College of Business Administration

Semester: 2022-2

Course Title: Accounting Theory ACC420

Course ID:
Section Number: Female/Male
Instructor Name: Prof. Tamer Elshandidy
Assessment tool: Assignment 4
Due Date: 26/4/2023
Time: Online submission

Student Name:…………Manar Mohammed Bajowaiber………………………………………….

Student ID:………………201810980………………………………………….…………………………

Question Course Learning

Maximum Mark Scored Mark
No. Outcomes (CLOs)
Question 1 Outcome 2 10
Total 10

Instructions:
1. Answer all questions.
2. Refer to academic resources where relevant
 Accounting Theory (ACC 420): assignment 4

QUESTION 1

Financial reporting is an essential aspect of corporate accountability and transparency. It

involves the communication of a company's financial and non-financial performance to
stakeholders such as investors, creditors, employees, and regulators. However, there are
different views on how companies should report the outcomes of their activities. Some argue
that it is essential to consider the economic impact of a company's activities on stakeholders,
while others believe that the monetary value of activities is of primary importance.

Discuss these two distinct perspectives how do they differ? Which perspective do you
support, and what is your justification for this choice?

[Total 10 Marks]

In assessing a company's financial health and performance, profit is one of the financial
variables that is most frequently observed. It is the amount of money gained or the amount of
money received from any business or investment activity that is more than all costs, including
taxes and other outlays. Profit or income comes in different forms, though - economic and
accounting incomes. The difference between the entire revenue and the total opportunity
costs associated with producing the goods or services offered by the company is referred to as
economic income. Contrarily, accounting income is the sum of sales proceeds (total revenue,
or price times quantity sold) less the cost of products or services produced. About how a
business might disclose its income is a topic of debate between economists and accountants.
Accounting professionals prefer accounting income, while economists prefer economic
income when determining the results of their efforts.

Accounting Income:
According to accountants, when there is proof of an exchange, the components of
financial accounts should be declared. Only when it is earned, revenue should be recognized.
Revenue that is predicted shouldn't be recorded by accountants. Rather, evidence that an
exchange has actually occurred should be used to confirm the presence of revenue. The basis
for measuring income should be the alignment of actualized costs (efforts) and revenues
(accomplishments). The historical cost model serves as the foundation for the accountant's
concept of income, which is in line with the idea of maintaining financial capital.
Because it only recognizes income after it has been achieved, accounting profit only
considers the explicit costs (costs that a corporation incurs, such as labor and raw materials)

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 Accounting Theory (ACC 420): assignment 4

when determining their net income. The company's net income is calculated by deducting
expenses from sales. The business can examine its state and decide whether to quit operating
or continue using a simpler measure of profitability when implementing the accounting
income formula. For investors, accounting income is significant and valuable since it
determines their decision-making.

Economic Income:
Most economists concur that the goal of calculating income is to ascertain how much
wealthier a company has become over the course of the accounting period. The idea of "real
income," or growth in economic prosperity, is congruent with this perspective on income.
The amount of income received during this time is equal to the highest amount that could be
allocated to owners while still leaving the business in a financially sound position. SFAC No.
1 states that pertinent information about an entity should be predictive. The recognition of
revenue during production, which is not predicated on the sale of the asset to customers, is
consistent with the economic view of income. Instead of taking into account transactions as
they happen, revenue recognition is based on predictions for upcoming events. Instead of
being offset against revenue that is recorded in accordance with the realization principle,
costs would be recorded as they are incurred.
Comparable to accounting income with implicit costs (costs that happen but are not
observed, like opportunity cost), economic income includes the explicit cost. Because it also
considers other factors like opportunity costs, economic profit is referred to as anomalous
profit because it might not give the true picture of the company's financial success. It
represents how effectively the business is deploying its resources to generate income.

Major Differences:
 The main difference between economic and accounting income is that economists
don't have as many rules and don't adhere to the same conceptual framework as
accountants, so they take opportunity cost into account. However, opportunity cost is
never taken into account in accounting because it isn't real.

 The computation of economic profit is more of a theoretical exercise based on

potential course of action. As opposed to this, accounting profit determines what
actually happened and the quantifiable outcomes for the period.

 Thus, accounting profit represents a company's genuine profitability, whereas

economic profit demonstrates how well businesses are running, particularly whether
they are effectively utilizing their resources.

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 Accounting Theory (ACC 420): assignment 4

Because it is not constrained by accounting regulations, economic profit may be viewed as

better than accounting profit. Economic profit depicts a company's standing in a broader,
more comprehensive manner since it takes into account choices that were made but not
implemented. Accounting profit will frequently exceed economic profit. This is because,
although an opportunity cost may be a cost avoidance technique that lowers accounting
profit, corporations frequently experience opportunity costs for operations foregone in favor
of other activities. In a very competitive market, these two sources of income are crucial for
the company's expansion. However, I support accounting income because it captures the
underlying profitability of the company in financial terms, help make timely decisions that
yield more profit.