Introduction to Accounting Theory
A statement on belief expressed in a language.
A deductive system in which observable consequences logically follow from the conjunction of observed facts with the set of the fundamental hypotheses … (Braithwaite, 1968)
A coherent set of hypothetical, conceptual and pragmatic principles forming the general framework of reference for a field of inquiry.
A set of premises which is logically related.
The process of identifying, measuring and communicating economic information to permit informed judgments and decisions by users of the information.
A set of interrelated concepts, definition and propositions that present a systematic view of phenomena by specifying relations among variables with the purpose of explaining and predictingthe phenomena.
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 practicesand procedures.
Nature of accounting theory
a.Accounting as a language
Perceived as a language of business.
Business activities are reported in accounting statements using accounting language.
Translate economic event and transactions into smthg that can be understood by users. b.Accounting as a historical record
Concern with providing a faithful record of the transactions of an entity and manager stewardship of the owner’s resources.c.Accounting as an economic good
Accounting info is not costless to produce and impose compliance costs.
Manager chooses accounting rules that minimize info costs and shareholders imposeaccounting rules that improve the ability to control and monitor the actions of managers.d.Accounting as current economic reality
Balance sheet and income statement should be based on a valuation basis that is morereflective of economic reality rather than historical costs. Focus on current and future prices.e.Accounting as communication-decision information
Accounting is action oriented. Accounting is prepared to suit the needs of users and willhave impact on the decision-making behaviour of managers and investors.
Accounting Theory Construction and Formulation
Accounting theory can be constructed by using deductive and inductive method.
Acceptance of a theory depends on the ability of a theory to explain and predict thevalidity / logical process of the theory’s construction, and the implication of the theory.1.Deductive method
Begins with basic accounting premises and proceeds to derive by logical meansaccounting principles that serve as guides and bases for the development of accountingtechniques.
From general to specific. Eg.