Prepared by Arabella VolkovUniversity of Southern Queensland

Introduction

• Reference– Text Chapter 1

Learning Objectives

• At the conclusion of this lecture, you should have an appreciation of:– what is meant by ‘accounting theory’

and the purpose it has served over time

– the structure of this book and how it logically sequences its discussion of accounting theory

Overview of Accounting Theory

What is a theory? Hendriksen’s definition:

…the coherent set of hypothetical, conceptual and pragmatic principles forming the general framework of reference for a field of inquiry.

Overview of Accounting Theory

What is an accounting theory? Hendriksen: logical reasoning in the

form of a set of broad principles that: • provide a general framework of

reference by which accounting practice can be evaluated and

• guide the development of new practices and procedures.

Accounting Theory

• Modern concept– compared to mathematics

or physics

• Pacioli’s treatise– Double-entry accounting– Documenting process but not

explaining basis for recording

The development of accountingtheory has been mostly unstructured

Chambers:Accounting has frequently been described as a body of practices which have been developed in response to practical needs rather than by deliberate and systematic thinking

Accounting Theory

Accounting Prescriptions

• Developed to resolve problems as they arose – reactive

• Ad hoc

• Led to inconsistencies in practice– e.g. Asset revaluations

• Accounting standard setters– Conceptual framework projects

• Pre-1400s little accounting theory

• 1400s– Pacioli 1494 – Double entry– Main emphasis was on practice

• Pre-theory period– 1400s until 1800s

Accounting Theory Development

Accounting Theory Development

Pre-Theory Period (1400s-1800s)

Goldberg:

No theory of accounting was devised from the time of Pacioli down to the opening of the nineteenth century. Suggestions of theory appear here and there, but not to the extent necessary to place accounting on a systematic basis

General Scientific Period

• 1800–1955– explanations of accounting practice– theory based on observations of

current practice– empirical analysis

Accounting Theory Development

Accounting Theory Development

Normative period

• 1956–1970 – norms for best practice

what should be v. what is• Two dominant groups:

– conceptual framework proponents– critics of historical cost

Accounting Theory Development

Normative period• End of the normative period started in

the early 1970s– Unlikely a normative theory would be

accepted– Availability of financial economic

principles and testing methods

Accounting Theory Development

Specific Scientific Theory / Positive Era• 1970–present day

– dissatisfaction with normative theories

• positive accounting theoryexplain & predict

• e.g. bonus plan hypothesis

Accounting Theory Development

• Behavioural research:Sociological implications of accounting numbers and the associated actionsof ‘key players’

– emerged in 1950s but despite growing acceptance, positive accounting theory still dominates

Accounting Theory Development

• Recent Events– Corporate collapses

• e.g. Enron, Worldcom• Could comprehensive theory

have prevented this?• Increased legislative reporting

requirements

Accounting Theory Timeline

Accounting Theory

• Conceptual framework – 1980s– nature and purpose of financial

reporting– criteria for deciding between

alternative accounting practices– SACs 1–4

Accounting Theory

• Conceptual framework – Recent Developments– Joint project between IASB & FASB– Harmonisation of accounting

practices through international accounting standards

Summary

• Definition of accounting theory

• Major periods of accounting theory development

• Conceptual framework

• Recent events

Key terms and concepts

• Accounting

• Theory

• Normative theory

• Positive theory

• Conceptual framework

Where to get more information

• Other courses

• List books

• Articles

• Electronic sources

Prepared by Arabella VolkovUniversity of Southern Queensland

References

• Text – Chapter 2

Theory and Method

Learning ObjectivesAt the conclusion of this lecture, you

should have an appreciation of:– why there are different types of theories

of accounting– the difference between deductive and

inductive approaches to theory development

– the importance of syntax, semantics and pragmatism in developing and evaluating theories

Learning ObjectivesAt the conclusion of this lecture, you

should have an appreciation of:

• the difference between dogmatic,self-evident and scientific tests of the ‘truthfulness’ of theories

• how scientific theories are developed and tested and how they progress

Imposing order

Accountants often need to impose some sort

of order on imprecise events and transactions

• Exercise appropriate judgement– Analyse the financial implications

of transactions – Assess the impact of transactions– Establish the legal entitlement– Calculate the current value

A range of accounting theories

Accounting as:

• a historical record

• a language

• intracorporate politics

• standards setting as politics

A range of accounting theories

Accounting as:

• mythology

• magic

• communication-decision information

• an economic good

• a social commodity

A range of accounting theories

Accounting as:

• ideology and exploitation

• a social club

Theory formulation

What is a theory?• a deductive system of statements

of decreasing generality• nets cast to catch the world…• Logical flow of argument leading

from fundamental assumptions and connected statements to final conclusions

Theory formulation

How are theories formulated?

• Deductive – reasoning from general statements

to specific statements

• Inductive– reasoning from the particular to the

general

Theory formulationFormulating a theory • Epistemology – the study of the acquisition

of knowledge• Accounting theorists have drawn on the

natural sciences• Accounting:

– Social science– Measurement and technical process

• Scientific or naturalistic method?

Parts of a theorySyntactics:

• Rules of the language used• Syllogism: set of premises and

conclusion

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.

Parts of a theorySemantics:

• Links the basic concepts of a theory to objects in the real world

Premise 1: All asset accounts have debit balances.

Premise 2: The sales returns account is not an asset account.

Conclusion: The sales returns account has a debit balance.

Parts of a theory

Pragmatics:

• The effect of words or symbols on people

Accounting should provide useful information for decision making to

certain interested parties

Testing a TheoryCriteria of truth:

• Dogmatic basis– ‘believe what we read’

• Self-evident basis– reasonableness

• Scientific basis– Syntactics and induction

Testing a Theory

1. Identifyresearch problem

2. Develop theoretical framework

3. Statehypothesis

4. Constructresearch design

5. Observe

6. Analyse7. Evaluate8. Assess

limitations and constraints

Theory plane

Observation plane

Empirical Accounting Research Program

Testing a Theory

Criteria of truth

• Scientific basis

– Popper and falsification

– Research programs

– Kuhnian paradigms or disciplinary matrices

– Feyerabend’s approach

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

Key terms and concepts

• Theory

• Natural science or Social science

• Deductive

• Inductive

• Syntax

• Semantics

• Pragmatism

Where to get more information

• Other courses

• List books

• Articles

• Electronic sources