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In: Finance

Economic Development and Accounting Development Go hand in hand, discuss? What are the reasons behind growth...

  1. Economic Development and Accounting Development Go hand in hand, discuss?
  1. What are the reasons behind growth of accounting knowledge?

Solutions

Expert Solution

Answer a.

As an economy grows, the complexity increases. The reporting requirements as well as the development objectives become more and more complex and intertwined. If these are not accurately reported and transparently presented, they lead to building up of a "fraud" oriented system. To have a better economy, it is imperative to have a sound accounting system that helps in promoting growth, keeping in mind the red flags that prevent the financial flaws to take place.

Thus, an economic system inevitabely leads to development of accounting system because:

1. A growing economy has no scope for financial crimes. Thus, appropriate measures need to be put in place to ensure people adhere to the rules.

2. When an economy grows, more and more investors are interested in investing in that economy. Accounting needs to grow to support the flow.

3. A economy tries to grow to be stable. Accounting supports just that. Thus, with a growing economy, accounting has to keep pace to make the environment stable

Vice Versa is equally true. A good accounting practice helps in building a great economy in the following ways:

1. Good accounting enables transparancy across the financial system. This helps keeping the money flowing and economy prospering.

2. With good accounting principles in place, the investor confidence remains intact, leading to more and more investments coming to the country.

3. Good accounting prevents financial scandals, leading to the money flowing in the right hands. A good economy growth model always plans to keep funds in right hands and well distributed. Accounting ensures just that.

Further, we have observed trends when it is difficult to apply accounting to underdeveloped economies and easier in developed ones. Also, the need of accountants rises in a growing economy- all these trends pointing to a clear correlation between the two-- Quiet right, they do go hand in hand.

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Answer b.

Reasons behind growth of Accounting:

1. Frauds:

Frauds in the financial landscape are still not very old. As economies started growing, the financial systems started geting more and more complex. In the early days, accounting used to deal with counting of money. However, as the world progrressed, people started using loopholes in these basic counting principles, leading to frauds and loss of money. This lead to the development of accounting as a profession to gather and present information in a more concrete and reliable way.

2. Financial Crises:

Each financial crisis tell us about one or the other factor in accounting that we did not pay attention to. As these crises have unfolded, advancing economies have found better ways to prevent these from happening, leading to the development of these principles.

3. Growing Economy:

It has been an observed trend that as the complexities in the economy have widened, we have come to realize that we need better Accounting Principles. This has led to the development of accounting as a profession in a more robust sense. Further there has been an observed trend that the number of Accountants needed has increased with the growth in the economy.

4. Stability and Confidance

In the longer run, every economy moves towards stability. A robust and accurate accounting process ensures that the economy is stable and functions optimally. This helps in appropriate governance as well as an insight as to to how each and every element of the economy is doing including the companies, the government, associate entities etc. This has lead to the development of accounting.

5. Promote decision making and Future Planning

It is always important that a country has appropriate tools to make decisions. A good accounting knowledge and process ensures that the leaders have sufficient information to make informed decisions for the future. This enables the leadership to take accurate decisions and make the country tread on a right path. The need to make accurate and healthy decisions have helped accounting to grow at a fast pace.

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