“The accounting profit figure is simply a measure of the true profit of an organisation.” Discuss.

940 Words Nov 15th, 2013 4 Pages
“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
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Therefore whatever true profit is, it is not the accounting profit, as I believed before.

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Deegan & Unerman, Financial Accounting Theory, McGraw-Hill Education, 2011
Kvaal & Nobes, International Differences in IFRS Policy Choice (September 2, 2009). Accounting and Business
Research, Forthcoming 2010. Available at SSRN: http://ssrn.com/abstract=1466693
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I soon began to doubt that there even is such a thing as true profit. In the Hines article from the first seminar Hines shows how accountants create reality when they describe it. In accounts objects only exist once they are realised by the accountant3. Hines uses the example of revenue: “We recognise revenue when it is realised. By naming it ‘revenue’, it becomes revenue.. Just like the black holes.” Concepts like revenue and profit are the creations of accountants. What they are depends on how you define them. With real life objects (e.g. a chair), definitions may vary, however they are all based on the existence of the same underlying object. With a concept like profit there is no object until it’s fully defined. Once I fully considered this the idea of true profit seemed strange. Profit was created as an accounting concept and accountants decide what it is. Profit doesn’t exist in reality outside accounting - there is no such thing as true profit.
This idea was soon challenged in later seminars. Wagner argues that there is

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