Professional Documents
Culture Documents
• Proprietary theory is based on the idea that the owner is the centre of attention
-accounting is done with the owners’ interests in mind
• Entity theory focuses on the firm as the centre of attention
PROPRIETARY THEORY
• With the advent of the company the theory has proved inadequate as a basis
for explaining company accounting
developed when businesses were smaller
a company is separate from its owners
a company is a legal entity in its own right
shareholders rely on managers for information
no longer so relevant
ENTITY THEORY
• Traditional Version
• Newer Interpretation
ENTITY THEORY
• A past transaction (or event) ensures that only present liabilities are recorded
and not future ones
• What kind of past transaction or event is acceptable?
wholly executory contracts
LIABILITY RECOGNITION
• Recognition criteria:
1. Reliance on the law
2. Determination of the economic substance of the event
3. ability to measure value of the liability
4. Using conservatism principle