuala (2005), like Okoye (2003) views theory as an attempt at synthesizing,

interacting and integrating empirical data for maximum clarification and unification. He added that every

individual has a number of personal theories based on postulates and assumptions of varying degrees of

adequacy and truth from which he makes deductions of various degrees of crucially and of course of accuracy.

It will be useful to state that the word 'theory' is used at different levels even in the history of accounting.

Accounting theory may mean purely speculative interpretations or empirical explanations of events for

economic decisions. Accounting theory is defined as a cohesive set of conceptual, hypothetical and pragmatic

proposition explaining and guiding the accountant's actions in identifying, measuring and communicating

economic information to users of financial statement, (American Accounting Association (A.A.A). 1966). Wolk,

Dodd and Rozycki (2008) opine that accounting theory consist of the basic assumptions, definitions, principles and concepts and how they are derived. They further assert that it includes the reporting of accounting and

financial information. According to (Perara and Matthew, 1996), it is the logical reasoning in the form of broad

principles that provide a general frame of reference to every accountant to evaluate and guide the development

of new practices and procedures. It is the rationalization of the rules of accounting which further explains the

manner in which accountants gather, record, classify, report and interpret financial data especially when

monetary amount is determined in the financial statements. In the words of Hendrickson, (1992), accounting

theory was defined as logical reasoning in the form of a set of broad principles that (1) Provide a general frame

of reference by which accounting practice can be evaluated, and (2) guide the development of new practices and

procedures. Accounting theory is used to explain existing practices and procedures to obtain a better

understanding and to provide a coherent set of logical principles that form the general frame of reference for the

evaluation and development of sound accounting practices. In accounting however, theory has loose and

overlapping meaning with principles, concepts, conventions, doctrines, standards, rules, assumptions, tenets,

postulates and procedures which are used interchangeably in this case. These doctrines however gave credence

to the rational judgment, universal applicability, comparability, and acceptability of financial statements.

Accounting conventions, unlike the laws of chemistry or natural science, are man-made-laws on data generation,

recording, classifying and analyses of financial information that are at least in part of monetary character and

interpreting the results therein for management decisions, Anao,(1996).

Unifying the views of American Accounting Association (A.A.A.) (1996), AICPA (1970) and Anao, (1996),

accounting theory means a cohesive set of conceptual, hypothetical and pragmatic propositions explaining and

guiding the accountants' actions in identifying, analyzing, measuring and communicating economic information

to the users an informed decision. These principles represent the best possible guides based on reason,

observation and experimentation. These rules are constantly changing, and hence resultantly influencing the

business practices. These principles however, contradict and conflict the interest of statement users because

various parties have different interests. Even though principles were developed from the opinions of the

stakeholders (creditors, labour unions, management, accountants, teachers, auditors, journalists, financial

institutions, government, tax authority, etc), their areas of diversities can hardly be resolved, Goldberg,(1949).

As theories are evolving, some are either rejected or accepted or continually being revised or modified in order

to keep pace with the increasing complexity of business operations and business risks. This is the nexus that

empowers International Financial Reporting Standard (IFRS) its relevance. Accounting theory in recent time,

has experienced tremendous growth and development, just like any system void of rules and regulations may

encounter pre mature death and stagnation, barred from withstanding the test of time and may lack basis of

evaluation and comparability, Macre,(1981). Globally known influential changer of many conceived and

underling Accounting theories is International Financial Reporting Standard (IFRS).

The main objective of this study is to critically review the Origin, Growth and Development of accounting

theories and their impacts on financial reporting. Other objectives are to explore accounting theory in resolving

areas of diversities among users of financial statements. It further examines the various uses of accounting

concepts and real income determination in the financial statements. Furthermore, to examine the extent to which

accounting theory has influenced practices and development of accounting profession in recent times. It is

obvious that the governments, financial institutions, professional and academic institutions and other users of

financial report stand to benefit greatly from this research. The legislative, executive and judiciary arms of

government also stand to benefit from the study in terms of policy formulation, administration and

interpretations of financial statements for investment decision. The historical accounting periods in different

regions of the world were critically reviewed and with particular attention to recent developments in accounting

theory. The paper however reviewed the achievements made in accounting theory; and precisely in Europe, Asia,

Athens, Mesopotamia, Great Britain and Africa. The review period is between 12th - 21st centuries. Emphasis

was on evolution of accounting standards. The paper also offered possible suggestions for the improvement of

accounting theory. The method used in gathering, recording and processing data is secondary source. The

researcher traced the origin, growth and development in accounting by using different textbooks, magazines,

journals and Internet services on accounting theory. The literature review has been organized into four main

phases. First the evolution of accounting, followed by discuss on recent growth and development in accounting

theory; secondly the fundamental theoretical accounting concepts; thirdly, the theories of Income Determination,

and finally the area of diversities in the use of accounting information.

2. EVOLUTION OF ACCOUNTING AND RECENT DEVELOPMENTS IN ACCOUNTING.

In this section a review of evolution of accounting and its theories are explored. Recent growths and developments in the accounting arena are also discussed.

2.1 EVOLUTION OF ACCOUNTING

The early development of accounting system is traceable to the most ancient cities, in Mesopotamia, a home of

number between 450 and 500 BC. (Keistar, 1965): Greece and Rome were cities where coinage was invented in

about 630 BC (Chatfield, 1977) and China is where accounting systems were concerned with the recoding of

merchants, temples, and estates (FU 1971). Keister (1965), further described the use of clay tablets impressed

with the markings of the Cuneiform script by the Scribe, a forerunner of the present day accountant. The system

though relatively simple by modern standards; the Mesopotamia economy did not require more advanced system

to record its transactions and property among parties. Goldberg (1949) also recognized the recording of complex

transactions of grain involving several individuals, a system of record-keeping (accounting) which is a clear

demonstration that accounting is socially constructed. Chatfield (1977), saw the systems of estate records in part

of Athenian Empire, by Zenon in terms of data collection, recording and analysis by several individual as

responsibility accounting. This system employed by Zenon Papyri with respect to data generation, recording and

analysis, (though elaborate and meticulous) were sufficient to detect error, fraud and inefficiency in the system.

The Zenon Papyri approach had little concern for decision making, efficiency or profitability, and perhaps this

feature might invalidate a lot of work that went into the operating system (Glautier, and Underdown 2001). The

Zenon system was developed in the 5th Century BC and later modified by the Romans. Goldberg (1949), saw the

modification of Zenon in ancient Rome as the memorandum book (adversaria' in Greek) and the monthly

transfer of entries to the ledgers ('codex tabulae' in Greek), from which today's ledger has derived its name

'codex'. This system of recording in ancient Greece and Rome according to Goldberg (1949) and Chatfield

(1977), indicates that the accounting systems were mainly concerned with recording and exposing losses due to

theft, fraud, inefficiency and corruption. It was not for decision making and assets protection. Gulman (1939),

added that the accounting system at that time avoided financial reports to outsiders or determination of income

or tax due to government and allied parties. The system still reveals that the accounting system at that period was

of course fulfilling the societal needs and expectations of the users of financial statements.

Fu (1971) said the accounting systems that were mostly used by feudal and expansionist for merchants and

estates in China, under Chou dynasty (1122 - 1256), allowed for large physical distances and several layers or

hierarchies. Officials who were needed to collect taxes in the form of goods for use by the imperial government

did so to ensure compliance. The surplus products however were collected for export and were used outside

China, (Yameh, 1940). The system, though in details, covers several officials and large distances to ensure good

administrative control through the appointment of higher-level officials as auditors who report at periodic

intervals of ten days, thirty days and yearly as the case may be. The Chou system may presumably have

stringent and appropriate penalties for non-compliance by defaulters, (Yameh, 1980). Ahmed (2000) argued that,

funds accounting system exists in the form of general reserve fund, special reserve fund and reserve fund. The

source of the goods, the purposes for which they were used, the frequency of taxes being levied and each tax

ceiling were all bases of accounting system. Nwoko, (1990), in similar vein, observed that the earliest records

known, which pre-dates monetary economy, were all accounting records, and were of ancient Middle Eastern

Civilization of Egypt, Mesopotamia, Crete, and Mycenae. These were mainly records of physical quantities of

goods.

Perara and Mathew (1966), opine that coinage was invented probably in Lydia at about 700BC as a result of

difficulties experienced in maintaining the records and other inherent factors associated with barter system. The

early accounting records were inscribed on stones and marble tablets in the Parthenon building accounts in

Athens and Acropolis. Nwoko (1990) and Perara (1966) also observe that the Zenon Papyri which was

discovered in 1915 contains information in business, agriculture, and construction projects of the private estate

of Apollonius kept under the accounting system. These records were kept in surprising and elaborate system that

had been in Greece since the fifth century BC. The Zenon accounting system had provisions for responsibility

accounting; written records of all transactions, personal account for wages paid to employees, inventory records,

and records for assets acquisitions and disposals. In addition, it contains evidence of auditing of all accounts,

(American Institute of Certified Public Accountants (AICPA), (2006).

2.1.1 THE CHARGE AND DISCHARGE SYNDROME

The early Greeks and Roman accounts were kept under "charge" and "discharge" principle, comparable to

modern day receipt and payment account, (James 1955). The medieval system of record keeping used in

England during the middle ages had many features of ancient accounting system and remained in use until the

nineteenth century as "charge" and "discharge" (James 1955 and Nwoko 1990). James' perception of 'charge'

and 'discharge' which was similar to the present day receipt and payment account or cash book was presented in

the form of:

The feudal socio-economic system requires that surplus be generated but does not have any perceived need to

measure the efficiency by which the surplus was generated. Moreover, no notion of income or return on capital

employed was in practice at that time. The manorial system dwells primarily on the interlocking check on the

honesty of different levels of officials in a stratified and regulated society, (American Accounting Association,

1964). The charge and discharge syndrome was surprisingly durable, lasting from twelfth to nineteenth centuries,

(James 1955). The book keeping for merchants was however in single entry form, rather than by charge, prior to

the arrival of an Italian Monk-Luca Pacioli in England, the acclaimed father of double entry bookkeeping system,

(Litleton, 1966).

2.1.2 THE COROLLARY OF DOUBLE ENTRY

The Normans imported the charge and discharge book keeping system, originated in the Mediterranean zone

into Europe. It was in Europe that the next significant development in accounting emerged (Nwoko, 1990). It

occurred in Italy, between thirteenth and fourteenth centuries, probably because of single entry system which

was inadequate to ensure effective internal control system, income determination, security of assets, employees'

contribution to profit, and separation of private property from business. The single entry system of recording did

not withstand the changes in size and nature of business organizations including the methods of providing for

depreciation, (Rorem, 1937). The double entry system sensitized merchants to distinguish between positive (+)

and negative (-) entries or increases in assets and decreases in liabilities, (Paul, 1985). Nwoko (1990)

emphasizes that those positive entries that increased assets or reduced liabilities are: cash receipts, sales to

customers, payment to creditors, discount received. While negative entries that increase, liabilities and reduces

assets are cash payment, purchases, discount allowed, and payment by debtors. The Latin words Dare (to give)

and Avere (to receive) were given in English as Credit (Cr) and Debit (Dr) respectively, and were employed

only on the completion of the venture. The balanced books of accounts however dates back to 1340 and were

produced by the Massari or Stewards of the commune of Genoa, before it's widespread use in Italy and beyond

in 1400, (Pyle, et al 1980).

The worldwide use of double entry however owes a lot to the work of an Italian Monk, and a Franciscan friar, in

1494, to Luca Pacioli. Pacioli's first printed work or treatise was on algebra, titled: "Summa de Arithmatica,

Geometrica, Proportioni et proportionalita (i.e. everything about Mathematics, geometry, and

proportions)". It was developed to ensure that every transaction has equal and opposite reaction, (Mike & Fred,

1983). The treatise contained a section on book keeping entitled "De computis or Scripturis (i.e.

computations and records), which was separately published in 1504 and translated into many languages.

Pacioli, however did not lay claims as the originator of double entry as he was only describing what Italian

Merchants were using for over 200 years, (Paton and Littleton, 1940).

Nwoko (1990) recognizes Grammateus of Schreiber, (1518), as mathematician of no mean repute who wrote a

book on algebra and bookkeeping. Jerome Cardam, an astrologer, physician, scientist, mathematician and

professor of medicine, like Simon Stevin, a Dutch Mathematician with various claims to fame, wrote also on

double entry bookkeeping in 1602 Institute of Chartered Accountants in England and Wales (ICAEW, 1975).

The new concept however was only describing a system in practice which lack general rules and principles and

did not however show clear method of calculating profit. It further revealed that provision for depreciation was

virtually absent including method of drawing up a balance sheet, (Edey, 1970). Perera and Mathews (1996), had

a strong view that the initial development of double entry bookkeeping in the Italian city states experienced long

period of stagnation, probably because of its non-acceptance in Europe: England, Germany, France and in Italy.

Commercial activities at these periods were inactive, though due to size and type of business, which also

encouraged the use of single and double entry bookkeeping, without regular closing of entries and income

determination (Baxter, 1981). The socio-economic changes from "a green land" (craft techniques) to "one dark

satanic mills" (factory production), were powered by machinery, building of factories and towns, separation of

ownership and control (capitalism), emergence of large-scale industrial and commercial activities and

accounting system in Europe, precisely in England (Pyle, et al 1980). The side effects of these changes on

accounting were profound in the development of recording, measuring and disclosure requirements in factories,

railways and aggregation of labour and capital equipment. New system of production, ownership and control of

assets including methods of providing for depreciable assets were based on accounting assumptions, (Ola, 1985).

Charge and discharge system could not meet the aggregation of capital equipment, calculation of product costs,

inventory valuation, income determination and depreciation of factory fixed assets; to the development of new

accounting system that could replace charge and discharge system in a new changing technological environment

(i.e. depreciation accounting, (Jennings, 1990).

Chafield, (1977) like Omolehinwa (2004) observes that where depreciation was not charged, costs were

understated, profit overstated and dividends were paid out of capital. Prior to company taxation, the early

theories of depreciation including replacement cost accounting contend that there was no need for depreciation

if the assets were maintained in good condition. This theory however, would produce as many problems as it

was meant to solve, (Paul, 1985) Stoner, et al, (2002), did observe also that the emergence of labour in factories

led to the need for the development of systems on how to pay wages, overtime, bonuses, piecework and as well

as managing the large number of employees that were necessary for the new industries. Akanni (1998), observes

that in every organization, both the employers and employees have sworn to be enemies, though one cannot do

without the other because employees need wages and employers need labour for production. Accounting

systems for wage and production must be designed for that purpose. The economic and legal changes resulting

from industrial revolution, particularly to the aggregation of capital, labour and company legislation brought

pressure on the accounting systems that would put the various parties at par. Accounting system that could

address aggregation of capital, methods of labour remunerations, depreciable assets, production cost, and

income determination was developed, (Dopuch and Sunder, 1980). Similarly, Golberg (1949), saw companies

and bankruptcy legislation in UK, dated to 'Bubble" Act 1719, as part of industrial revolution which declared

unincorporated companies not formed by Royal Charter as common nuisance.

According to Mike and Fred, (1983), the practice in accounting could not develop properly to meet the ever

increasing demands of a complex society without reference to a coherent underlying theory for true income

determination. Bierman and Drebin (1972), in a similar way observed that there was no response to the need for

a consensus on the nature and application of Generally Accepted Accounting Principles (GAAP) in given nation.

The Institute of Chartered Accountants in England and Wales (GAAP) has since in 1942 been publishing

recommendations on Accounting Principles. The development of a framework of principles to underpin the

preparation of financial accounts, perhaps received greater attention by US government in 1934, as a result of

great economic depression. This act however, led to the establishment of Security and Exchange Commission

(SEC) in 1934 to prescribe the principles to be applied by the American Accounting Professionals in the

preparation of financial statements. The American Institute of Certified Public Accountants (AICPA), took more

positive approach in the establishment of a coherent set of accounting principles. The AICPA established the

committee on Accounting Procedure (CAP) in 1938 which was replaced in 1959 by the Accounting Principles

Boards (APB). In 1973, this in turn was replaced by Financial Accounting Standards Board (FASB). The need

for international accounting principles that would cope with the need and increasing multi-national nature of

business, led to the establishment of International Accounting Standards Committee (IASC) in July, 1973.

Chambers (1966), observes that Generally Accepted Accounting principles (GAAP) has over 100 lists different

from about 70 lists by Spacek put together in all about 170 GAAP exist and now merged to 13. He further

stressed that accounting principles can also be described as concepts; conventions; postulates; standards;

doctrine; tenets; assumptions; rules and regulations governing the preparation and presentation of financial

statements. Bierman and Drebin (1972) were more pragmatic in grouping accounting principles into three. First

is the "assumptions

about the world", second, the "operating conventions" and third is the "quality considerations" for the purposes

of true income determination in the financial statements. The three groupings according to them would however

unify the interests of the various parties, all things being equal.

2.2. RECENT GROWTHS AND DEVELOPMENTS IN ACCOUNTING

Accounting in recent years, has made significant impact on socio-economic and political development especially

on recording, preparing, interpretation, auditing and management and investment. Other impacts include merger,

acquisition, planning, controlling, and storage of business operation. Above all, is the impact on the decision

making process, (Remi, 2006).

2.2.1 Regional Grouping of Associations

Glautier and underdown (2001), observed that regional grouping of accounting associations indeed developed

accounting principles, peculiar to their culture, religion, government policies, political and socio-economic

environment. These were later absorbed into International Accounting Standards Committee work plan. This

approach assured determination and comparability of profit, revenue, expenses, net assets, and liability

internationally. Accounting bodies now regulate and ensure compliance to the application of GAAP, (Adeniyi,

2004).

2.2.2 Consultative Committee of Accounting Bodies (CCAB)

The institutional structure of accounting profession made possible the formation and amalgamation of various

accounting bodies in 1965. By 1970, ICAEW formed an Accounting Standard Steering Committee (ASSC) now

called Accounting Standards Committee (ASC). Early Committee members include; Institute of Chartered

Accountants of Ireland (ICAI: 1970), Association of Chartered Certified Accountant, (ACCA, 1973) Institute of

management Accountants, (ICMA, 1976) and the Chartered Institute of Public Finance and Accountancy

(CIPFA: 1976). Others include Financial Accounting Standard Board (FASB); European Economic Community

(EEC) now European Union (EU) Security and Exchange Commission (SEC), Financial Reporting Standard

Board (FRSB). They were saddled with the responsibility of reviewing standards on Financial Accounting and

reporting and to publish consultative documents on maintaining and advancing accounting standards. Also to

propose to the councils the best statements of standard accounting practice. Consultation was usually made with

representatives of finance, commerce, industry, government and other persons concerned with financial

reporting. This however, resulted to uniform accounting standards and practice all over the world, (Nwoko

1990).

2.2.3 The Use of Exposure Draft (ED) and Letter of Intent (LOI)

Justification and application of (ED) and LOI said Mootze (1970) is to enable various professional associations

and users of financial statements all over the world to first analyze the accounting implication and adopt a

uniform position before the publication of Generally Accepted Accounting Principle (GAAP). This however,

will encourage uniformity, comparability and convertibility of financial statement in different currencies across

national boundaries, -Robert, (1999) and Adeniyi (2004).

2.2.4 Setting Accounting Standards

Postulates, assumptions, tenets, principles, rules, laws, and theories said Mootze, (1970), constitute the basis of

practicing accounting. Violation of GAAP may result in qualifying the financial reports. Treatment of incomes,

expenses, assets and liabilities, should adhere to the normal accounting standards. Otherwise there will be no

basis of truth and fairness in the financial report (Robert, 1999). The concept of double entry or accounting

equation (A=C+L) shows why trial balance or balance sheet must always balance, (Nwoko 1990).

2.2.5 Training, Workshop and Seminars

Institutions of higher learning in different regions have adopted the training programmes and researches for the

development and improvement of accounting standards. This process is to ensure uniformity in the treatment of

business transactions, (Stoner et al, 2002). Workshops and seminars are being organized in different regions by

accounting bodies including governmental and non-governmental organizations. The objective is to enlighten,

educate and inform users on how to prepare credible financial statements, especially on transparency and public

accountability. Nwoko (1988) did observe that continuous training and development have made great impact on

public cost consciousness and accountability.

2.2.6 Information and Communication Technology (ICT)

Millichamp (1990) views accounting information as data processed from source documents. The source

documents usually include receipts, vouchers, invoices, Local purchase order (LPO), cheques stubs and books of

original entry which must be tested for proof of arithmetical accuracy (trial balance) for the preparation of final

accounts, (trading and profit and loss account, balance sheet). Other information that are statutorily

communicated to the users are": note to the accounts, auditors report, cash flow statement, value added statement

and group accounts, produced either in hard copy or by electronic device. The Internet service or on-line system

has made accounting reports to be produced and communicated on time to users with high degree of accuracy

(Robert: et al 1990).

2.2.1 Audit Ordinance or Guidelines

The Company Act 1948, and 1968 as amended, the constitutions of different countries such as;

US, UK, Italy and the constitution of the Federal Republic of Nigeria 1979, 1989 and 1999 as amended stipulate

the use of public funds. The Finance Control and Management Act 1958, the Audit Ordinance Laws (1956),

established the Consolidated Revenue Fund (CRF), Development Fund (DF) and the Contingencies Funds (CF)

to ensure proper control of public funds. The systems state the basis of government accounting and audit. The

Audit Ordinance (1956), companies and Allied matters Act (CAMA) 1990, outlined duties, responsibilities,

appointment, tenure, removal and retirement of Auditor General for the Federation. The relevant laws and edits

also respectively govern the state and local governments.

2.2.2 Discipline and Sanctions

Accounting institutions, associations and government have absolute control on compliance and adherence to

financial regulations, treatment of business transactions, and code of conduct, preparation and presentation of

financial statements, (Pyle et al, 1980). Discipline and sanctions await erring members for non-compliance.

Nevertheless discipline is seldom carried out for lack of hard evidence. The presence of Economic and Financial Crime Commission (EFCC) and Independent and Corrupt Practice Commission (ICPC) are now tools against

corruption in Nigeria economy.

2.2.3 Researchers

Universities are research geared, research institutes and accounting associations now pursue with vigor by way

of modification and update on accounting standards in the treatment of business transactions. Accounting

teachers have offered ideas and suggestions in the formulation and development of accounting theories.

Accounting software package are now available especially on inventory valuation, ledgers, income statements,

balance sheet, cash flow statement and budgeting. (Robert et al (1990).

2.2.4 Data Processing and Information Technology (DPIT)

Accounting however predates computer. Their integration is inseparable on ground of accuracy, quality,

timeliness, speed, and storage. Akanni (1998) like Robert et al (1990) configured computer device for business

and accounting operations

3.1 Business Entity Assumptions (BEA): Husband (1954), contends that business can be separated from its

owners and the environment in which it operates is necessary in order to set a boundary to the accounts. Only the

transactions directly affecting the entity are recorded in financial statement. Omolehinwa (2003) also observed

that the separate legal personality is assumed as business has a right to acquire assets and incurs liabilities as

distinct from its owners. The business has right to sue and be sued like any other person. Both agreed that it can

sometimes be somewhat arbitrary, particularly for small and medium enterprises where the affairs of the owners

and the businesses are often inextricably interwoven. This process would however give rise to distortion in real

income determination, especially where information are not readily available about private expenses of the

owners as distinct from the firms. Early advice and proper accounting records will however eliminate the

pending danger of not separating private expenses from business expenses. However, what Husband (1954) and

Omolehinwa (2003) did not recognized was the inability of the court to imprison the entity as individual can be

sentenced and imprisoned, except those who acting in that capacity.

3.2 Going Concern Assumption (GCA) means that in drawing up financial statements; the entity will continue to

exist in its present form into the indefinite future (perpetuity) (Fremgen, 1968). It is further stresses by (Fremgen,

1986) that organization will continue to exist for life as far as the firm can meet its immediate and long term

financial obligations. GCA, however ensure that assets should also be valued based on their economic useful life,

cost, degree of usage and residual value for purpose of real income determination. The controversy to going

concern assumption is that a firm could be compelled to go into liquidation if it cannot meet its short term and

long term financial obligations as they fall due. Other reasons for a firm's liquidation may include:

i . On litigation by creditors or by an order of the court.

ii. Proclamation by the government

iii. When the firm operates outsides its memorandum and articles of associations. (ultra vires)

iv. When the activities of the firm are illegal, injurious to health and against the public policy

v. On mutual agreement by the owner and stake holders.

vi. On completion of a particular venture or contract and;

vii. By an act of God (disasters, death etc)

Omolehinwa (2004) added that in valuation of assets, firms may use different methods which may give different

values in the financial statement. These methods include first- in- first- out, weighted average, highest- in- firstout

and next -in- first- out. Depreciation also has different methods of valuing assets. These methods are straight

line method, reducing balance method, sum of the year's digit method, revaluation method, annuity method,

sinking fund method and production units or hourly method. The choice criterion among the various methods of

assets valuation could result to over or understated profit in the financial statements. The going concern

assumption can however be realistic to some extent if the firm will be able to meet its routine and long term

financial obligations as they fall due. Otherwise, organization may abort this assumption by going into

liquidation. The strength and weakness of a firm will possibly predict or signal to interested parties on pending

danger for immediate action by identifying the various strengths, weaknesses, opportunities, and threats (SWOT)

of a firm.

3.3 Stable Monetary Unit Assumption (SMUA): states that the value of the monetary unit used in drawing up

the financial statements is constant over time. The validity of this assumption is somewhat questionable (Fisher,

1980). Its existence is apparently based on the additive nature of accounting data. Within a set of accounts all

the numbers that are capable of addition and subtraction exist. It is clear that even among infant school

arithmetic, it is not possible to add or subtract unlike terms or items and get a meaningful result like two

elephants, five apples, and ten motor vans do not make a meaningful quantity of seventeen (Fisher 1980). The

assumption however is that money values of property, plant and machinery, stock, debtors and cash obtained at

different times are summed up in a balance sheet; which are identical, even though the transactions may have

taken place at different times. The stability assumption also overlooks the purchasing power of money which is

constantly changing due to inflation and other factors, (Buckmaster, and Brooks, 1974). This assumption also

negates the time value of money, as it erroneously, compares N200.00 profit in 1980 with N200.00 profit in

20013, especially when interpreting the financial statement over two decades. It is however, glaring to note that

the value of a firm's profit for different accounting periods cannot claim to be the same because of the presence

of inflation or changes in purchasing power or price level changes. Generally, the rate of inflation can be used as

yardstick to determine the appropriate rate for cost of capital. The use of appropriate accounting index could

restate and resolve the differences between the accounts prepared under Historical Cost Accounting (HCA),

with the Current Purchasing Power Accounting (CPPA).

3.4 Accounting Period or Periodicity Assumption (PA) believes that the continuum of time can be subdivided

into a number of discrete time periods (accounting periods) (British Institute of Management Information (BIMI,

1984). According to Keynes (1980), in the long run we are all "dead", implies that the net income of a firm

prepared under this assumption (discrete time period), may not after all be realistic because of the presence of

inflation and changes in price level. He asserts that the net profit usually has the components of unrealized profit

or uncollectible realized revenue that may eventually go bad in the form of bad debts. The provision for losses

may however not cover the total debtors during the accounting period. Similarly, the fundamental problem, be it

in the short or long run, is the method of stock valuation. Stock valuation could be based on full cost or marginal

cost, straight-line or declining method, especially when the firm is operating either at full-capacity or undercapacity.

Where there is under-capacity utilization the absorption rate is likely to be high if the depreciable

amount is always high, it reduces the profit figure in the financial statements, vice-versa.

3.5 Operating conventions are classified into five as indicated below:

3.5.1 Historical cost Convention (HCC): Forms the basis of valuation used in the preparation of published

financial statements. That is, all assets are shown in the accounts at the cost of acquisition. The word 'cost', said

Horngren and George, (1990), is intricate, complex and confusing. This is because cost may mean different

things to different people at different time, place and event. They assert that cost is intricate when referred to as

expired or futuristic, production cost or period cost, direct or indirect cost. It is complex when referred to as

variable cost, fixed cost, semi variable cost, semi fixed cost, marginal cost, absorption cost, sunk cost,

conversion cost and opportunity cost. Confusion may arise when certain cost attributes are not or are to be

capitalized for purpose of assets valuation. They added that if asset was acquired under a given scenario, two

different accountants may arrive at different value judgment about the asset as follows: (Pyle et al, 1988).

$

Purchase cost x

Agreement fee x

Installation charges x

Improvement cost x

Development cost x

Total cost x

Since assets are valued at historical cost, for purpose of income determination, the confusion may arise if

purchase cost or part therein or total cost is regarded as historical cost. The net book value arrived at as a result

of deducting depreciation charges based on different depreciation methods may be different, hence the

difference in net profit, (Okoye, 1997).

3.5.2 Realization Convention (RC): It suggests that it is when contractual relationship between the buyer and

the seller was completed that the amount of revenue is recognized and recorded in the books of accounts but not

necessarily when cash is collected. Turpin and Stein, (1986) assert that accounting period imposes serious

problem to realization principle as the entity needs to have recognized the transactions during the accounting

period but not when contractual relationship was completed. The problem was further stressed by American

Accounting Association (1965) as thus: an entity produced motor van in year one for $30,000, stores it through

in second year, sells it in third year for $60,000 and collected cash in the fourth year. Realization convention

argued that the revenue and profit element of $60,000 and $30,000 respectively are realized in the third year

when the contract of sale was completed, but not in the accounting period - year one. Confusion may arise when

revenue is realized on production basis rather than when goods may have been sold or service discharged,

especially as in the case of government contracts. Sometimes, contracts may last over and above the accounting

period and revenue may be recognized on the basis of the extent of work done or production, Hylton, (1965).

3.5.3 Matching Convention (MC_): Leads to the matching of entity's revenue generated with the expenses

incurred. The matching process also deals with the allocation of capital costs between periods. The combination

of the matching principles with that of realization gives rise to the accruals system of accounting, Hylton (1965).

This means that profit will be recorded at the point of sales, whether cash is received or not. Similarly, the

matching principle leads to the association of an expense with the revenue that it generated, irrespective of cash

payment connected with the expense. Profit or net income is however reported in the financial statements, when

costs consumed or incurred during the accounting period are matched with revenue realized either on cash or

accrual basis during the same accounting period.

3.5.4 Duality Convention (DC_): This is associated with the system of Double Entry Book-keeping invented

by Luca Pacioli in 1494. It requires that every accountant enters both aspects of every transaction in the books of

account because every action has an equal and opposite reaction, (Sterling: 1972). For every entry in a ledger an

entry of equal magnitude must be made on the opposite side of the ledger or another ledger. Thus, the sum, of

the entries on both sides of all ledgers, barring errors, must always be equal. Hence, the arithmetical accuracy of

all ledgers is further tested through the agreement of a trial balance for absolute proof. The trial balance and

profit of arithmetical accuracy of all the postings in the ledger however assert that my agreement is not an

absolution proof because of errors of: (1) Omission (2) Original entry (3) Commission (4) Compensation, (5)

Principles, (6) Additive and (7) Transposition, Omolehinwa (2004).

3.5.6 Quantifiability or Money Measurement Convention (MMC): Says that all items included in the

accounts must be measurable or quantifiable in terms of monetary unit. This assumption suggests that it would

be insufficient to include non-quantifiable items in traditional accounts merely using an ordinal ranking for them,

(Bierman, 1972). Placing or fixing monetary value to an item may somehow be confusing because of the

presence of inflation or changes in price level value judgment however affect materiality concept for money

measurement, as there is no uniformity relating to perceived value of an item in the book of accounts as value

may vary from person to person and from firm to firm. (James, 1955).

3.5.7 Quality Considerations (QC): Accountants will however strive to achieve certain qualitative

characteristics in the application of the operating conventions when preparing financial statements as shown

below:

3.5.7.1 Objectivity states that entries made in the ledger shows that accounts must be capable of verification by

an independent party. This would ensure that financial statements are free from bias and minimizes the

possibility of subjective judgment by accountant (ACCA study pack, 1988). The issue of objectivity test is

relative as IASC (2001), observed that even historical cost account cannot be completely objective. The contrast

of historic cost accounting system lies on both valuation techniques and method of estimating assets life span,

scrap value and acquisition cost. This implies that different accountants may have different values for the same

assets, and different depreciable values, thereby resulting in increase or decrease in net profit. The verifiability of

all entries in the ledger and accounts, however show how accountants can examine, verify, detect and prevent

frauds, errors, embezzlement, misappropriation, pilfering and corruption.

3.5.7.2 Prudence or conservatism (C) Connotes that where an accountant could deal with an item in more than

one way, his choice between the alternatives should give precedence to which provides the most conservatism

result, (Moore, 1972). The principle also states that in stock valuation: if the current price is lower than the cost

of acquisition, the stock should be recorded at lower of cost or current price. And where assets have appreciated

in value, the gain should not be recorded in the books of account until the assets are sold. Conventionally, the

principle further states that accountants should anticipate for no profit but make possible provision for all losses,

(Chambers, 1966).

3.5.7.3 Consistency consideration (CC). This states that where a transaction or economic event is repeated in

different time periods, then the accounting representation should be the same in all time periods. The

consideration however does not preclude mistakes being rectified nor accounting treatment being altered when

the changes are beneficial in terms of giving a better representation of the economic reality, (Burk, 1973).

Hendrickson, (1992), however, stresses that where the accounting treatment is changed from straight line to a

declining balance method of depreciation, the effects of the change and the position under both the original and

revised accounting treatment should be clearly shown. The consistency consideration forms the basis of

uniformity and comparability of financial statements within and outside the accounting periods, especially on

target profit.

3.5.7.4 Materiality. It states that the way an item is treated in the accounts should depend upon its magnitude.

To classify an item as material depends upon the influence the item will have on the interpretation of the

amounts SSAP 4. The accounting treatment of government grants state that the amount of the differed credit

should, if material, is shown separately in the balance sheet. Macre (1981) like Nwoko, (1990) viewed

'materiality' as being subjective, as what may be material to one entity may not be material to another entity.

Both agreed that for an item, to be material, it must be relevant, the value can be spread over and above one

accounting period, the size or magnitude of the item could lead to distortion in the financial statements, and its

inclusion or exclusion from the financial statements will be misleading. Chase (1979) adds that the significance

nature of an item, will however determine its materiality effect in the financial statements.

4 AREAS OF DIVERSITIES IN THE USE OF ACCOUNTING INFORMATION

No system in the world may lay claims to be absolutely watertight. Accounting as a system is not an exception

(Robert, et al, 1990). Though accounting grows homogenously with socio-economic and political development,

it however encountered some endemic perils, which similar professions indeed encountered 4.1 Cultural Diversity

Stoner, et. al (2002), observed that culture is an implicit factor to the organizational and work force development.

The integration of different cultures and ideological taught to form a common force in establishing international

accounting standards worldwide took centuries to materialize. Today the situation is however not too different as

cultural imperialism on developing nations by the advanced nations had effects on early accounting development.

Some religions especially Islamic religion does not encourage interest payment on loans and advances which

however negates business ethics of capital growth and appreciation or increase in business income, (Robert et al

1990).

4.2 Language Barrier or Linguistic logy

The major drawback in early accounting development was the medium of expression and communication

apparatus. Language barriers, among nations prevented early good intentions to stimulate and form a body

charged with the responsibilities of formulating accounting principles, training and research. The method of

communication was crude and mostly by letters which were virtually absent in developing countries (Akanni,

1988).

4.3 Early practitioners were not research oriented.

The early accounting practitioners were not research orientated. And those who lay claims on research did not

find it easy after all as materials and sources of inspiration were difficult to obtain, (Benjamin, 1990). Generally,

their level of education, and the so-called accountants at that time had no broad accounting knowledge. Even in

the 21st century, most people especially in the banking, insurance and public sector organizations were often

called accountants, even when they have no accounting background. This indeed limits their research capability

and ability to formulate accounting principles Pyle, et al, 1980).The situation at that time suggests that workers

are judged by their ability and not by their disability

4.4 Disagreements between academicians and practitioners

The superiority complex among practitioners and academic accountants did not timely restore peace and unity

to encourage early development and growth in the accounting profession. The superiority complex according to

Anao (1996), has not been entirely written off even in the 21st century. The two bodies that should have

integrated their ideas and focus on developing the best accounting practice, have no early unified objectives.

4.5 Diversity and Complexity in government policies

The status-quo of independence immunity of sovereign nations determines the nature, scope and application of

accounting systems peculiar and suitable for its socio-economic and political environment, (Glautier, and

underdown 2001). It is however possible that those sovereign nations in line with their cultures, do formulate,

design, and implement accounting systems which have less reference to other nations and such accounting

systems will be void of international comparison. This is further aggravated by instability in monetary units and

changes in socio-political economy, (Mootze 1970).

4.6 Judicial Application and Interpretation of Business Transactions

Environmental factors, culture, religion and political power had a great influence on the interpretations and

treatment of business transactions among nations. Prior to a decided case by Justice Joyce in 1904 in Garner V.

Murray, solvent partners share deficiency in capital in proportion to their profit sharing ratio. However Justice

Joyce inversed the old rules in favour of the proportion of capital contribution by solvent partners. He argued

that capital loss does not excavate from ordinary business operations, but from equity, (Paul, 1985).

4.7 Money as a unit of measure

According to Millicham (1990), translation of foreign subsidiaries (with different monetary unit into parent

company which is based on exchange rate estimates and the magnitude of inflation over time, makes the

international comparability of financial statements between two accounting periods very difficult. However in

accounting, money is the only unit of measure, and naira amount exchange for dollar or pound sterling may not

have the same value over time. The instability in exchange rate or monetary unit is however more common in

developing countries. Even within the same country, the monetary unit remains unstable.

4.8 Non-Unification of Various Ideological taught by various Bodies

Nwoko (1988) observed that accounting bodies formed in different countries with different or similar objectives

have been influenced by their indigenous cultures, socio-economic needs, political environments, incessant

change in government policies and programmes. An attempt to unify these ideological thought into a united

whole could result in a Herculean task to publish a complete document on accounting theory,

QUESTION 1

Discuss the meaning of accounting theory based on the article title: "Theories of accounting: evolution & developments, income-determination and diversities in use"