Accounting

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

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.

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.

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.

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??

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.

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.

Evaluation of a Theory

A theory is evaluated to prove the

adequacy of what it proposes.

Criteria to evaluate a theory???

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.

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 e
xplanation of accounting behaviour and event
s.

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.

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

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

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).

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

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.

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.

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 sy
stem to account for the impact of their private pr
oduction activities on the social environment thr
ough measurement, internalisation, and disclosure
in their financial statements.

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.

A Role of Accounting
Theories
A c c o u n tin g T h e o r ie s

A C o n c e p tu a l F ra m e w o rk

A c c o u n t in g P r in c ip le s , C o n c e p t s a n d P o s t u la t e s

A c c o u n t in g T e c h n iq u e s

G AAP

A c c o u n t in g S t a n d a r d s

A c c o u n t in g P o lic ie s

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.

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.

GAAP

Examples of pronouncements of
the professional accounting
societies!!!!

In a new situation, what methods

would be generally accepted????

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?

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

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.

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.

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

Accounting Standards

Who should set accounting

standards?

The free-market approach

The private-sector approach

The public-sector regulation of

accounting standards

Accounting Standards

Standard-setting approach for

developing countries

The Evolutionary Approach

The Transfer of Technology Approach

The Adoption of International

Accounting Standards

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

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.