Economic Profits vs. Accounting Profits
There are basically two main concepts of presenting financial information in a business: economic and accounting profit concepts. The accounting concept measurement is based on what is actually received by the business while the economic concept analyses and presents what is actually received against what could have been received. These two concepts are affected by several legal, moral, and ethical issues that weigh on their importance in the presentation and effectual consequences the reports will have on the stakeholders.
Although the economic profits concept seeks to explain the allocation of company resources in a firm and subsequently reflect the results in illustrating its impact on the shareholder’s wealth, most state laws mandate companies to provide their financial results through the accounting basis as this information is important in assessing the tax position of companies. Additionally, tax authorities in different state jurisdictions recommend the presentation of consolidated income statements in the accounting concept to make the assessment process straightforward to the authorities and the stakeholders using these statements.
Reliable and timely accounting information is very essential in any firm
This information should be produced by those who hold high moral and ethical repute in order to allay any form of suspicion on the validity and dependability of information presented. Morality and ethics are likely to be highly unrecognized in the economic concept of accounting as this model provides ample opportunity for fraudulent activity as it deals principally in non cash flow activities but rather economic discernment, as compared to the accounting concept that altogether considers the cash flows registered by the firm.
An example of failure registered through difference in the concept includes small businesses that have a high failure and turnover rates. Small firms do not have in place the proper accounting mechanisms that appropriately fit their respective financial structures. This is due to the fact that economic and accounting concepts were primarily designed to fit large corporations (Baker & Powell, 2005).
The best ways of gauging legal, moral and ethical issues in accounts presentation is through the assessment of the creators and stakeholders of this information in order to determine who exemplifies the best practices. Ethical criteria that could be use in this assessment include assessment of internal control systems, company leadership, reputation and transparency. These issues are representative of the major issues leveraged in economic and accounting concepts of profit accounting.