ACC 0402

Accounting Theory

Md. Jahngir Alam

Lecturer in Accounting
Dept. of Business Administration

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 Course Description
• This course is about accounting, not how to
account. The objective of this course is to provide
the student with the opportunity to obtain a sound
knowledge of normative, positive and critical
theories of accounting. The course begins by
examining the nature of theories and alternative
forms of logic. The conceptual framework and key
contemporary and historical accounting issues are
examined, highlighting the role of theory in
understanding current accounting standards,
accounting practice and the use of accounting
information by the myriad stakeholders in reporting
entities.
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 Course Objectives
• Apply knowledge of accounting techniques, concepts,
principles and theories to solve financial reporting
problems.
• Apply a structured decision model to exercise judgment
in the application of accounting standards
• Analyze the advantages/disadvantages of the various
accounting models;
• Assess business health/performance as implied by the
various accounting models;
• be familiar with concepts of theory development and
theories of accounting policy choice, measurement of
economic income and the societal use of accounting
information;
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 Text Book

• Accounting Theory: An Introduction,

– L. S. Porwal, Third Edition
• Accounting Theory
– Eldon S. Hendriksen
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 Chapter 01: Content
1. Definition and nature of accounting theory
2. Need of Accounting Theory
3. History of accounting theory:
– Early history of Accounting
4. Growth of Accounting knowledge and the
double entry system
5. Basic Accounting equation
6. The GAAP
7. Standard vs Principle
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 Accounting Theory

A set of broad principles that :

 Provide a general frame of reference by which
accounting practices can be evaluated
 Guide the development of new practices and
procedures

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 Theory
Theory is a systematic statements of the rules or
principles which underlie or govern a set of
phenomena.
That is the theory is defined as a set of
interrelated concepts, definitions and
propositions that present a systematic view of
phenomena by specifying relation among
variables with the purpose of explaining and
predicting the phenomena.

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 Nature of Accounting Theory

coherent set of logically derived principles that serve as

a frame of reference for explanation of accounting
events and behavior.
• Accounting theory may be extracted from the practices
of accountants. Accountants think it's as a process
which should follow practice.
• The methodology use for formulation of accounting
theory has been essentially descriptive .
• Descriptive or positive theory is a theory which attempts
to explain how financial information is collected ,
analyzed and communicated

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 Nature of Accounting Theory

• Prescriptive theory is a theory which attempts to

state what financial information should be
collected , analyzed and communicated
• Combination of art and science
• Combination of multiple theories

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 Need for accounting theory

The need for accounting theory arise because of some

problems and limitations faced by the accountants : the
reason is
• Develop accounting as a discipline:
Until the middle of the present century accounting was
regarded as an art , to develop accounting as a
discipline ,there is need for accounting theory.
• Changes in economic and social environments: Due
to rapid changes in economic and social environments,
accountants have to face new problems and to which
traditional explanations of accounting do not apply.

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 Need for Accounting Theory…

• Areas of accounting increase:

social accounting, human resource accounting , inflation
accounting etc are opening up. Application of traditional
models ,rules and methods of disclosure are
inadequate .
• To satisfy specialist of other disciplines:
It is difficult to convince the specialists of other
disciplines by saying that “ this has been practice, or this
is how it must be” .Specialists can be convinced or
satisfied on the basis of logic and sound reasoning that
is through accounting theory.

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 Early history of Accounting

Accounting appears to have been practiced since

the beginning of recorded history ;
 Introduction of money as a medium of exchange
provided necessary impetus for the development of
modern accounting
 3000 B.C. business transactions and land were
recorded

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 Early History of Accounting…

 The Chinese were the originator of accounting

practice. Sophisticated forms of government
accounting existed in china as early as 2000 B.C.
 Banking and other commercial activities led to the
maintenance of accounts in ancient Greece
 Roman kept their accounts on wax tablet
 The economic development in the middle ages
helped in the development of accounting
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 Early History of Accounting…

 It is believed that the idea of double entry was

developed by the banks during 1300 A.D.
 The first Professional organization was founded in
Venice in 1581.
 Luca pacioli is considered as the father of modern
accounting
 European professor Simon steven and arthur cayley
assisted in developing accounting ideas.
 Professor cayley wrote the book “ the principles of
double entry book keeping "

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 Growth of Accounting Knowledge

Accounting knowledge has grown much over the

period 1775-2000:
 1775-1850: Great emphasis on balance sheet
 1850-1900: Growth of corporations and the entity
concept changed from B/C to I/S.
 The ownership concept shifted from proprietary
ownership to shareholders in case of companies
 Development of accounting concepts of income and
periodicity concept

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 Growth of Accounting
Knowledge………
 Evolution of financial auditing
 The basic accounting principles(operating
guidelines) developed
 1900-1950: revolution of accounting practice and
theory
 Developed the concept of stewardship accounting
 Developed cost accounting and management
accounting

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 Growth of Accounting
Knowledge…..
 Greater emphasis was given on evolving
techniques, practices and systems of accounting to
make them more useful in decision making
 Tax accounting, tax advising and tax planning were
developed
 Better techniques of recording and analysis of data
were introduced

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 Growth of Accounting
Knowledge…..
• Accounting developed into a full fledged information
system
• New theoretical course were tested and put to
practice
• Descriptive and normative approach to the
development of accounting theory
• Various accounting boards and committees were set
up

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 Growth of Accounting
Knowledge…..
 International accounting developed to harmonize
accounting techniques and practices
 Development of corporate social accounting, human
Resource accounting
 Application of computer technology and information
technology

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 Basic Accounting Equation

All transactions of a business can be referred to

this basic equation…

Assets = Liabilities + Owners equity

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 The GAAP

Every business enterprise prepares its Financial

statements in accordance with the GAAP. GAAP are
common set of standards that indicate how to report
accounting issues.

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 Standard vs Principle
 Principle connotes things basic and fundamental of
a short Which can be expressed in few words .
 On the other hand standard helped in developing
solutions to the specific accounting issues .
 Standards are the part of GAAP.

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 END OF CHAPTER 01

Thank You

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