Introduction to Accounting

Theory (1.2)
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Definition of Accounting
Belkaoui (2004);

Accounting is the art of recording, classifying, & summarizing in a

significant manner & in terms of money, transactions, & events
which are, in part at least, of a financial character, & interpreting
the result thereof. (AICPA)

From broader perspective;

The process of identifying, measuring, & communicating economic
information to permit information judgments & decisions by user of
information

Quantitative information;
Accounting is a service activity. Its function is to provide quantitative
information, primarily financial in nature about economic entities
that is intended, to be useful in economic decisions, in making
resolve choices among alternative course of action.

From the definition;

Accounting: an art or science?
Accounting deals with enterprise, which are certainly

social groups;
It is concerned with transactions & other economic

events which have social consequence & influence

societal relationship;
It produces knowledge that is useful & meaningful to

human beings being engaged in the activities having

social implications;
On the basis of the guidelines available, accounting is a

social science.
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The nature of Accounting

Accounting as;
1. Ideology
2. Language
3. Historical record
4. Current economic reality
5. an information system
6. Commodity
7. Mythology
8. Rationale
9. Imagery
10. Experimentation
11. distortion
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1. As an ideology

(beliefs, ideas, thought,

principles)
As a means of sustaining & legitimizing the

current social, economic & political arrangement.

Perceptions of accounting as an instrument of
economic rationality.
Capitalist practice turns the unit of money in a
tool of rational cost-profit calculations, of which
towering monument is double-entry
bookkeepingprimarily the product of the
evolution of economic-rationality; the cost-profit
calculus, in turn reacts on the rationality; by
crystallizing and defining numerically, it
powerfully propels the logic of enterprise
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2. Accounting as language of
Business
Communicating information about a

business.
Recognized in accounting profession, which
published accounting bulletin & empirical
literature, to measure the communication
of accounting concepts.

3. Historical record
As a means of providing the history of the

organization & its transaction with

environment.
History of managers stewardship of the
owners resources.

4. Reflecting current economic

reality
Both balance sheets & income statement

should be based on valuations basis that is

more reflective of economic reality than
historical cost.
Determination of true income (concept of
changing of wealth of the business over a
period of time)
Which method best measure, has
generated more prolific debate in
accounting literature.
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5. Information system
Process that link information source of

transmitter (accountant), a channel of

communication, & set of receivers (users)
the process of encoding observations in
the language of accounting system, of
manipulating the signs & the statements of
the system & decoding & transmitting the
result
The behaviors of the sender is important,
(behavioral research in accounting)
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6. Commodity

(product)

Demand & supply of accounting information.

Accounting provides ideal ground for policy & contracts

between the organization & environment.

In accounting research;

the emergence of the image of accounting as a commodity

again provide a striking example of the manner in which
accounting thought reflects its social content. It has arisen
in an are of mushrooming regulation & increasing concern
with the public interest in a situation of scarce resources &
many contemplating demand . It has provided the rationale
for accounting policies which seek to aid the allocation of
resources in the service of public interest .
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7. Mythology

(symbolic rituals/practice)

Myth that there are an easy way of

understanding of economic world &

explaining complex phenomena,
For the users in a more simplified &
understandable manner, thereby creating
more myths than realities.
Like witchcraft, accounting embrace a
system of values that regulate human
conduct & explains to humans when things
going wrong or right.
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8. rationale
Used to attach the meanings to events &

therefore provide a justification for future

occurrence.
Accounting provide a shield of guarantee or
a certification of authority to these numbers
& provides a rationale for actions to be
based on them.
Organizational decisions, need to be
justified, legitimized, & rationalized,
accounting provides useful means of action.
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9. imagery
Creating a picture or an image of an

organization through a selective choice of

events & accounts impinging (impress) of an
organization.
The image created through selective
interpretation & representation of events in
turn creates a stable & certain environment
& basis for decision making.
Also view as financial map-making
(complex phenomena are mapped into
financial statement)
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10. experimatation
It flexible enough to accommodate various

situations, adopt new solutions, to new

problems, & adapt to the most complex
case.
As an experiment, accounting allows itself
to go through trial & error phases towards a
search for the most contingent solution to a
given environment & a desire response &
behavior repertoire (The entire range of skills or aptitudes or
devices used in a particular field or occupation).

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11. distortion
Since accounting used to control or

influence of actions of both internal &

external users, it become an ideal target to
those seeking & manipulate the nature of
message view by the user.
The method used can be categorized into
six board categories; smoothing, biasing,
focusing, gaming, filtering & illegal acts.

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What is an accounting theory?

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Definition of Theory
Popper, K (1968) ,The Logic of Scientific

Discovery-emphasizes empirical nature of

the theory rather than logicalTheories are nets cast to catch what we call
the world, to rationalize, to explain and to
master it

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Hendriksen (1970):
1the coherent set of hypothetical, conceptual

and pragmatic principles forming the general

framework of reference for a field of inquiry.
2logical reasoning in the form of a set board
principles(1) provide a general framework of
reference by which acctg practices can be
evaluated and guided the development of new
practices and procedures.

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McDonald argues that a theory must have

three elements:
1. encoding of phenomena to symbolic

representation
2. manipulation or combination
according to rules
3. translation back to real-world
phenomena

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Belkaoui (2000)
..a set of interrelated constructs

(concepts),definitions, and propositions that

present a systematic view of phenomena by
specifying relations among variables with the
purpose of explaining and predicting the
phenomena.

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Accounting Theory
Classification
Godfrey et. al. (2010), classified accounting
theory as:
Theory as Language
Theory as Reasoning
Theory as Script

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BKAF3083

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A. Theory as Language
As language as business
Three question that should asked about

language, word, phrases

What effect will the words have on listeners?
What meaning, if any, do the words have?
Do the word make logical sense?

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Pragmatics study of the effect of language

Semantics-the study of the meaning of

language
Syntactic the study of the logic or
grammar of the language

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i. Pragmatics
This relation pertains to the effect of words

or symbols on people
How acctg concepts, and their real world
corresponding events or objects, affect
people behaviour.
How people react to the same message in
different way-acctg standard-support &
lobbying
The relation of signs to users of those signs
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Accounting should provide

useful information for decision
making to certain interested
parties

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ii.Semantics
Concern the relationship of word, sign or

symbol to a real world object or event

It is established in relation to individual
premises and the conclusion, but not to the
line of the logic( argument) which can only
be assessed for validity

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Premise 1:
Premise 2:
account.
Conclusion:
balance.

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All asset accounts have debit balances.

The sales returns account is not an asset
The sales returns account has a debit

iii. Syntactic
Rules of the language employed
Refer to rules of grammar & mathematics
Analytical methodology basically relied upon

syllogism
If the combination of premise is valid, so the

conclusion was also true.

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Premise 1: All accounts relating to assets have debit

balances.
Premise 2: The accumulated depreciation account relates
to assets.
Conclusion: The accumulated depreciation account has a
debit balance.

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B. Theory as Reasoning
The debate whether the theory is argument

flow:
General to specific (deductive).
Acctant usually deduce acctg principles or

postulates to provide concrete applications or

rules
Specific to General (inductive).
Acctg principles are induced from the best
current practice.

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i. Deductive Reasoning
Example,

P1: All asset accounts have debit balances.

P2: The cash account is an asset account
C : The cash account has a debit balances
Objective are important part of deductive

process. P1 & P2 are more generalize. C is

more specifically to cash account.

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 Advantages of the method;

If postulates or premises is false, conclusion

may also false

To provide the basis for practical rules.

Criticism;
Misunderstand the meaning of theory

The main objective of theory to provide a

framework for the development of new ideas or

new procedures and to help making choices
among alternative procedures.

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ii. Inductive Reasoning

Arguments begins with a set of a particular

examples, claim that it will representative

of some greater whole, then infer some
generalization about that whole.
Advantages;
Not necessarily constrained by a structure
Free to make relevant observation

Disadvantages
Influenced by the idea of relevant
relationship/observed

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 Example,
P1: The cash account is an asset account and
has a debit balance.
P2: The Vehicles account is an asset account
and has a debit balance.
P3: The land account is an asset account and
has a debit balance.
C : All asset accounts have debit balances
P1, P2, &P3 is so specific for each

account. C is generalization from all P.

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C. Theory as Script
The theory may be
To set forth and explain what and how

financial information is presented and

communicated to users of acctg data
(descriptive or positive)
To prescribed what data ought to be
communicated and how they ought to be
presented. (prescriptive or normative)

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i. Normative (prescriptive)
1950s & 60s
Explain more on what should be done rather

than what is i.e. analyzing & explaining

accepted practice
Attempts to discover the best way of
accounting for a transaction & useful in
making decision.

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ii. Positive (descriptive)

1970s
More on the inductive theory nature
Attempts to discover how management and

others decide which is the best way for

them.
More on explanation on what and how,
testing assumptions made by normative
theories.

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TESTING A THEORY
Criteria of truth
Dogmatic basis

believe what we read

Self-evident basis

Reasonableness (determine the truth, e.g.

accounting must using market price)

Scientific basis

Syntactic (logical reasoning) and induction

(refer to empirical evidence)

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Criteria of truth
Scientific basis

Popper

(try & error: hypothesis & proposition)

and

falsification

(all hypothesis must be capable of

falsification, if no; there is no informative & doesn't not add to
scientific progress)

Research programs

(encourage discovery of
solutions, involving try & error, able to change)

Kuhnian paradigms, or disciplinary

matrices

(dominance of one paradigm, competing

school of thought)

Feyerabends approach

(Society are too complex:

good scientist is one who prepares to develop & accepted inconsistent
ideas & theories)

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Empirical Accounting Research

Program
Theory plane
2. Develop
theoretical
framework

3. State
hypothesis

1. Identify
research problem

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8. Assess
limitations
and constraints

4. Construct
research
design

5. Observe

7.
Evaluate

Observation plane

6. Analyse

Summary
A number of conflicting theories

have developed
A theory generally consists of
three parts
There are several criteria for
judging a theory
Persuasiveness of evidence

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