Truth in Accounting 1st Edition by Kenneth Macneal ISBN 1512804037 978-151280403

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ISBN 10:1512804037 

ISBN 13:978-151280403

Author:Kenneth Macneal

This book is a volume in the Penn Press Anniversary Collection. To mark its 125th anniversary in 2015, the University of Pennsylvania Press rereleased more than 1,100 titles from Penn Press’s distinguished backlist from 1899-1999 that had fallen out of print. Spanning an entire century, the Anniversary Collection offers peer-reviewed scholarship in a wide range of subject areas.

Table of contents:

1. I THREE FABLES

   Accounting is the language of finance. Members of the accounting profession are interpreters upon whom the vast majority of people must rely for information relating to any business or project with which they are not intimately and personally familiar. If interpreters do not tell the truth, or do not tell the whole truth, or tell truths intermixed with half truths, many people may be deceived to their hurt.

   Doubtless few accountants or business men would contend that present accounting principles are perfect, or that all financial statements prepared in accordance therewith state truly and without misrepresentation the facts that they…

   II PRESENT ACCOUNTING PRINCIPLES

   Accounting procedure is governed by a number of laws, or customs, on which there is rather general agreement. It is common for these laws to be variously described as rules, conventions, practices, methods, or customs. Taken together they serve to indicate the theoretical generalizations, or principles, upon which accounting procedure may fairly be said to be based.

   Meaning of Accountant’s Certificate. Prior to 1933, the usual form of unqualified certificate employed by auditors read, with minor variations, as follows:

   We certify that the above balance sheet is, in our opinion, a correct statement of the financial condition of the Company…

   III DEFENSE OF PRESENT ACCOUNTING PRINCIPLES

   When the origin and development of accounting methods is examined in Chapter IV, it will be seen how the principles governing the valuation of assets originated and how indeed they could hardly have taken any other form. With the advent of modern conditions, however, accounting authorities have apparently felt the need for justifying methods of valuation which were apt to be so widely at variance with the facts. The arguments used have ranged from purely theoretical ones to practical arguments based entirely on expediency. The theoretical arguments most often advanced hold that original cost valuations are real values from the…

    

   IV ORIGIN OF PRESENT ACCOUNTING PRINCIPLES

   It is probable that accounting in some form has been practiced by mankind since the dawn of human intelligence. The earliest reference to accounting in the Library of Congress in Washington is an exhibit of Sumerian administrative documents dating from 3945 b.c. An exhibit of Babylonian cuneiform tablets dating from 2474 b.c. is also contained in the Library as well as various other exhibits of later dates. Coincident with the growth of civilization and the expansion of trade and governmental authority, the importance of primitive accounting to the ancient peoples of the Mediterranean steadily increased, reaching its peak under the…

    

   V THE NATURE OF VALUE

   Value is one of the most common words in modern use, and one of the least understood. In its wider aspects it enters the fields of psychology, theology, ethics, logic, aesthetics, and metaphysics. In its different concepts it has been studied by Plato, Aristotle, Kant, Lotze, Nietzsche, and a host of modern thinkers. None of these has fully succeeded in defining it. Plato called it the most difficult question of all science. The modern recognition of its importance has been called “the greatest philosophical achievement of the nineteenth century.” It has assumed such a large field in psychological and philosophical…

    

   In communities where a state of barter and exchange exists, market prices are quoted in terms of different commodities instead of in terms of a common medium of exchange such as money. Hence the value of a cow might be fifty bushels of wheat, or five pigs, or twenty yards of cloth. A given quantity of any one thing might have a value expressible in terms of scores of different commodities. This system of direct exchange without the use of money exists in some few places in the world today and, indeed, has not been entirely eradicated even in the…

    
2. VII MARKET PRICES

   It has been stated that the economic value of a thing is its market price or is evidenced by its imputed market price. But what is meant by market price? A shopper may buy a reproduction of a painting at one store and then walk across the street to a less expensive store and buy an exactly similar reproduction for one-half as much. Do such prices constitute market prices and, if so, which price represents the value of such a picture? In other words, what sort of market must exist in order to make its prices acceptable as economic values?…

    
3. VIII IMPUTED MARKET PRICES

   The previous chapter discussed the valuation of marketable assets, i.e., those assets which are traded in markets which are free, competitive, and satisfactorily broad and active. Such assets should invariably be valued at market price. Some assets, however, are traded only in markets which lack one or more of the required characteristics, and others are not traded in any market at all. Such assets are described as nonmarketable, and their economic values can be determined only by estimating or imputing the market prices that would prevail were acceptable markets to exist.

   The imputed market price of a thing is an…

    
4. IX TRUTHFUL FINANCIAL STATEMENTS

   So far this work has reviewed some of the evils caused by present accounting principles and has described, and commented upon, the arguments used by accounting authorities to defend these principles. The origin and development of accounting principles have been surveyed, and it has been noted that these principles are, in the main, a natural outgrowth of primitive conditions which have now largely ceased to exist. It has been indicated how accounting principles may justifiably be said to have “just growed” like Topsy, rather than to have been consciously formulated by men of intelligence. Also, the nature of economic value…

    
5. X BALANCE SHEET ASSETS

   It has been shown that the best indication of the economic value of an asset is its price in an acceptable market, that the next best indication is its replacement cost, and that the third and least accurate indication is its original cost. It follows that a balance sheet which aims to present economic values must exhibit acceptable market prices when these exist, replacement costs when no acceptable market prices are available, and original costs only when, due to the nature of the asset, neither an acceptable market price nor a replacement cost is obtainable. The preparation of a balance…

    
6. XI BALANCE SHEET ASSETS—Continued

   Inventories. Present accounting authority directs that inventories be valued at “cost or market, whichever is lower.” The argument used is that of “conservatism,” supported by the rule: “Never anticipate a profit but provide for all losses.” Thus Hatfield says:

   General usage prescribes that merchandise on hand shall be inventoried at cost rather than at selling price. Prudence further demands that merchandise which evidently cannot be sold except at a loss, be marked down even below the cost price. If one could count not only on good faith but as well on unbiased judgment in making inventories, the taking of the…

    
7. XII VALUATION ACCOUNTS

   A valuation account is an account set up to adjust the value of an asset. Thus an account entitled “Reserve for Depreciation of Buildings” is in reality a part of the buildings account, but is carried separately for purposes of convenience. The credit balance shown in such a reserve account is commonly deducted, on the face of the balance sheet, from the debit balance appearing in the account of its related asset. Similarly, valuation accounts may be used to record increases or decreases in the economic values of assets due to changes in their market prices. The use of various…

    
8. XIII BALANCE SHEET LIABILITIES

   This chapter will examine the treatment of those balance sheet accounts usually found on the liability side of the balance sheet. As elsewhere in this book the aim will be to contrast present accounting practice with the new treatment suggested, and not to discuss present accounting practice when no deviation therefrom is recommended.

   The Balance Sheet Function. The function of the asset side of a balance sheet should be to exhibit a classified summary of the valuable possessions of a business. The total value of these possessions should equal the total wealth owned by the business as of the date…

    
9. XIV THE PROFIT AND LOSS STATEMENT

   The purpose of this chapter is to discuss the preparation of a profit and loss statement in accordance with the principles outlined heretofore. No effort will be made to review the details of present accounting practice, save where changes therein are recommended.

   Legal Definition of Profits. Much has been written relative to the legal definition of profits. Over a period of many years, courts and legislatures have propounded conflicting views, until an authority can now be found for almost any viewpoint, no matter how absurd. It has been held that depletion of wasting assets is not a loss,¹ that depletion…

    
10. XV THE FUTURE OF ACCOUNTING

    Probably few accountants realize the extent to which recent developments support the hypothesis that their profession is facing a declining future. During the past decade accounting methods have been subject to severe and increasing criticism. This criticism has had the effect of rendering traditional accounting concepts increasingly untenable and has confronted the profession with the choice of improving existing methods so that they justify traditional concepts, or of renouncing these concepts and adopting a more restricted definition of the purpose of accounting.

    Two Alternatives. On the one hand, accountants may admit that present accounting principles are based on expediency rather…

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