Chapter 1: Introduction

Deductive and Inductive Theory

 Deductive

Theory

Hypothesis

Observation

Confirmation
 Inductive

Theory

Tentative Hypothesis

Pattern

Observation
 Accounting standards provide guidance on what accounting
treatment for a specific event.
 Accounting that focuses on how to implement accounting
standards is a part of practical knowledge.
 “Good practice is based on good theory whether we are
aware of the theory or not. If we can formulate “good” theory
then we will have “good” practices if the theory is followed
(Kam, 1990).
 By using theory, we can see a problem from a broader
perspective and free from technical matters or details.
 Sound practice is dependent upon sound theory (Wright,
1984)
 Theory: from Greek Language “Theater”: a place for seeing.
 Overview of Accounting Theory
 Theory: the logical reasoning underlying the statement of belief.

 Accounting theory: logical reasoning in the form of a set of

broad principles that (1) provide a general framework of reference
by which accounting practice can be evaluated and (2) guide the
development of new practices and procedures.
Overview of Accounting Theory
 Whether the theory is accepted depends on:
How well it explains and predicts reality
How well it is constructed both theoretically and empirically
How acceptable are the implications of the theory to a body
of scientists, professionals and society as a whole
History of accounting development
 Period before pre-theory:
- Egypt
- Babylon: recording of “receipt”, ”disbursement”,
“production cost
- Greece: the first time “balance concept” is introduced
- Rome: code is introduced
- Arabic: - Al Baqarah 282-283: record all transactions;
witness
- zero (0) is introduced
- place value is introduced
Pre-theory (1450-1750)
 1494: Luca Pacioli
 His book: Summa de Arithmetica Geometria Proportioni et
Proportionalita (Review of Arithmetic, Geometry and
Proportions) double-entry accounting system
 Concentrate on refining practice
 Accounting terms: - Debere (Dr): Debit (adebeo) counting
- Credere (Cr): Credit (credito) reliable
 “All entries..have to be double entries: if you make someone
creditor, you must make someone debtor”
Pragmatic accounting (1800-1955)
 Focus: providing an overall framework to explain why
accountants account as they do  based on observation of
practice
Normative accounting (1956-1970)
 Accounting theorists attempted to establish “norms” for “best
accounting practice”.
 Less concerned  what actually happened in practice, more
concerned  how accounting should be practiced.
 Based on opinions of what the accounts should report, and
best way to do that
 More dominant about the measurement
 Two drawbacks of normative theories:
Do not necessarily involve empirical hypothesis testing
Based on value judgements
Specific accounting theory or
Positive accounting
 Based on empirical approach
 Objective: to explain and predict accounting practice
 Sought to provide a framework for explaining the practices
which were being observed:
whether what practicing accountants produced had a
decision-usefulness objective
Whether it filled other roles
Whether it was inferior or superior to proposed alternatives
Recent development
 Academics: pursue a more positive approach
 Professions: pursue a more normative approach