THEORETICAL FRAMEWORK ABOUT ACCOUNTING

In order to know the relationship between investment decision and accounting systems， we must first know the theoretical framework about accounting. We must know the definition of accounting and the two main basic standards of accounting systems: principles and rules.

Because different countries use different accounting systems， we choose some different systems to introduce various accounting systems. They are US accounting system， French accounting system， Russian accounting system， International accounting system and Chinese accounting system. Each system bases on one of the two main basic standards.

That will be interesting for us to know the basic knowledge of accounting before we start to do the investment decision.

1. Accounting

Accounting is a financial record that records the transfer of money or capital. It is a very useful subject and important instrument in the world. It is the measurement， disclosure or provision of assurance about financial information that helps managers， investors， tax authorities and other decision makers make resource allocation decisions. It contains financial accounting which involved financial information about a business is recorded， classified， summarized， interpreted， and communicated.

Accounting is a very complicated but systemic system， in which accountants classify and record the daily financial activities of the company.

Accounting is very useful. Firstly， it belongs to the management part of the company. The managers can use it to study the historical financial data of their company， and find out the exact quantity of some important financial items， and then they can make crucial decisions according to the serious study. Secondly， accounting can be used to supervise the activities of the company. The auditors can audit the financial part of the company by carefully reading the account book， such as， balance sheet. Especially， for the listed companies， the accounting books are very important sources for annual reports， which should be published every year to the public. Thirdly， deciding the rule or principle of accounting is the government?蒺s tool to administer the country?蒺s whole economic system. Taxes are the most important revenues for government， and there is a strong relationship between the taxes and accounting.

At the heart of modern financial accounting is the double?鄄entry bookkeeping system. This system involves making at least two entries for every transaction: a debit in one account， and a corresponding credit in another account. Each transaction gives rise to both a credit entry and debit entry. Credit entries represent the sources of financing， and the debit entries represent the uses of that financing. The total of the debit values must equal the total value of the credit values， so any monetary transaction must logically affect two aspects of a company. This provides an easy way to check for errors.

Practitioners of accountancy are known as accountants. There are many professional bodies for accountants throughout the world. Many allow their members to use titles indicating their membership. Examples are Chartered Certified Accountant (ACCA or FCCA)， Chartered Accountant (FCA， CA or ACA) and Certified Public Accountant (CPA).

There are two different standards of accounting: principles and rules. Different countries or regions have different accounting systems， for example， USGAAP is based on rules， and IAS is based on principles. Besides， different countries have different authorities to establish the different systems， for example， in France they have CRC， and in US they have AICPA and others.

2. Principles Rules

2.1 Rules

Rule is a basic generalization that is accepted as true and that can be used as a basis for reasoning or conduct; rule is any one of a systematic body of regulations defining the way of life of members of a religious order. Rule is concrete， it?蒺s the criterion and inhibit of an accurate accounting actions， tell people how to do， what can be down and what can?蒺t be down in an accounting action.

Rule includes specific criteria， bright line， thresholds， examples， scope restrictions， exceptions， subsequent precedents， implementation guidance， etc. Accounting rule is inclined to use formulating details， complex and specific provisions to regulate the accounting business.

Firstly， a rules?鄄based approach also hinders accounting standards being translated into different languages and cultures. Global convergence of accounting standards cannot be achieved by a rules?鄄driven approach. Secondly， a rules?鄄based approach that would set broad goals backed by enough detail to produce meaningful， informative financial statements. And investors might have a better understanding of corporate accounting that is based on a rules?鄄based approach.

2.2 Principles

Principle is an explanation of the fundamental reasons (especially an explanation ofthe working of some device in terms of laws of nature); principle is a basic truth or law or assumption. Principle is generalize of accounting rule， it take in charge of the direction of the actions and tell that we finish an accounting process in what way other than how to do it.

Principles are contained in the standard setters， conceptual frameworks. Simply stated， principles?鄄based accounting provides a conceptual basis for accountants to follow instead of a list of detailed rules. Accounting principle is inclined to use simple and intelligible principia to supervise the accounting business.Principles?鄄based accounting may be simpler and more flexible， but much depends on who sets the principles. It can prepare financial statements with flexibility to deal with new and different situations.

Accounting principle， which is as a directive ideology and creed， has comprehensive currency and applicability. Although it is not the material accounting rule， it has 5 effects:

1. Supervising the establishment of accounting rule.

2. In the case of lacking the specific accounting rule， providing a referenced frame to solve the fiscal problems.

3. When weave the financial report forms， deciding the range of estimating.

4. Enhancing the confidences and comprehension of the user to the financial report forms.

5. Boosting up the comparability via decreasing the quantities of the fiscal spare methods.

Accounting principle is more powerful than accounting rule. Accounting principle is the gist of establishing and estimating accounting rule. It has the effects to be the rudder when lack the specific accounting rule. However， accounting rule helps to work out the material criterion of validating， measuring and reporting to the economic business.

Firstly， a principles?鄄based accounting may be simpler and more flexible. Principles?鄄based accounting provides a comprehensive basis for preparing financial statements with the flexibility to deal with new and different situations. Secondly， principles in accounting involve judgments based on society?蒺s views of acceptable conduct. Thirdly， a move to principle?鄄based standards will require greater discipline by the corporate community. Fourthly， a principles?鄄based approach could give companies and accountants too much leeway and too little structure， resulting in inconsistent treatment that would make it hard to compare financial results at different companies.

It is difficult to say principle or rule which is better. While nowadays because of the changing world， people is inclined to principle which is more flexible and can deal with new and different situations. Some accounting systems contain both rule and principle.

Reference:

1. AICPA， The Fundamental Purpose of the AICPA

2. Benston， George， Bromwich， Michael， Litan， Robert E.，F(xiàn)ollowing the Money: Corporate Disclosure in an Age of Globalization， Editor: Brookings Institution Press-139 pages-2003

3. Box Jerkins， Time Series Analysis: Forecasting Control

4. Christopher W. Nobes， Rules?鄄Based Standards and the Lack of Principles in Accounting， Accounting Horizons， Vol. 19， No. 1， March 2005， pp.25-34

5. International Financial Reporting Standards: Practical Guide

6. Jep Robertson Renae Clark， Intermediate Accounting， 11th Edition Kieso， Weygandt， and Warfield， Chapter 1: Financial Accounting and Accounting Standards