Why Proprietary Theory, Measurement Theory and Information Theory are used by Corporations?
Answers
Proprietary Theory:-
Under the proprietary theory, the entity is the agent, representative, or arrangement through which the individual entrepreneurs or shareholders operate.
In this theory, the viewpoint of the owner's group is the center of interest and it is reflected in the way that accounting records are kept and the financial statements are prepared. The primary objective of the proprietary theory is the determination and analysis of the proprietor’s net worth.
The proprietary theory has some influence on financial accounting techniques and the accounting treatment of items. For example, the ‘net income’ of a company, which is arrived at after treating interest and income taxes as an expense, represents “net income to equity shareholders” rather than to all providers of capital. Similarly, terms such as “earnings per share”, “Book value per share,” and “dividend per share” indicate a proprietary emphasis.
The proprietary theory has two classifications depending upon who is considered to be included in the proprietary group. In the first type, only the common shareholders are part of the proprietor group, and preferred shareholders are excluded. Thus, preferred dividends are deducted when calculating the earnings of the proprietor (equity shareholders).
This narrow form of the proprietary theory is identical to the “residual equity” concept in which the net income is extended to deduct preferred dividends and arrive at net income to the residual equity on which will be based the computation of earnings per share.