Traditional approaches

of Accounting Theory

Submitted to: Submitted by:

Dr. Meena Sharma Bhawna
Roll no-3
M.com (Hons)
ACCOUNTING THEORY

 It is a set of assumptions , framework, and

methodologies used in the study and
application of financial reporting principles.
Contents:

 The pragmatic approach

 The authoritarian approach
 The deductive approach
 The inductive approach
 The ethical approach
 The sociological approach
 The economic approach
 The eclectic approach
 Pragmatic
Non-theoretical approach
approaches Authoritarian

Types of traditional
approach

approaches
The deductive
approach
The inductive
approach
The ethical
Theoretical approach
approaches The sociological
approach
The economic
approach
The eclectic
approach
The pragmatic approach
 Non theoretical and practical approach
 This approach includes logics and reasoning.
 This approach includes the amalgamation of theory with the
operational context and operational utilities.
 It is more of a problem solving approach, which helps in transforming
the theory into practical usefulness.
 Useful to users and relevance to decision making
 Example: financial statement of company
 Pragmatic approach

Descriptive pragmatic approach

Psychological pragmatic approach

The authoritarian approach
 This approach is mostly used in professional and government
organisations.
 It consist of issuing pronouncements for the regulation of
accounting practices.
 According to Hendrikson “a theory without practical consequences
is a bad theory.”
 Example: in developing economies, where financial accounting and
reporting practices differ
 The deductive approach
 This approach to theory construction begins with the basic
propositions and proceeds to derive logical solutions.
 It emphasis “what ought to be”
 In this approach we go from general to the particular.
 The FASB and other many theorist are following this for accounting
theory formulation.
 Steps included:

Techniques of
objectives postulates principles
accounting
 The inductive approach
 The inductive approach to a theory, Belkaoui says,
involves the following four stages:

Observation Analysis and Inductive

and recording classification of derivation of Testing of
of all these generalisation generalisations
observation observations and principles
Continued..…..
 in induction, the truth and falsity of the propositions must be
empirically tested.
 It is interesting to note that while deductive approach starts with
general propositions.
 Some applicant use both approaches. Principles are derived by
deductive process, while the general propositions are formulated
through an induction process.
The ethical approach:
 This approach should not be taken as independent approach to
construction of accounting theory.
 It places emphasis on the concepts of fairness, justice, and truth,
which are regarded as basic core of the ethical approach.
 Fairness implies that the accounting data should be fair, unbiased,
and impartial, without serving special interests.
 Justice implies equitable treatment to all interested parties.
 Truth means true and accurate financial statement without
misrepresentation.
Continued……
 For example:

The committee of auditing procedures refers to the concept of ‘fairness of

presentation’ as:
1. conformity with GAAP
2. Disclosure
3. Consistency
4. comparability
The sociological approach:
 Emphasizes the social effect 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.
 it is also known as socio economic accounting
 The main objective is to encourage business activities on social
environment through measurement, internalisation and disclosure in
their financial statements.
The economic approach
 Emphasizes controlling the behavior of macroeconomics 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.

 For example:

The choice of accounting techniques depends on the particular

situation. Like during inflation, there is a widespread shift from FIFO to
LIFO for inventory valuation purposes.
 The eclectic approach

 It means combination of approaches.

 In developing economies imposition of accounting
procedures by the government seems to be the direction in
which economies are moving. In India there is quasi-
political approach.
 QUESTIONS?
 Q1- What is the basic difference between deductive approach
and Inductive approach?
 Q2-In which approach it is expected that accounting data will

help in social welfare judgement?

 Q3-How many types of pragmatic approach are there?

Explain.
 Q4-Name the 4 stages of Inductive approach?
 Q5-Explain the ethical approach.
References:
 L S Porwal “An Accounting theory” 2nd edition ., Tata McGraw-Hill
Publishing Company ltd.
 https://
www.assignmentpoint.com/business/accounting/traditional-approac
hes-to-accounting-formulation-theory.html
 https://www.coursehero.com/file/p5k3avs/Approaches-to-the-form
ulation-of-accounting-theory-Three-Types-1-Traditional/
Thank You