• Nature and Definition of Accounting
• Conceptual Framework
• Evolution of Accounting Thought
• Recognition of Assets, Liabilities,
Expenses, Revenue in Financial
Statements
• Concept of Goodwill
• Valuation & Accounting for Goodwill

• The concept of true and fair view
• Depreciation in Accounting
• Accountability in Accounting
• Social Responsibility Accounting
• Human Resources Accounting
• Creative Accounting
• Accounting Standards
• Accounting Theories
• Process of accounting theory construction

• Examination
– Midterm Test (15 marks)
– Assignment (15 marks)
– Final Examination (70 marks)

• How to Tackle Theoretical Questions
• No one correct answer (open ended questions)
• Demonstrates how you evaluate different views (corresponds to how much you have read ?)
• Finally express your own view
• Outline: Main issue, different views and your own view
• Give reference
• Expected not a professor’s knowledge

• How to Tackle Theoretical Questions
• No one correct answer (open ended questions)
• Demonstrates how you evaluate different views (corresponds to how much you have read ?)
• Finally express your own view
• Outline: Main issue, different views and your own view
• Give reference
• Expected not a professor’s knowledge

• Theory
• Accounting theory
• Nature and role of accounting
• Descriptive, normative and positive theories
• Postulates, concepts and principles
• Conceptual framework

• What is a theory?
– …the coherent set of hypothetical, conceptual and pragmatic principles forming the general framework of reference for a field of inquiry (Hendriksen)
– theories are composed of words or other symbols …they are statements and do not have a physical form

• To Systematically Create New Knowledge!

– …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
(Hendriksen).

• …the process of identifying, measuring and communicating economic information to permit informed judgements and decisions by users of information (AAA, A statement of
Basic Accounting Theory)

• Theories which explain (e.g. accountants do not do X because of Y)
• Theories which predict (e.g. cosmetic accounting policy changes will have no impact on share price) - Positive
• Theories which recommend/ prescribe
(e.g. current cost accounting should be used to provide more useful information)
– Normative

• ‘General Scientific Period’ (up to 1955??)
– ‘What is’ theories (descriptive)
– Based on observations
– Empirical analysis
– e.g. Choose ‘best’ depreciation method based on the one that has been used the most

• ‘Prescriptive/Normative Period’ 1956 +
– ‘What should be’ (prescriptive)
– Norms for best practice
– Not necessarily based on observation
– e.g. the development of current value accounting systems in the late 1960s - early
1970s

• Decision usefulness theories
– Decision makers: ask the users what they want
– Decision models: researcher deduces what is necessary for efficient decisions to be made
• Measurement Issues and Concept of
Income
• Conceptual framework projects

• ‘Positive Period’: 1975 +
– ‘Specific scientific theory’
– Dissatisfaction with normative theories
– Normally based on observation
– Seek to explain and predict

• capital market based research
• behavioural research

• Does not provide prescription so does not provide a means of improving accounting practice
• Not value-free but rather value-laden
• Underlying assumption of wealth maximisation
• Issues being addressed have not shown any significant development
• Scientifically flawed

• Consider logic and evidence
• Using ‘all’ instead of
‘some’
• Repeated ‘affirmation’
• Argument by analogy only
• Use of emotional words
• False credentials
• Appeal to authority
• Change in the meaning of terms during arguments

• Accounting seen as pragmatic, procedural endeavour
• Rules, practices and procedures developed on an ad-hoc basis usually in response to recording and reporting issues that presented themselves for resolution
• Repetition and general acceptance has provided support and legitimacy to the practitioners’ rules.

Hierarchy of the Elements of Structure of
Accounting Theory
Objectives of Financial
Statements
Postulates of
Accounting
Theoretical
Concepts of
Accounting
Principles of
Accounting
Accounting
Techniques

Entity
Postulate
Going Concern
Postulate
Accounting
Postulates
Unit of Measure
Postulate
Accounting
Period
Postulate

Theoretical
Concepts
Proprietary
Theory
Entity Theory
Fund Theory

Cost
Revenue
Recognition
Accounting
Principles
Consistency
Full
Disclosure
Conservatism

• Solar System
• Eco-System
• Digestive System
• Transportation System
• Economic System
• Political System
• School System
• ... and on and on.

• A System is a set of parts (or components) coordinated to accomplish a set of goals.
Input
Process
Output

• Component Parts
• A Process
• Goal
Input Output (Goal)
Process

• Subsystem
– a component may itself be a system
• a subsystem
• Supersystem
– a system may itself be a component of a bigger system
• the supersystem
Supersystem
Subsystem

The Environment
Boundary
System
Interaction

System 1
Interface
System 2

• Closed Systems
– No Interaction with environment
• Relatively Closed Systems
– Controlled interaction
• Open Systems
– Uncontrolled interaction
• Feedback Control Systems
– Portion of output returned as input

• A Relatively Closed System
• Subsystems of AIS
– Classified as Application Systems
• Cash Disbursement
• Accounts Receivables
– Classified as Transaction Cycles
• Revenue Cycle
• Expenditure Cycle
• Conversion Cycle
• Financial Cycle

• Environment
– Customers
– Vendors
– Government
– Owners
– Creditors

• AIS is a subsystem of MIS
Executive Information System
Budgeting and Responsibility
Reporting System
Transaction Processing System

Structured
Retrospective
Recurring
Transaction
Processing
Systems
Responsibility
Reporting
Systems
Budgeting
Systems
Unstructured
Prospective
Nonrecurring
Decision
Support
Systems