Chapter 2 enrironmental influence on accounting development

Source of funds and working capital

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Source of funds and working capital

Source of funds and working capital may be decided by economic systems, and in return they may decide accounting objectives and postulation. Source of funds has two types of orientation: creditor and equity orientation. They may influence the degree of investor orientation versus creditor orientation of the accounting system. For the creditor orientated accounting system, the major source of funds is loans from banks, financial intermediaries, or even wealthy individuals, accounting standards, principles, and procedures will tend to be more conservative and reflective to creditor preferences and requirements. This creditor orientation remains predominant in the world, at least in terms of number of countries. On the other hand, for the equity orientated accounting system, the majority of funds is invested by investors, and the accounting system will include such important investor information as earnings per share and more extensive public disclosure. For instance “the huge public interest in corporate securities in the United States has produced many so-called “sunshine” accounting standards of wide open disclosure, whereas the virtual absence of public participation in corporate equities ownership in France has limited effective financial communications there largely to “insider” communication channels. Heavy bank ownership of corporate equities in West Germany still produces different accounting responses. In the United States, the American Institute of Certified Public Accountants (AICPA) made special recommendations for particular financial accounting standards and practices to be used by smaller, closely held enterprises” (Choi and Mueller, 1978).

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