Introduction to Financial Accounting Theory - Coggle Diagram
Introduction to Financial Accounting Theory
Can we prove theory?
Depends upon how one views the development of scientific thought. When it comes to accounting theories. We need to appreciate again that financial accounting is a human activity and that common sense would dictate that not all people will react in a similar way to accounting numbers.
We might consider that if a theory provides sound predictions the majority of the time then the theory is still of use, albeit that its predictions are not perfect. That is, we would evaluate it on the basis of the correspondence between the prediction of behaviours provided by the theory and the subsequent behaviour, .
Evaluating theories- Considerations of logic and evidence
Evaluating logical deduction
An argument is logical to the extent that if the premise on which it is based are true, then the conclusion will be true. That is, the argument will only provide a true account of the real world if the premise on which it is based are true. It should be remembered that not all theories or arguments seek to correspond with real-world phenomena.
For many normative theories we might considered only the logic of the argument and whether we are prepared to accept the premises on which the argument is based.
Evaluating underlaying assumptions
The objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to present and potential equity investors, lenders and other creditors in making decisions in their capacity as capital providers
Universal applicability of theories
We cannot really expect particular theories about human behaviour to apply all the time. People are different and to expect theories or models of human behaviour to have perfect predictive ability would be naive. If a number of theories are available to describe a particular phenomenon, then considering more than one theory may provide a more rounded perspective.
For those theories that attempt to predict and explain accounting practise it is common practise to test he theories empirically in various settings and across various types of decisions
Generalizing theories from the testing of samples
These researcher believe that it is possible to develop generalizable accounting theories and therefore that the results they derive from particular samples of observations can be generalized to the broader population of the phenomenan questions.
If normative theories, it is appropriate not test them empirically. If researcher are arguing that accountants should provide particular types of accounting information or if other researcher are providing a view that organizations have a social responsibility to consider the needs of all stakeholders.
Overview Theories of Accounting
Predictive Accounting Theories
At this time major accounting had a major aim of explaining and predicting accounting practise, rather than prescribing particular approaches. This was another movement by many accounting researchers away from descriptive research. Nevertheless, there are many researchers who still undertake descriptive research.
Positive theories can be developed through some form of deductive (logical) reasoning . Their success is explaining or predicting particular phenomena will then typically be assessed based on observations.
Inductive Accounting Theories
Early development of accounting theory relied on the process of induction, that is the development of ideas or theories through observation.
There were developed by the process referred to as 'induction'. This can be constructed with a process wherein a theories are developed by deductive reasoning, which is based more upon the use of logic rather than observation.
Prescriptive (Normative) Accounting Theories
It is a continuously contemporary accounting, which describes how financial accounting should be undertaken. That is theory which prescriptive . Central of this theory view that most useful information about their' current cash equivalent'.
Theories that prescribe particular actions are called normative accounting theories as they based on norms held by the researchers proposing the theories. The dichotomy of positive and normative theories is one often used to categorize accounting theories and this dichotomy is adopted throughout this book.
Evaluating Accounting Theories
Positive Accounting Theory
it is a dead philosophical movement, has provided no accounting information, married by oversights, inconsistencies and paradoxes, imperiously dictatorial, it is akin to cottage industries, empthy and commonplace, suffers from logical incoherence, wasted effort
In common with all forms of empirical investigation we must recognise that all perception in theory-laden. That is our preconceptions about the world significantly colour what we observe and which aspects of particular events we focus upon. Thus accountants are more likely to view the world through accounting frameworks and convensions
Why it is important to study Accounting Theories?
To expose to various issues
what motivates individuals to support and perhaps lobby regulators for some accounting methods in preference to others
what implications for particular types of organizations and their stakeholders are if one method of accounting is chosen
what motivates manager to select particular accounting methods in preference to others
how and why the capital markets react to particular accounting information
what motivates managers to provide certain types of accounting information
whether there is a 'true measure' of income
how the various elements of accounting should be measured
What is Theory?
Oxforf English Dictionary
A scheme or system of ideas or statements held as an explanation or account of a group of facts or phenomena, a hypothesis that has been confirmed or established by observation or experiment, and is propounded or accepted as accounting for known facts.
A coherent set of hypothetical, conceptual and pragmatic principles forming the general framework of reference for a field of inquiry.
US FINANCIAL ACCOUNTING STANDARDS BOARD
A coherent system of interrelated objectives and fundamentals that can lead to consistent standard.