Download Accounting Theory: Elements and Structure

Chapter - 1
ACCOUNTING THEORY
AND
STANDARDS
Dr. BALAMURUGAN MUTHURAMAN
A THEORY: DEFINITION

A theory: ‘a set of interrelated constructs
(concepts), definitions, and propositions that
present a systematic view of the phenomenon
by specifying relationships among variables
with the purpose of explaining and predicting
the phenomenon’

A theory includes propositions linking
concepts in the form of hypotheses to be
tested.
A THEORY: DEFINITION

Elements of a theory include:
◦ Concepts: the main units of a theory and it is
devised to refer to identifiable characteristics or
phenomena.
: The better the concept, the better the theory.
: A formation of concept starts from the idea
or percept generating a concept designated by
terms.
A THEORY: DEFINITION

Elements of a theory include:
◦ Propositions: Establish relation between the
concepts of a theory.
: Designated by a sentence.
: Characterized by
1) The number and degree
predicates; and
2) The degree of generality.
of
A THEORY: DEFINITION

Elements of a theory include:
◦ Hypotheses: a proposition about a relationship
whose truth or falsity is yet to be determined by
an empirical test.
: Confirmation of a theory is the extent to
which a hypothesis is capable of being shown to
be empirically true, that is, of describing the real
world accurately
: Falsification??
ACCOUNTING THEORY MEANING
“. . . a set of basic concepts
and assumptions and related
principles that explain and
guide the accountant’s
actions in identifying,
measuring, and
communicating economic
information.”
WHY ACCOUNTING THEORY IS
IMPORTANT

Many individuals have to make decisions
about external accounting reports.
◦
◦
◦
◦
◦
Corporate managers
Public accountants
Officers of lending institutions
Investors and financial analysts
Individuals in accounting standard-setting
bodies
STRUCTURE OF ACCOUNTING
THEORY
FORMAL APPROACH
RULES
PRINCIPLES
ASSUMPTIONS
Accounting theory provides a logical framework
for accounting practice.
FUNCTIONS OF A THEORY

Descriptive function: using the constructs
or concepts and their relationships so as to
provide the best explanation of a given
phenomenon and the forces underlying it.

Delimiting function: selecting the favorite
set of events to be explained and assigning
a meaning to the formulated abstractions of
the descriptive stage.
FUNCTIONS OF A THEORY

Generative Function: the ability to
generate testable hypotheses or to provide
hunches, notions, and ideas from which
hypotheses could be developed.

Integrative Function: the ability to present
a coherent and consistent integration of the
various concepts and relations of a theory.
ACCOUNTING THEORY:
DEFINITION

Accounting theory:
principles that:
A set
of
broad
1) provides a general frame of reference by
which accounting practice can be
evaluated; and
2) guides the development of new practices
and procedures.
ACCOUNTING THEORY:
DEFINITION

Accounting theory should explain and
predict accounting phenomena.

The primary objective of accounting
theory is to provide a basis for the
prediction and explanation of accounting
behaviour and events.
ACCOUNTING THEORY:
DEFINITION

Accounting theory should have Three
elements:
1) Encoding of phenomena to symbolic
representation;
2) Manipulation or combination according
to rules; and
3) Translation
phenomena.
back
to
real-world
A ROLE OF ACCOUNTING
THEORIES
Accounting Theories
A Conceptual Framework
Accounting Principles, Concepts and Postulates
Accounting Techniques
GAAP
Accounting Standards
Accounting Policies
GAAP
GAAP (Generally Accepted Accounting
Principles): a guide to the accounting
profession in the choice of accounting
techniques and the preparation of financial
statements in a way considered to be good
accounting practice.
GAAP
 Conditions
under which an accounting
method will be deemed as generally
accepted:
◦ The method will be in actual use;
◦ The method would have support in the
pronouncement
of
the
professional
accounting societies;
◦ The method would have support in the
writing of a number of respected accounting
teachers and thinkers.
ACCOUNTING STANDARDS
What are the differences between GAAP
and accounting standards???
ACCOUNTING STANDARDS
 Accounting
standards
consist
of
Three parts:
◦ A description of the problem to be
tackled.
◦ A reasoned discussion or ways of
solving the problems.
◦ In line with discussion or theory, the
prescribed solution.
ACCOUNTING STANDARDS
 Reasons
to establish standards are:
◦ To ensure quality of financial information
◦ To be guidelines and rules
◦ To be database for a government
◦ To generate interests in principles and
theories.
ACCOUNTING STANDARDS
 Who
should
standards?
set
accounting
◦ Theories of regulation:
 Public-interest theories
 Interest-group or capture theories
 The political
regulation
ruling-elite
theory
 The economic theory of regulation
of
ACCOUNTING POLICIES
The specific accounting principles and the
methods of applying those principles that
are judged by the management of the entity
to be the most appropriate in the
circumstances to present fairly financial
position, changes in financial position, and
results of operations in accordance with
generally accepted accounting principles.