ATPB 313

Accounting Theory & Practice

Sem 2 2013/2014
(updated October 2013)
Topic 2:
OVERVIEW OF ACCOUNTING THEORY
REF: 1 & 2 (Godfrey et al 2010)
1

Learn in g O u tcom es

At the end of this lecture,

students should be able to:
Describe
Describe
Describe
how
Discuss an
how
the
accounting
overview
accounting
developme
theories
of what
theories
nt of
are
accounting
are
accounting
constructe
theory is
formulated
theory
d and
and tested
measured
2

1.0 W h at is A ccou n tin g Th eory?

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

guide the
development of new
practices and
procedures

1.0 W h at is A ccou n tin g Th eory?

The
acceptanc
e of a
theory will
depend
on:

How well it
explains and
predicts
reality

Main
objectives
of
accountin
g theory

Explain why
& how
current
accounting
practice
evolved

How well it is
constructed

Suggest
improvement
s

How
acceptable
are the
implications
of the theory

Provide the
basis for
development
of such
practice
4

2.0 D evelop m en t of A ccou n tin g Th eory

21800-1955
1
1400-1800
Pre-theory
period
No theory
of
accounting
was
devised

General
Scientific
Period
Observe
what
actually
happened
Based on
empirical
analysis
i.e. relying
on realworld
observatio
ns not
simply on
logic
Pragmati

c
accounti

3
1956-1970
Normative
Period
Prescribe
what
should
happen
2 group
dominated
Limitation
of the
theory
Do not
involve
hypothesis
testing
Based on
value
judgment

4
1970present
Specific
Scientific
theory
Describe,
explain
and predict
accounting
practice
i.e.: bonus
plan
hypothesis

Positive
accounting
5

2.0 D evelop m en t of A ccou n tin g Th eory

5. Behavioural Research
Result from the
narrow approach of
positive theorists

Concerned the broader

sociological
implications of
accounting numbers
and the associated
actions of key players

Emerged in 1950s

6. Current development
Corporate collapses e.g. Enron & WorldCom
has triggered question on whether a
comprehensive theory of the impact of
accounting on behaviour had been developed
increase in legislative
reporting requirements.

convergence
6

3.0 A p p roach to form u lation of

accou n tin g th eory
FORMULATING
ACCOUNTING
THEORY

Deductive
G eneralto specifi
c

Inductive
Specifi
c to general

A p p roach to form u lation of accou n tin g

th eory

Deductive
Drawing specific conclusion from detailed
observations and measurements
A "top-down" approach.

Deduction
P1 all asset accounts have debit balance.
P2 The plant & machinery account is an asset
account.

A p p roach to form u lation of accou n tin g

th eory

Inductive

From specific observations to a general

conclusion
A "bottom-up" approach

Induction
P1 the plant and machinery account is an asset account and
has a debit balance.
P2 the motor vehicle account is an asset account and has a
debit balance.
P3 the land is an asset account and has a debit balance.
Conclusion all asset accounts have debit balance.

4.0 Parts of a Th eory

Theory development eventually must relate to

the real world.
Theoretical structure

Syntactic

Pragmatic
Semantic
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5.0 Testin g a Th eory

In developing theory using scientific approach, we
need to test a theory using criteria of truth.

Theory testing

Dogmatic
Scientific

selfevidence

Syntactic
Induction
Falsifi
cation/Popper
Research program /Lakatos
Kuhnian
Feyeraband

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Testin g a Th eory
Dogmatic
basis

Accept the statements made by people who has the authority

Selfevident

The justification of self-evidence as a way to determine truth is the

reasonableness, sensibility, or obviousness of a statement based on
our general knowledge, experience, or observation

SCIENTIFIC
Syntactic

Statements ascertained as valid or invalid by logic or reasoning alone

Induction

Statements whose truth or falseness can be known only by reference

to empirical evidence or its correspondence with observations of realworld phenomena

Falsificatio
n (Popper)

the trial and error testing of speculative hypothesis

can never be proven absolutely true, but can be rejected when
shown to be false

Research
Programs
(Lakatos)

hard core of the research program which stipulate the basic

assumptions of science
forms a protective belt of hypothesis

Kuhnian
paradigms

Revolutionary i.e. involves the abandonment of one theory and

replace by another incompatible theory.

Feyeraben
ds
approach

There is no single scientific way of getting ideas.

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6.0 A ccou n tin g Th eory C on stru ction

A useful way to study & assess accounting theories is to

classify them according to the assumptions they rely
on, how they are formulated and their approach to
explaining & predicting actual events.
Accounting theory classification:

Pragmati
c
Normativ
e

Syntactic

Semantic

Positive

Naturalis
tic
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A ccou n tin g Th eory

THEORIES
EXPLANATION
C on
struTheories
ction
Pragmatic
Descriptive
pragmatic
approach

Observe behavior of accountants

Psychological
Observe users responses to the accountants
pragmatic
outputs i.e. financial reports
THEORIES
EXPLANATION
approach
How to derive the true income for an accounting
Normative
Theories
period
(1950s and
Type of information useful for economic decisions.
1960s)
Positive
Theories
(1970s)

Testing theories back to the experiences or facts

of the real world (to find the reasons)

i.e. questionnaires/survey

Alternative
Naturalistic
approaches

Tries to explain complex & unique situations using

an unstructured approach.

Use case studies & individual experiences

Try not to generalize.

Syntactic

rely on logical argument based on a set of

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premise.

A ccou n tin g Th eory C on stru ction

Syntactic and Semantic Theories

A theory that has both syntactic and semantic element

E.g. historical cost:

Proponents:
Syntactic: Logic in the sense it is the value recorded
on the day transaction is made
Semantic: The cost recorded based on real vouchers

Opponents:
Syntactic: Poor as different monetary measures are
added
Semantic: Do not consider inflation and no
independent empirically observable correspondent to
concepts such as profit or assets.

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A ccou n tin g Th eory C on stru ction

Issues for auditing theory construction

Development of a
theory of auditing

Development of a
theory of
accounting

(lag in 1960s)
Early writers
attempted to
document the
process of auditing
and the duties of
expected of
auditors.

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S u m m ary: Top ic 2
Accounting theory
Definition:
Logical reasoning in the form of a
set of broad principles to provide
a general framework of reference
by which accounting practice can
be evaluated & guide the
development of new practices
and procedures.
Objective:
Explain current accounting
practice evolved, suggest
improvements & provide the
basis for development of such
practice.

Development of
Accounting Theory
1.Pre-theory period (1400-1800)
2.General Scientific Period (1800
1955)
3.Normative Period (1956 1970)
4.Specific scientific
theory/Positive Era (1970
present)

Formulate:
Deductive:
general to
specific
Inductive:
specific to
general

Parts of
Theory:

1.Syntactic
.
2.Semantic
3.Pragmati
c

Theory Construction:

1.Pragmatic behavior of
accountants & users of
accounting information
2.Syntactic rely on logical
argument based on a set of
premise.
3.Semantic how theories
correspond to real-world events.
4.Normative rely both on
semantic & syntactic approach.
5.Positive test hypothesis against
actual events.
6.Naturalistic consider individual
cases & try not to generalize.

Testing:

1.Dogmatic .
2.Self-evident
3.Scientific:
. Syntactic
. Induction
.
Falsification/Popper
. Research
program /Lakatos
. Kuhnian
.Feyeraband

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TU TO R IA L 2 (40 M A R K S )
Q1 Useful theories must eventually relate to the real world. Using
examples, please discuss THREE distinct relationships of
theories which are: syntactic, semantic and pragmatic.
[6 marks]
Q2. Accounting theorist attempted to established norms for best
practice during the normative period. While, specific scientific
theory is to explain and predict accounting practice.
i. Explain two groups dominated during the normative period.
[4 marks]
ii. Explain the reasons why the specific scientific theory arises.
[6 marks]
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TU TO R IA L 2
Q3 Explain TWO (2) limitations of self evidence. Discuss with example.
[4 marks]
Q4 In your opinion, can accounting theory be constructed as a purely
syntactical exercise without involvement by other approaches?
Provide your reasoning.
[4 marks]
Q5 Is it important to account for the effects of inflation on deriving the
true income in normative theory? Provide your reasoning.
[4 marks]
Q6 What role(s) can theory play in relation to accounting? Give an
example.
[4 marks]
Q7 Explain FOUR (4) main differences between normative and positive
theories.
[8 marks]

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