ACCOUNTING THEORY

ACCOUNTING THEORY(2024) THEORY - a scheme or system of ideas or statements held as an explanation or account of a group of facts or phenomena Theory is a coherent set of (1), (2) AND (3) forming the general framework or reference for a field of inquiry - (1) HYPOTHETICAL (2) CONCEPTUAL (3) PRAGMATIC PRINCIPLES A theory could be based on numerous observations known as (1) or developed on the basis of (2) (3) - (1) inductive reasoning (2) logic (3) deductive reasoning Inductive reasoning is done with (?) - OBSERVATION (1) is done with logic and (2) - (1) Deductive reasoning (2) understanding Differences of Deductive Reasoning and Inductive Reasoning - INDUCTIVE reasoning is weighing up observational evidence for a general proposition about a set of facts while DEDUCTIVE reasoning is based more on the use of logic rather than observation Theories of accounting considers three (3) things and these are? - (1) People's behaviour with respect to accounting information, (2) People's needs for accounting information and (3) Why people within organisations elect to supply particular information 2 BROAD CLASSIFICATIONS OF ACCOUNTING THEORY - (1) Positive (2) Normative A positive is similar to what type of reasoning - Similar to inductive reasoning (observations) A classification of accounting theory which is similar to deductive reasoning; prescription; logic - Normative Example of Normative - To prescribe how assets should be valued TRUE or FALSE? - Many theories of financial accounting exists; - No universally accepted theory of accounting; - No universally accepted perspective about the role of accounting theory - TRUE Empirically based theories is an accounting theory (1) developed on the basis of (2) observations and developed to make (3) about likely occurrences. - (1) may be (2) past (3) predictions WHAT IS EMPIRICAL RESEARCH - Research that relies upon observing actual phenomena or data Other term for Normative Theory - Prescriptive Theory Basis of Normative - (1) Based on the norms, values or beliefs held by the researchers proposing the theories (2) Based on the process of deduction rather than induction (3) Based on logical argument (4) Based on what the researcher believes should occur in particular circumstances and not based on observation What does Normative Theory seek for? - (1) sought to prescribe particular accounting theories (2) sought to develop new methods of accounting Examples of Normative Theory - (1) Conceptual framework of Accounting (2) Authors proposed that accounting measurement systems be changed from historical cost to a system based on current values A general rule that prescriptions is about? - "What should be should not be evaluated by reviewing observations of what is." What does the Normative / Prescriptive Research based on and seeks to? - Generally based on deductive reasoning and seeks to develop a basis for informing people as to what they should do Criticism of Normative Theories - Criticised for lack of empirical observation (they are based on personal opinion about what should happen) Argument against Normative Theory - Positive theorists argue that they would prefer to provide information about expected implications of actions and let other decides themselves what they should do 2 Classifications of Normative Theories? - (1) TRUE INCOME THEORIES (2) DECISION USEFULNESS THEORY What is true income theories - make assumptions about the role of accounting then seek to provide a single 'best measure' of profits What is decision usefulness theory - theories that ascribe a particular type of information for particular classes of users on the basis of assumed decision-making needs