What is Accounting Theory?

An accounting theory is a notion that uses speculations, methodologies, and frameworks in the study of
financial reporting (as well as how financial reporting principles are applied in the accounting industry).

Basically, accounting theories serve as a basis for the understanding of financial reporting and how
companies channel their financial statements using the appropriate strategies.

An in depth study of accounting theory entails a look into existing accounting practices, how they
evolved, and the modifications or additions done to them overtime. These accounting principles serve as
framework for accurate financial reporting and statements.

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How is Accounting Theory Used?

Accounting theories are basically the skeleton for accounting practices. That is, an accounting theory
guides accounting practices.

All accounting theories rest on the tenets or framework of accounting provided by the Financial
Accounting Standards Board (FASB). This board is responsible for stating the acceptable practices of
financial reporting as well as the key objectives of financial reporting.

The FASB is an autonomous organization that oversees the preparation of financial statements by both
private and public enterprises.

Key Elements of Accounting Theory

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.

Furthermore, accounting theory generally maintains that professionals in the accounting industry
operate based on assumptions which are:

Discrepancy between a business and its owner,

continuity of the business, and

preparation of financial statements using dollar representation and compilation of statements monthly,
quarterly or annually.

The Origins and Evolution of Accounting Theory

The evolution of accounting theory can be traced to the inception of accounting as one of the major
disciplines. Accounting as a discipline was developed in the 15th century and this birthed accounting
theories used by corporate businesses. Due to the changes in accounting practices, a number of
modifications and additions were also done to accounting theory. The Financial Accounting Standards
Board helps to regulate and revise accounting theories. Certified Professional Accountants (CPAs) also
help corporate businesses adjust to these modifications and new standards.