A Theoretical Framework


Scope of accounting

Accounting is in an age of rapid transition; its environment has undergone vast changes in the last two decades and an accelerating rate of change is in prospect for the future. Much of what is accepted as accounting today would not have been recognized as such 50 years ago, and one may safely predict that in 50 years' time the subject will bear little resemblance to what it is today.

Changing social attitudes combine with developments in information technology, quantitative methods and the behavioural sciences to affect radically the environment in which accounting operates today, thereby creating the need to re-evaluate the objectives of accounting in a wide perspective. Accounting is moving away from its traditional procedural base, encompassing record-keeping and such related work as the preparation of budgets and final accounts, towards the adoption of a role which emphasizes its social importance.

The changing environment has extended the boundaries of accounting and has created a problem in defining the scope of the subject. There is a need for a definition which is broad enough to delineate its boundaries, whilst at the same time being sufficiently precise as a statement of its essential nature. It is interesting to contrast definitions which were accepted a little time ago with more recent statements. According to a definition made in 2018, 'the control purpose of accounting is to make possible the periodic matching of costs (efforts) and revenues (accomplishments). This concept is the nucleus of accounting theory, and a benchmark that affords a fixed point of reference for accounting discussions' (Littleton, 2018).

The Committee on Terminology of the American Institute of Certified Public Accountants formulated the following definition in 2018: 'Accounting is the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of a financial character, and interpreting the result thereof. (A.I.C.P.A., 2018.)

A more recent definition is less restrictive and interprets accounting as 'the process of identifying, measuring and communicating economic information to permit informed judgements and decisions by the users of the information'. (A.A.A., 2006.)

This definition comes closer to our own interpretation of the scope of accounting, and the manner in which we should like to treat its subject matter, but we would add the rider that accounting is moving rapidly now towards a consideration of social welfare objectives. Accordingly, the purpose of accounting has been re-defined as 'to provide information which is potentially useful for making economic decisions and which, if provided, will enhance social welfare'. (A.A.A., 2014.)

According to this viewpoint, the scope of accounting should not be restricted to the private use of information, which has the limited perspective of being concerned with the impact of information on the welfare of individuals as such. The social welfare viewpoint is concerned with the impact of information on all the individuals making up society.

The actions of individuals have what are known as 'externality effects' which affect the welfare of other members of society. Hence, the social value of information resides in knowledge of these 'externality effects'. The significance of such information may be seen in the context of the range of groups having vested interests in business organizations, for example shareholders, managers and employees. It is evident that the supply of information to one group may give them an unfair advantage over the other groups in the decisions which they subsequently make, resulting in changes in the allocation of social benefits. The social welfare viewpoint states that in considering the information accountants ought to be supplying and the groups to whom such information should be provided, judgements ought to be made on the basis of the extent to which improvements in the welfare of one group outweigh the sacrifices in welfare borne by other groups.

One aspect of the social welfare theory of accounting is reflected in the development of social responsibility accounting. In the past, the interests of shareholders, investors, creditors and managers have exerted a dominating influence on the development of accounting practices. The social welfare theory of accounting requires that the interests of employees, trade unions and consumers ought to be taken into account, and that the traditional imbalance existing in the supply of information should be corrected. Social responsibility accounting draws attention to the gulf existing between the sectarian interests represented in conventional business accounting and its focus on profit, and the need to see the entire social role of business organization in the context of all those affected by its activities.

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Read on: The Welfare Approach

The welfare approach

The welfare approach is an extension of the decision-making approaches, which considers the effects of decision making on social welfare. Basically, decision-making approaches limit the field of interest to the private use of accounting information. If accounting information had a relevance limited to private interests, the decision-making approaches would provide a sufficient analysis of information needs. It is because of the external social effects of decisions made on the basis of accounting information that there is imputed a social welfare dimension to accounting... see: The Welfare Approach