Chapter 3

Traditional
approaches to the
formulation of an
accounting theory

Traditional approaches to
accounting theory

Non-theoretical approaches
Deductive approach
Inductive approach
Ethical approach
Sociological approach
Economic approach

The nature of accounting:

various images
Accounting as:
language
historical record
current economic reality
information system
commodity
ideology

Accounting as an ideology
Accounting has been perceived as:
a means of sustaining and legitimising the
current social, economic and political
arrangements:
Karl Marx maintained that accounting
perpetuates a form of false consciousness
and mystifies rather than reveals the true
nature of social relationships
accounting has been perceived as a myth,
symbol and ritual that permits the creation
of a symbolic order within which social
agents can interact
an instrument of economic rationality and a
tool of the capitalistic system

Accounting as a language
Accounting is perceived as the language
of business
According to Hawes, a language has two
components, being symbols and
grammatical rules:
numerals and words and debits and
credits are examples of the symbols
unique to accounting
in accounting, grammatical rules refer
to the general set of procedures used

Accounting as a historical
record
Accounting records provide a history of
the managers stewardship of the
owners resources
Measurement of the stewardship
concept has evolved over time, in the
following periods:
pure custodial period
traditional custodial period
asset-utilisation period
open-ended period

Accounting as a current
economic reality
Balance sheets and income statements
should both be based on economic
reality rather than on historical costs
The main objective of this image of
accounting is the determination of true
income

Accounting as an
information system
Accounting links an information source or
transmitter (usually the accountant), a
channel of communication and a set of
receivers (external users)
This view of accounting:
assumes that the accounting system is
the only formal measurement system
in the organisation
raises the possibility of designing an
optimal accounting system capable of
providing useful information

Accounting as a commodity
Accounting exists because specialised
information is in demand and
accountants are willing and capable of
producing it
There is a market for accounting
information with its derived demand
and supply

The nature of
accounting theory
The primary objective of accounting
theory is to provide a basis for the
prediction and explanation of accounting
behaviour and events
No single comprehensive theory of
accounting exists at present

Definitions of
accounting theory
Hendriksen defines accounting theory
as a set of broad principles that:
1. provides a general frame of
reference by which accounting
practice can be evaluated
2. guides the development of new
practices and procedures

Definitions of accounting theory

(contd)
McDonald argues that a theory must
have three elements:
1. encoding of phenomena to
symbolic representation
2. manipulation or combination
according to rules
3. translation back to real-world
phenomena

How accounting meets these

criteria
Accounting employs:
1. symbols (debit and credit)
2. translation rules
3. rules of manipulation

The two methodologies

Descriptive methodology:
attempts to describe accounting
practices that exist and are deemed
useful
Normative methodology:
attempts to justify what ought to be
rather than what is

Non-theoretical approaches

The pragmatic approach:

consists of the construction of a
theory that conforms to real-world
practices and suggests practical
solutions
The authoritarian approach:
consists of issuing pronouncements
for the regulation of accounting
practices

The deductive approach

Steps used to derive the deductive
approach

1. Specifying the objectives of

financial statements
2. Selecting the postulates of
accounting
3. Deriving the principles of
accounting
4. Developing the techniques of
accounting

The inductive approach

Four stages
1. Recording all observations
2. Analysing and classifying these
observations to detect recurring
relationships
3. Inductive derivation of
generalisations and principles of
accounting from observations that
depict recurring relationships
4. Testing the generalisations

Comparing deductive and

inductive approaches
In the inductive approach, the truth or falsity of
the propositions does not depend on other
propositions, but must be empirically verified
In the inductive approach the truth of the
propositions depends on the observation of
sufficient instances of recurring relationships
Accounting propositions that result from inductive
inference imply special accounting techniques only
with high probability
Accounting propositions that result from deductive
inference lead, on the other hand, to specific
accounting techniques with certainty

The ethical approach

The basic core consists of the concepts of

fairness, justice, equity and truth
In general, the concept of fairness implies
that accounting statements have not been
subject to undue influence or bias
The committee on auditing procedures
refers to fairness of presentation as:
1. conformity with GAAP
2. disclosure
3. consistency
4. comparability

The sociological approach

Emphasises the social effects of
accounting techniques
According to this approach, a given
accounting principle or technique is
evaluated for acceptance on the basis of
its reporting effects on all groups in
society
Implies that accounting data will be
useful in making social welfare
judgements

The economic approach

Emphasises controlling the behaviour of
macroeconomic indicators that result from
the adoption of various accounting
techniques
The choice of different accounting
techniques depends on their impact on the
national economic good
Accounting policies and techniques should
reflect economic reality, and the choice of
accounting techniques should depend on
economic consequences

Eclectic approach
In general, the formulation of
accounting theory and the development
of accounting principles have followed
an eclectic approach (a combination of
approaches), rather than just one
school of thought