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
explanation of accounting behaviour and events.
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
system to account for the impact of their private
production activities on the social environment
through 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
Accounting Theories
A Conceptual Framework
Accounting Principles, Concepts and Postulates
Accounting Techniques
GAAP
Accounting Standards
Accounting Policies
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
 the
political ruling-elite theory of regulation
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.