“The accounting profit figure is simply a measure of the true profit of an organisation.” Discuss.
“The accounting profit figure is simply a measure of the true profit of an organisation.” Discuss.
In order to assess whether the accounting profit is a measure of the true profit it must first be shown that there is such a thing as true profit. If we decide there is, we then need to know what it is exactly, in order to assess the extent to which the accounting profit reflects this true profit figure. Before studying this module I believed that the true profit was essentially the accounting profit calculated correctly. I saw profit as being a simple calculation that would always return the same figure. As I didn’t realise the extent to which professional judgement is involved in reaching the profit figure I couldn’t identify the real issues surrounding the idea of the true profit. Instead I pointed out flaws in the concept of profit itself, for example that profit doesn’t consider cash flow. However as these flaws apply to true profit as much as accounting profit (they apply to the notion of profit itself), they’re not really relevant to the question.
I first learned that accounting profit and true profit could not be the same thing early in the module. Accounting profit draws directly on data from the accounts. The way these accounts are held is the outcome of applying various accounting rules and conventions, and at times relies on the professional judgement of individual accountants. Deegan and
Unerman add that “As these rules change (as they frequently do), the same series of transactions will lead to different measures of ‘profits’ and net assets.”1 The accounting profit also varies from country to country. Even amongst countries that have adopted IFRS there are systematic differences in how accounts (and therefore the profit figure) are calculated (Kvaal and Nobes, 2010)2. If accounting practices can vary so much over time and between countries then the accounting profit and true profit cannot be the same thing. For a number to be
In order to assess whether the accounting profit is a measure of the true profit it must first be shown that there is such a thing as true profit. If we decide there is, we then need to know what it is exactly, in order to assess the extent to which the accounting profit reflects this true profit figure. Before studying this module I believed that the true profit was essentially the accounting profit calculated correctly. I saw profit as being a simple calculation that would always return the same figure. As I didn’t realise the extent to which professional judgement is involved in reaching the profit figure I couldn’t identify the real issues surrounding the idea of the true profit. Instead I pointed out flaws in the concept of profit itself, for example that profit doesn’t consider cash flow. However as these flaws apply to true profit as much as accounting profit (they apply to the notion of profit itself), they’re not really relevant to the question.
I first learned that accounting profit and true profit could not be the same thing early in the module. Accounting profit draws directly on data from the accounts. The way these accounts are held is the outcome of applying various accounting rules and conventions, and at times relies on the professional judgement of individual accountants. Deegan and
Unerman add that “As these rules change (as they frequently do), the same series of transactions will lead to different measures of ‘profits’ and net assets.”1 The accounting profit also varies from country to country. Even amongst countries that have adopted IFRS there are systematic differences in how accounts (and therefore the profit figure) are calculated (Kvaal and Nobes, 2010)2. If accounting practices can vary so much over time and between countries then the accounting profit and true profit cannot be the same thing. For a number to be