BBFA 4034 Accounting

Theory & Practice

Bachelor of Accounting (Honours)
 Question 1 (a)
Explain the differences of developing a theory by induction and
developing theory by deduction in terms of the theory development.
 Differences between Induction and
Deduction Reasoning

INDUCTIVE REASONING DEDUCTIVE REASONING

Weighting the observation evidence for a
Based on logic rather than observation.
general proposition about a set of facts.

Starts with observations and moves Starts with a statement of hypothesis

backward toward generalization and and then test to see if it’s true through
theories. observation

Commonly known as “informal logic” Commonly associated with “formal logic”

The conclusions reached are probable, The conclusions reached are certain,
reasonable, plausible, believable inevitable, inescapable
 Differences between Induction and
Deduction Reasoning
INDUCTIVE REASONING DEDUCTIVE REASONING

Observation Theory

Pattern Hypothesis

Tentative Hypothesis Observation

Theory Confirmation
 Question 1 (b)
Give an example each on accounting theories developed by induction
and deduction.
Example of theory
developed by induction.
Inductive theory developed by Grady in
1965, who undertook research
commissioned by the American Institute of
Certified Public Accountants (AICPA). The
research paper formed the basis o APB
Statement No. 4 ‘Basic Concepts and
Accounting Principles Underlying the
Financial Statements of Business
Enterprises’, which reflects the generally
accepted accounting principles at that time.
APB Statement No. 4

Published on October 1970

Purpose of the Statement was to state

the fundamental concepts of financial
reporting to serve as a foundation for
the opinion of the APB.

The Statement covered:

● The environmental of financial
accounting
● The objectives of financial
statements
● The basis features and basic
elements of financial accounting
● A summary of existing generally
accepted accounting principles
 The Development of Theory
on Deduction

To explain particular Not driven by existing Developed based on

01 02 03
facts based on the use practice the theorist’s opinion
of logic of the theorist
and prescribed what
people should do.
 Normative theories
Normative theories are based on the deductive approach and seek to
develop a basis for informing people as to what they should do.
The example each on
accounting theories
developed by deduction

Conceptual Framework Accounting

Studied by Moonitz and Sprouse and
Moonitz commissioned by the Accounting
Research Division of the AICPA. They
proposed that the accounting measurement
systems should be changed from historical
cost to a system based on the current
values. Such research should not be
evaluated by reviewing current practice. It
was not supported by AICPA as the
proposal was too radically different from
current historical cost practice.
 Question 1 (c)
Describe the criticism of accounting theories developed by induction
and deduction.
 The Criticism of Accounting Theories
Developed by Induction
Gray, Owen and Maunders (1987, p.66)
state: Studying extant practice is a
study of “what is”, but does not study
“what is not” or “what should be”.
Developing theory on the basic of
observation typically does not allow us to
address the issue of what should be the
most appropriate behaviour in particular
circumstances.
Generalising theories of accounting based
on what accountants actually do and
assumed that what is done by the majority
of accountant is the most appropriate
practice.
The Criticism of
Accounting Theories
Developed by Deduction
Normative theory should not be
evaluated on whether they reflect
actual accounting practice.
– indeed the prescriptions might
reflect radical departure from existing
practices.

Criticized for lack of empirical

observation they are based on
personal opinion about what should
happen.
Thank You