Topic 1 Accounting Theory 1 2002
Topic 1 Accounting Theory 1 2002
Topic 1 Accounting Theory 1 2002
Learning Objectives
Appreciate what is meant by accounting theory and the purpose it has served over time Explain the importance of understanding accounting theories
Key Terms
Theory Accounting theory Nature and role of accounting Descriptive, normative and positive theories Postulates, concepts and principles Conceptual framework
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Definition of Theory
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 symbolsthey are statements and do not have a physical form
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Accounting Theory
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).
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Receiver: Decision-Maker e
Function of Theories
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) Theories which recommend/ prescribe (e.g. current cost accounting should be used to provide more useful information)
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Evaluating theories
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
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Recap
Nature of accounting:
The Measurement Communication System
Accounting theories
prescriptive (normative) descriptive (positive)
NOW
The Conceptual Framework (a prescriptive model) and the Measurement-Communication System
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Receiver: Decision-Maker
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Historically
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.
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GAAP
Think of Generally Accepted Accounting Practices:
What are some conventions? What are some doctrines? What are some principles?
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Accounting Postulates
Entity Postulate Going Concern Postulate
Theoretical Concepts
Theoretical Concepts
Proprietary Theory
Entity Theory
Fund Theory
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Accounting Principles
Cost Revenue Recognition Matching
Full Disclosure
Materiality
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problems from a lack of a general theory permissiveness of accounting practice inconsistency of practices defense against political interference a normative method of theory development was proposed (CONCEPTUAL FRAMEWORK). It is premised on user needs driving the formulation of rules and other operational procedures for use in practice.
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Summary
Meaning of theory History of accounting theories Types of accounting theories Evaluating accounting theories Importance of theory in the development of accounting practices
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