“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
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 profession. 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

3

Ruth D. Hines, Financial accounting: In communicating reality, we construct reality; Accounting,
Organizations and Society, 1988, vol. 13, issue 3, pages 251-261
4
Wagner, J. W. Defining