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Accounting Theory: Roles and Approaches

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Title: Accounting Theory: Roles and Approaches


1
Accounting Theory Roles and Approaches
  • Lectured by S. Sutthachai
  • Accounting Department
  • Faculty of Management Science
  • Khon Kaen University

2
A Theory Definition
  • A theory a set of interrelated constructs
    (concepts), definitions, and propositions that
    present a systematic view of the phenomenon by
    specifying relationships among variables with the
    purpose of explaining and predicting the
    phenomenon
  • A theory includes propositions linking concepts
    in the form of hypotheses to be tested.

3
A Theory Definition
  • Elements of a theory include
  • Concepts the main units of a theory and it is
    devised to refer to identifiable characteristics
    or phenomena.
  • The better the concept, the better the
    theory.
  • A formation of concept starts from the idea
    or percept generating a concept designated by
    terms.

4
A Theory Definition
  • Elements of a theory include
  • Propositions establish relation between the
    concepts of a theory.
  • designated by a sentence.
  • characterized by 1) the number and
    degree of predicates and 2) the degree of
    generality.

5
A Theory Definition
  • Elements of a theory include
  • Hypotheses a proposition about a relationship
    whose truth or falsity is yet to be determined by
    an empirical test.
  • Confirmation of a theory is the
    extent to which a hypothesis is capable of being
    shown to be empirically true, that is, of
    describing the real world accurately
  • Falsification??

6
Functions of a Theory
  • Descriptive function using the constructs or
    concepts and their relationships so as to provide
    the best explanation of a given phenomenon and
    the forces underlying it.
  • Delimiting function selecting the favorite set
    of events to be explained and assigning a meaning
    to the formulated abstractions of the descriptive
    stage.

7
Functions of a Theory
  • Generative Function the ability to generate
    testable hypotheses or to provide hunches,
    notions, and ideas from which hypotheses could be
    developed.
  • Integrative Function the ability to present a
    coherent and consistent integration of the
    various concepts and relations of a theory.

8
Evaluation of a Theory
  • A theory is evaluated to prove the adequacy of
    what it proposes.
  • Criteria to evaluate a theory???

9
Accounting Theory Definition
  • Accounting theory A set of broad principles
    that
  • 1) provides a general frame of reference by
    which accounting practice can be evaluated and
  • 2) guides the development of new practices and
    procedures.

10
Accounting Theory Definition
  • Accounting theory should explain and predict
    accounting phenomena.
  • The primary objective of accounting theory is to
    provide a basis for the prediction and
    explanation of accounting behaviour and events.

11
Accounting Theory Definition
  • Accounting theory should have 3 elements
  • 1) encoding of phenomena to symbolic
    representation
  • 2) manipulation or combination according to
    rules and
  • 3) translation back to real-world phenomena.

12
Formation of Accounting Theories
  • Accounting practitioners and researchers draw on
    different images of accounting to elaborate
    different theories of accounting.
  • Views of accounting
  • Accounting as an ideology
  • Accounting as a language
  • Accounting as a historical record

13
Formation of Accounting Theories
  • Views of accounting (continue)
  • Accounting as current economic reality
  • Accounting as an information system
  • Accounting as a commodity
  • Accounting as mythology
  • Accounting as rationale
  • Accounting as imagery

14
Accounting Theory Approaches
  • Deductive Approach it moves from general (basic
    proposition about the accounting environment) to
    the particular (accounting principles first and
    accounting techniques second).

15
Accounting Theory Approaches
  • Deductive approach used in formulating a
    conceptual framework of accounting
  • Specifying the objectives of financial statements
  • Selecting the postulates of accounting
  • Deriving the principles of accounting
  • Developing the techniques of accounting

16
Accounting Theory Approaches
  • Inductive Approach involves 4 stages
  • Recording all observations
  • Analysis and classification of these observations
    to detect recurring relationships (likes and
    similarities)
  • inductive derivation of generalizations and
    principles of accounting from observations that
    depict recurring relationships
  • testing the generalizations.

17
Accounting Theory Approaches
  • Ethical Approach the concepts of
  • fairness fair, unbiased and impartial
    presentation
  • justice equitable treatment of all interested
    parties
  • true true and accurate accounting statements
    without misrepresentation.

18
Accounting Theory Approaches
  • Sociological Approach Social Welfare
  • the social effects of accounting techniques
  • Socioeconomic accounting to encourage the
    business entities that function in a free-market
    system to account for the impact of their private
    production activities on the social environment
    through measurement, internalisation, and
    disclosure in their financial statements.

19
Accounting Theory Approaches
  • Economic Approach General Economic Welfare
  • 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 the
    techniques should depend on economic
    consequences.

20
A Role of Accounting Theories
21
GAAP
  • GAAP (Generally Accepted Accounting Principles)
    a guide to the accounting profession in the
    choice of accounting techniques and the
    preparation of financial statements in a way
    considered to be good accounting practice.

22
GAAP
  • Conditions under which an accounting method will
    be deemed as generally accepted
  • The method will be in actual use
  • The method would have support in the
    pronouncement of the professional accounting
    societies
  • The method would have support in the writing of a
    number of respected accounting teachers and
    thinkers.

23
GAAP
  • Examples of pronouncements of the professional
    accounting societies!!!!
  • In a new situation, what methods would be
    generally accepted????

24
GAAP
  • Little GAAP and Big GAAP
  • A little GAAP for smaller and/or closely held
    businesses.
  • A big GAAP is for large companies
  • What is the definition of small businesses?

25
Accounting Standards
  • What are the differences between GAAP and
    accounting standards???

26
Accounting Standards
  • Accounting standards consist of 3 parts
  • A description of the problem to be tackled.
  • A reasoned discussion or ways of solving the
    problems.
  • in line with discussion or theory, the prescribed
    solution.

27
Accounting Standards
  • Reasons to establish standards are
  • to ensure quality of financial information
  • to be guidelines and rules
  • to be database for a government
  • to generate interests in principles and theories.

28
Accounting Standards
  • Who should set accounting standards?
  • Theories of regulation
  • Public-interest theories
  • Interest-group or capture theories
  • The political ruling-elite theory of regulation
  • the economic theory of regulation

29
Accounting Standards
  • Who should set accounting standards?
  • The free-market approach
  • The private-sector approach
  • The public-sector regulation of accounting
    standards

30
Accounting Standards
  • Standard-setting approach for developing
    countries
  • The Evolutionary Approach
  • The Transfer of Technology Approach
  • The Adoption of International Accounting Standards

31
Accounting Standards
  • Standard-setting Procedures (IASB Due Process)
  • Setting the agenda
  • Project planning
  • Development and Publication of a discussion paper
  • Development and publication of an exposure draft
  • Development and publication of an IFRS
  • Procedures after an IFRS is issued

32
Accounting Policies
  • The specific accounting principles and the
    methods of applying those principles that are
    judged by the management of the entity to be the
    most appropriate in the circumstances to present
    fairly financial position, changes in financial
    position, and results of operations in accordance
    with generally accepted accounting principles.
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