1. APPRACHES IN THE FORMULATION OF ACCOUNTING THEORY
SUBMITTED BY:
ARPITA BAIJAL
ROLL. No. 4
M.COM(HNRS.)
UBS

2. INTRODUCTION
In commerce, they believe that there is a solution to every accounting problem.
No, it is far away from the truth because there are many issues remain unresolved
After having the knowledge of mere accounting. To become of student of accounting in reaunderstanding the problems of accounting practice and profession. For this matter and reason, the Accounting theory is recommended. The accounting theory provides the knowledge of Generally accepted accounting principles (gaaps), contemporary issues and other Developments in the field.
So we should understand theory and its main issues like .Theory , approaches of constructing the theory, need of Accounting theory..

3. Theory
A statement on belief expressed in a language.
A coherent set of hypothetical, conceptual and pragmatic principles forming the general framework of reference for a field of inquiry.
A set of premises which is logically related.
Accounting
The systematic recording, reporting, and analysis of financial transactions of a business. 
Accounting Theory
A set of interrelated concepts, definition and propositions that present a systematic view of  phenomena by specifying relations among variables with the purpose of explaining and predicting the phenomena.
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.

4. ACCOUNTING THEORY
Attempts to formulate a generally accepted accounting theory have not succeeded so far because of different assumptions ,methodologies and users.
A useful way to study and assess accounting theory is to classify them according to the assumptions they rely upon.
Some of the approaches that have proven to be the most useful are pragmatic ,syntactic, normative, positive, nutralistic approaches.

5. NATURE OF ACCOUNTING THEORY
Accounting as a language
Perceived as a language of business.
Business activities are reported in accounting statements using accounting language.
Translate economic event and transactions into something that can be understood by users.
Accounting info is not costless to produce and impose compliance costs.
Manager chooses accounting rules that minimize information costs and shareholders impose accounting rules that improve the ability to control and monitor the actions of
Balance sheet and income statement should be based on a valuation basis that is more reflective of economic reality rather than historical costs. Focus on current and future 
Accounting is action oriented. Accounting is prepared to suit the needs of users and will have impact on the decision-making behavior of managers and investors

6. Accounting Theory Construction and Formulation
Accounting theory can be constructed by using deductive and inductive method
Method
Deductive
From general to specific
Inductive
From specific to general

7. Deductive Method
Begins with basic accounting premises and proceeds to d erive by logical means accounting principles that serve as guides and bases for the development of accounting techniques.
From general to specific. Eg.
Deductive method:P1 All assets accounts have debit balancesP2 Building & machine accounts are asset accounts  Building & machine accounts have debit balances

8. DEDUCTIVE Steps: a. specifying the objectives of financial statements.
b. selecting the postulates of accounting.
c. deriving the principles of accounting.
d. developing the techniques of accounting.
Advantages- if premises are false, conclusion may also be false. Provide a basis for  practical rules.
Criticism- misunderstands the meaning of theory. The theory not necessarily to be entirely practical.

9. Inductive Method
Begins with observations and measurements and moves toward generalized conclusions.
From specific to general. Eg.
Inductive method:P1 Building account is an asset account and has a debit balanceP2 Machine account is an asset account and has a debit balanceP3 Land account is an asset account and has a debit balanceP4 Vehicle account is an asset account and has a debit balance All asset accounts have debit bala nce

10. INDUCTIVE Steps: a. recording all observations.
b. analysis and classifying of these observations to detect recurring relationships(similarities)
c. inductive derivation of generalizations and principles of accou nting from observations that depict recurring relationships'.
d.testing the generalizations. The truth of the propositions depends on the observation of suffi cient instances of recurring relationships
Advantages: not necessarily constrained by a structure and free t o make relevant observation
Disadvantages: influenced by the idea of relevant relationship and raw data are likely to be different.

11. APPROACHES OTHER APPROACHES PREDICTIVE INDUCTIVE
Traditional approaches
Theoretical
Non-theoretical
Modern approaches
Events
Behavioural
Information processing
OTHER APPROACHES
PREDICTIVE
INDUCTIVE

12. APPROACHES COVERED : TRADITIONAL APPROCHES: Theoretical:. These are:
a) deductive approaches
b) inductive approach
c) ethical approach
d) sociological approach
e) economic approach
f) eclectic approach
g) regulatory approach
Non-theoretical: Non-theoretical approaches to accounting theory are concerned with developing a theory or accounting techniques and principles that will be useful to users, particularly decision makers.these are:
a)pragmatic
b)Authoritarian
REFFERENCES:
L.S. PORWAL,E3,PG ,ACCOUNTING THEORY,AN INTRODUCTION
APPROACHES
TRADITIONAL
THEORITICAL
PRACTICAL
REGULATION
REGULATORY

13. TRADITIONAL APPROACHES:
PRACTICAL APPROACHES
The pragmatic approach consist of the construction of a
theory characterized by its conformity to real – world
practices that is useful in terms of suggesting practical solutions
This approach is useful to different categories of users of accounting information and their relevance in decision making process it tends to provide practical solutions
According to this approach, accounting techniques and principles should be chosen on the base of their usefulness to users of accounting information and their relevance to decision making process

14. EXAMPLE
so as practical approach it does not give any theory but tells about using it in real practice. Pragmatic approach e.g.:- the impact of any information relating to the company on its share price Reference: theory#ixzz2qNv8fO60

15. TRADITIONAL APPROACHES CONTD.
the authoritarian approach to the formulation of an
accounting theory which is employed primarily by
professional organizations , consists of issuing
pronouncements for the regulation of accounting practices.
Some are however of the view that “the practical attempts should not be discarded simply because they are non theoretical ,practical are necessary to any theory with an operational utility”

16. Traditional Approaches contd.
THEORITICAL APPROACH:
Deductive Approach: This approach involves developing a theory from basic propositions, premises and assumptions which results in accounting principles that are logical conclusions about the subject. The theory is tested by determining whether its results are acceptable in practice.
Edwards and Bell (1961) are deductive theorists and historical cost accounting was also derived from a deductive approach

17. Traditional Approaches contd.
Inductive approach
For this approach we start with observed phenomena and move towards generalized conclusions.
The approach requires empirical testing, i.e. the theory must be supported by sufficient instances/observations that support the derived conclusions.
As Riahi-Belkaoui states: General propositions are formulated through an inductive process, but the principles and techniques are derived by a deductive approach. He also observes that when an inductive theorist, Littleton (1935), collaborates with a deductive theorist, Paton (1922), a hybrid results showing compromise between the two approaches.

18. Traditional Approaches contd.
The ethical approach should not be taken as an independent approach to construction of accounting theory.
It places emphasis on the concept of fairness, justice and truth which are regarded as basic core of the ethical approach.
Financial reports should present a true & accurate statement without misrepresentation. Accounting data should be fair ,unbiased & impartial , without serving special interests.

19. EXAMPLE:
Example of ethical approach An asset is sold at a price at which company makes profit but in accounts the value of asset before its sale was shown as it was increased before sale.
Ex.-the management or shareholders should not be favored the interest of all group and users should be taken into consideration for proper balance.
Reference: theory#ixzz2qNvk8jH1

20. Traditional Approaches contd.
Sociological approach
This is actually an ethical approach that centers on social welfare.
In other words, accounting principles and techniques are evaluated for acceptance after considering all effects on all groups in society.
Thus within this approach we would need to be able to account for a business entity’s effect on its social environment

21. EXAMPLE:
Examples of sociological approach Depriciation method. Proper tax. Bonus to employees. Charity. Special reserves.
Reference: theory#ixzz2qNwzETRc

22. Traditional Approaches contd.
Economic approach
This approach focuses on general economic welfare. Thus accounting principles and techniques are evaluated for acceptance depending on their impact on the national economy.
Traditionally, accounting standards have been set without considering economic consequences but lobby pressures from groups who perceive themselves as being affected can be strong

23. IMPACT
Influence of economic approach on accounting theory At time of inflation valuation of inventory method shifts from FIFO method to LIFO method. Companies also makes higher dividend payments & large capital expenditure in prosperity economic periods & discourage investment during period of inflation Reference: theory#ixzz2qNxSeZyL

24. Eclectic approach
This is perhaps our current approach where we have a combination of all the approaches already identified appearing in our accounting theory.
This eclectic approach has also led to the development of new approaches to accounting theory

25. Regulatory approaches
This regulatory approach is also one that tends to identify solutions to difficulties that have occurred in our reporting rather than providing us with a theory that anticipates the issues.
Indeed, they might argue that new standards are only developed when a particular user complains about misinformation or non-information. But there are questions to consider if we do adopt this approach to the development of accounting theory.

26. CONCLUSION
The traditional theory consists of theory views more rather practical. it is able to give theoretical base to methodologies techniques followed in accounting. it sets out accountings relationship with other fields of human knowledge. These theories constructed with some subjectivity also. under it sequence of events are made & after observing a phenomena lead to set up hypothesis & hypothesis tested accordingly test results a generalization can be stated & after it principle is introduced.

27. Thank
you

28. QUESTIONS:
Q1:WHAT ACCORDING TO YOU ARE THE MOST IMPORTANT ELEMENTS IN THEORY FORMULATION ? OR WHAT ELEMENTS SHOULD BE KEPT IN MIND WHILE FORMULATING A THEORY? Q2:WHICH THEORY IS NOT SUFFICIENT IN ITSELF? Q3: EXPLAIN THE RELEVANCE OF THEORY IN PRACTICAL APPLICATION. . Q4: NAME THE THEORY WHICH IS THE MIXTURE OF ALL THE THEORIES Q5: GIVE OPINION: TO WHAT EXTENT DO YOU THINK IS REGULATORY APPROACH IS USEFUL IN THE BUILDING OF ACCOUNTING THEORY.