Elements of Accountancy · Ch 2 — Theory Base of Accounting
Introduction
Introduction
The previous chapter established that accounting is concerned with recording, classifying, and summarising financial transactions and events, and then interpreting the results. Its purpose is to give various users — owners, managers, employees, investors, creditors, suppliers, and tax authorities — the information they need about a firm's financial performance.
But that information is only useful if people can actually rely on it and compare it. An investor may want to compare one firm's profit against another's (an inter-firm comparison), or compare this year's numbers with last year's (an inter-period comparison). Neither comparison means anything unless the financial statements involved were built on consistent accounting policies, principles, and practices.
That need for consistency — running through every step from identifying transactions, to measuring and recording them, to summarising and reporting the results — is exactly why accounting needed a proper theory base: a shared set of principles, concepts, rules, and guidelines that every accountant follows in the same way.
This chapter builds that theory base, starting with the rules the accounting profession has generally agreed to follow.