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

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“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 true profit could
be defined as the profit figure obtained using perfect objectivity and neutrality. Although it
only exists in theory it would be possible to observe when a profit figure is getting closer to
true profit as practices improve, or farther away from true profit as bias is introduced. If
true profit is lack of bias and perfect neutrality we can see how close accounting profit is to
true profit by analysing how neutral and objective practices are in the accounting
There are two ways bias could be introduced into accounts. Firstly through the standards
that accountants follow. It is possible that these standards themselves aren’t neutral.
Secondly when creating company accounts managers and accountants may not do so in a
neutral and objective manner. It is likely that bias is introduced into the standards where it
is deemed appropriate to consider economic and social consequences when setting
standards. If the negative implications of introducing a standard are significant, that
standard could be dropped. Zeff states “What is abundantly clear is that we have entered an


Ruth D. Hines, Financial accounting: In communicating reality, we construct reality; Accounting,
Organizations and Society, 1988, vol. 13, issue 3, pages 251-261
Wagner, J. W. Defining