1.

8 What is the difference between developing a theory by induction and developing a theory by
deduction?
As described in this chapter, theory created by induction is developed as a consequence of making a
series of observations about specific occurrences and then developing a theory based on these facts.
Developing theory based on observation, on the other hand, typically does not allow us to address the
issue of what would be the most appropriate behavior in specific circumstances (and determining
‘appropriate behavior' will be influenced by specific assumptions or value judgments made by the
researcher).
Developing theory by deduction, on the other hand, does not rely on observation. Rather, it develops
arguments and associated theories through the application of logic. Some deduction-based theories,
such as positive accounting theories that are established and subsequently used to forecast specific
behavior, may be tested (but not initially developed) by observation. Other deduction-based theories,
such as Chambers' theory of accounting (Continuously Contemporary Accounting), should not be
judged by subsequent observation because he was prescribing an approach to accounting that was
diametrically opposed to what accountants were doing at the time.

1.10 In the 1960s a number of accounting researchers concentrated on developing

theories of accounting based on observing and documenting the behavior of practicing
accountants. Do you think that such research is useful in improving the practice of
financial accounting? Explain your answer

It might be claimed that before we can enhance financial accounting practice, we must first
understand which accounting procedures are already in use.
However, it may not be productive if theories are formed by observing existing practice and
then used to prescribe what everyone else should do. It is not always the smartest or most
efficient thing to do just because the majority of others are doing it.

1.31 we would generally not be inclined to abandon a theory because a particular research
project generated results that did not support the theory. Also, it is possible that the results
failed to support the theory because there were problems with how the underlying data was
gathered and analysed, or how the theoretical variables were defined.

Obviously, if a theory continued to be unsupported by many studies then we might

ultimately question its relevance.