Prepared by Arabella Volkov University 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 accounting theory 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

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

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 theory explain & predict e.g. bonus plan hypothesis

Accounting Theory Development Behavioural research: Sociological implications of accounting numbers and the associated actions of ‘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

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Prepared by Arabella Volkov University of Southern Queensland

References Text – Chapter 2 Theory and Method

Learning Objectives At 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 Objectives At 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 formulation Formulating 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 theory Syntactics: 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 theory Semantics: 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 Theory Criteria of truth: Dogmatic basis –‘believe what we read’ Self-evident basis –reasonableness Scientific basis –Syntactics and induction

Testing a Theory 1. Identify research problem 2. Develop theoretical framework 3. State hypothesis 4. Construct research design 5. Observe 6. Analyse 7. 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

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