BKAR5043 – FINANCIAL ACCOUNTING THEORY AND REPORTING PRACTICE (LH221)

INDIVIDUAL DISCUSSION 1 (ID1)

Prepared by: MOHD AZMAN BIN MAASOM

1. What is meant by accounting theory?

Hendriksen’s definition:
…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 is a set of principles, frameworks, and methodologies used in the study
and application of financial reporting principles and as a guideline for the purpose of
development new practices and procedures.

2. Discuss about double entry system.

Double entry system of accounting

is one which reports business
transactions in such a way that
each entry is
recorded twice – first as a debit and
second as a credit. This system was
originally developed to reduce
mistakes
associated with bookkeeping
because at the end of the day, it is
expected that the sum of the debit
side should be
equal to that of the credit side
otherwise, something must have
gone wrong somewhere. The
development of
double entry bookkeeping has
been credited to the early
Italians, with the earliest known
evidence from a
Florence
Double entry system is where business report transaction are recorded twice known as
debit and credit. The main purpose of this system is to reduce mistakes where at the end
the day the amount of debit and credit should be balance. This is crucial as a check
balance of any mistakes happened.

3. What is the importance of accounting history?

Importance of accounting history :

1. To assist in better understanding current accepted practices or issues
2. To develop new policy regarding accounting standard and practices
3. To improve current practices

4. Compare between deductive and inductive approaches to the formulation of accounting

theory.

Deductive theory – Aim at testing an existing theory

Inductive theory – Aims at developing an accounting theory

5. How to verify a theory?

Developed Through research, tests of which it is empirically verified through observation
and experience.

6. It is important to understand that accounting theory is not simply an abstract process. It is not
divorced from reality. In fact, its main objectives are to explain why and how current
accounting practice evolved, to suggest improvements, and to provide basis for developments
in such practice (Godfrey, Hodgson, Tarca, Hamilton and Holmes, 2010).

(a) Discuss the statement “accounting theory is not simply an abstract process”.
- Continuous process of improvement
- Current practices always evolving acoording to the needs and time.
- Create basis development of future practices

There are some crucial elements in accounting theory that makes it an

indispensable framework for accounting practices. The key elements include
the following;

 Relevance - this is a crucial element of an accounting theory. Information

provided by accounting theories are relevant in all aspects.
 Usefulness - accounting theory is useful for the compilation of financial reports of
statements. It helps corporate businesses make informed decisions as regards
finance.
 Reliability - an accounting theory is reliable. It follows the standards of general
accepted accounting principles (GAAP).
 Consistency - this is another key element of accounting theory.
https://thebusinessprofessor.com/en_US/accounting-taxation-and-reporting-managerial-
amp-financial-accounting-amp-reporting/accounting-theory-definition

(b) Explain three roles of accounting theory to accounting practices and research.
- Providing a guideline for effective accounting and financial reporting
- Providing a base for future development and research of new accounting policy
and practices.
- To ensure accounting information relevant, reliable, comparable, and consistent.

(c) Academic research emphasis in the area of capital market, agency theory and behavioural
impact, while the profession concentrates more on normative approach. Discuss the focus of
these perspectives with example.

Capital market research – into the impact of accounting and the behaviour of capital
markets
 – did not explain accounting practice
– investigated connection between the accounting data and share prices/returns
– efficient markets hypothesis (EMH)
– capital asset pricing model

Sought to explaining and predict accounting practices across firms

– ex post opportunism
– ex ante efficient contracting

Examples: