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Prepared by Arabella Volkov
University of Southern Queensland
Introduction
• Reference
– Text Chapter 1
Learning Objectives
• At the conclusion of this lecture,
you should have an appreciation
of:
– what is meant by ‘accounting theory’
and the purpose it has served over
time
– the structure of this book and how it
logically sequences its discussion of
accounting theory
Overview of Accounting Theory
What is a theory?
Hendriksen’s definition:
…the coherent set of hypothetical,
conceptual and pragmatic principles
forming the general framework of
reference for a field of inquiry.
Overview of Accounting Theory
What is an accounting theory?
Hendriksen: logical reasoning in the
form of a set of broad principles that:
• provide a general framework of
reference by which accounting
practice can be evaluated and
• guide the development of new
practices and procedures.
Accounting Theory
•
Modern concept
– compared to mathematics
or physics
•
Pacioli’s treatise
– Double-entry accounting
– Documenting process but not
explaining basis for recording
Accounting Theory
The development of accounting
theory has been mostly unstructured
Chambers:
Accounting has frequently been
described as a body of practices
which have been developed in
response to practical needs rather
than by deliberate and systematic
thinking
Accounting Prescriptions
• Developed to resolve problems as
they arose – reactive
• Ad hoc
• Led to inconsistencies in practice
– e.g. Asset revaluations
• Accounting standard setters
– Conceptual framework projects
Accounting Theory Development
• Pre-1400s little accounting theory
• 1400s
– Pacioli 1494 – Double entry
– Main emphasis was on practice
• Pre-theory period
– 1400s until 1800s
Accounting Theory Development
Pre-Theory Period (1400s-1800s)
Goldberg:
No theory of accounting was devised
from the time of Pacioli down to the
opening of the nineteenth century.
Suggestions of theory appear here
and there, but not to the extent
necessary to place accounting on
a systematic basis
Accounting Theory Development
General Scientific Period
• 1800–1955
– explanations of accounting practice
– theory based on observations of
current practice
– empirical analysis
Accounting Theory Development
Normative period
• 1956–1970
– norms for best practice
what should be v. what is
• Two dominant groups:
– conceptual framework proponents
– critics of historical cost
Accounting Theory Development
Normative period
• End of the normative period started in
the early 1970s
– Unlikely a normative theory would be
accepted
– Availability of financial economic
principles and testing methods
Accounting Theory Development
Specific Scientific Theory / Positive Era
• 1970–present day
– dissatisfaction with normative
theories
• positive accounting theory
explain & predict
• e.g. bonus plan hypothesis
Accounting Theory Development
• Behavioural research:
Sociological implications of
accounting numbers and the
associated actions
of ‘key players’
– emerged in 1950s but despite
growing acceptance, positive
accounting theory still dominates
Accounting Theory Development
• Recent Events
– Corporate collapses
• e.g. Enron, Worldcom
• Could comprehensive theory
have prevented this?
• Increased legislative reporting
requirements
Accounting Theory
Timeline
Accounting Theory
• Conceptual framework – 1980s
– nature and purpose of financial
reporting
– criteria for deciding between
alternative accounting practices
– SACs 1–4
Accounting Theory
• Conceptual framework – Recent
Developments
– Joint project between IASB & FASB
– Harmonisation of accounting
practices through international
accounting standards
Summary
• Definition of accounting theory
• Major periods of accounting theory
development
• Conceptual framework
• Recent events
Key terms and concepts
•
•
•
•
•
Accounting
Theory
Normative theory
Positive theory
Conceptual framework
Where to get more
information
•
•
•
•
Other courses
List books
Articles
Electronic sources
Prepared by Arabella Volkov
University of Southern Queensland
References
• Text – Chapter 2
Theory and Method
Learning Objectives
At the conclusion of this lecture, you
should have an appreciation of:
– why there are different types of theories
of accounting
– the difference between deductive and
inductive approaches to theory
development
– the importance of syntax, semantics
and pragmatism in developing and
evaluating theories
Learning Objectives
At the conclusion of this lecture, you
should have an appreciation of:
• the difference between dogmatic,
self-evident and scientific tests of
the ‘truthfulness’ of theories
• how scientific theories are
developed and tested and how they
progress
Imposing order
Accountants often need to impose some
sort
of order on imprecise events and
transactions
• Exercise appropriate judgement
– Analyse the financial implications
of transactions
– Assess the impact of transactions
– Establish the legal entitlement
– Calculate the current value
A range of accounting
theories
Accounting as:
• a historical record
• a language
• intracorporate politics
• standards setting as politics
A range of accounting
theories
Accounting as:
• mythology
• magic
• communication-decision
information
• an economic good
• a social commodity
A range of accounting
theories
Accounting as:
• ideology and exploitation
• a social club
Theory formulation
What is a theory?
• a deductive system of statements
of decreasing generality
• nets cast to catch the world…
• Logical flow of argument leading
from fundamental assumptions
and connected statements to final
conclusions
Theory formulation
How are theories formulated?
• Deductive
– reasoning from general statements
to specific statements
• Inductive
– reasoning from the particular to the
general
Theory formulation
Formulating a theory
• Epistemology – the study of the acquisition
of knowledge
• Accounting theorists have drawn on the
natural sciences
• Accounting:
– Social science
– Measurement and technical process
• Scientific or naturalistic method?
Parts of a theory
Syntactics:
• Rules of the language used
• Syllogism: set of premises and
conclusion
Premise 1: All accounts relating to assets have debit balances.
Premise 2: The accumulated depreciation account relates to
assets.
Conclusion: The accumulated depreciation account has a debit
balance.
Parts of a theory
Semantics:
• Links the basic concepts of a theory to
objects in the real world
Premise 1:
All asset accounts have debit balances.
Premise 2:
The sales returns account is not an asset account.
Conclusion: The sales returns account has a debit balance.
Parts of a theory
Pragmatics:
• The effect of words or symbols on
people
Accounting should provide useful
information for decision making to
certain interested parties
Testing a Theory
Criteria of truth:
• Dogmatic basis
– ‘believe what we read’
• Self-evident basis
– reasonableness
• Scientific basis
– Syntactics and induction
Testing a Theory
Empirical Accounting Research Program
Theory plane
2. Develop
theoretical
framework
3. State
hypothesis
1. Identify
research problem
8. Assess
limitations
and constraints
4. Construct
research design
5. Observe
7. Evaluate
Observation plane
6. Analyse
Testing a Theory
Criteria of truth
• Scientific basis
– Popper and falsification
– Research programs
– Kuhnian paradigms or
disciplinary matrices
– Feyerabend’s approach
Summary
• A number of conflicting theories
have developed
• A theory generally consists of
three parts
• There are several criteria for
judging a theory
• Persuasiveness of evidence
Key terms and concepts
•
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•
•
•
•
Theory
Natural science or Social science
Deductive
Inductive
Syntax
Semantics
Pragmatism
Where to get more
information
•
•
•
•
Other courses
List books
Articles
Electronic sources