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CHAPTER 2: FORMULATION AND VERIFICATION OF ACCOUNTING THEORY - Coggle…
CHAPTER 2: FORMULATION AND VERIFICATION OF ACCOUNTING THEORY
WHAT IS THEORY?
A coherent set of hypothetical,
conceptual and pragmatic principles forming the general framework of reference for field of inquiry
(Hendriksen)
Accounting theory is
logical reasoning in forming general framework
by reference for the field required
DEVELOPEMENT OF ACCOUNITNG THEORY
a) Behavioural | 1400 - 1800
Rely on study of behaviour accounting as they influenced by accounting function and reports
Importance of Behavioral
Identifies how people use and process accounting information.
Provides valuable insight into the ways of how different decisions are produced, processed and how people react to particular items of accounting information and improve communication method for better understanding
Lead to training and increase in knowledge for accountants to improve their skills in information gathering, processing and communication.
b) Pragmatic | 1800 - 1955
General scientific period
observe what actually happened
Rely on real world observation not simply on logic
c) Normative | 1956 - 1970
prescribe what should happen
Limitation of theory
Do not involve hyphotesis testing
Based on judgement value
d) Positive | 1970 - Present
Specific scientific period
Explain and predict accounting practice
4. FORMULATION OF ACCOUNTING THEORY
DEDUCTIVE APPROACH
General to Specific statement
Based on normative theory
Steps used to derive the deductive approach
1.Specifying the objectives of financial statements.
2.Selecting the postulates of accounting (assumption)
3.Deriving the principles of accounting.
4.Developing the techniques of accounting
Deductive Approach
A top-down approach
Based on facts and truths
INDUCTIVE APPROACH
Specific to General statement
Based on positive theory
A bottom-up approach
Steps used to derive the inductive approach:
Recording all observations observation
Analyzing and classifying and explain these observations to detect recurring relationships.
Inductive derivation of generalizations and principles of accounting from observations that depict recurring relationships and making conclusion
Testing the generalizations.
Inductive Approach
Based on pattern and connections
COMPARING DEDUCTIVE AND INDUCTIVE
Comparing Inductive and Deductive Reasoning Youtube
1. DEFINITION
INDUCTIVE
: the truth of the propositions depends on the observation of sufficient instances of recurring relationships.
DEDUCTIVE
: the truth or falsity of the propositions does not depend on other propositions, but must be empirically verified.
2. ACCOUNTING PROPOTION
DEDUCTIVE
: inference lead, on the other hand, to specific accounting techniques with certainty.
INDUCTIVE
: inference imply special accounting techniques only with high probability.
3. PREMISE AND CONCLUSION
DEDUCTIVE
: From general to specific conclusion
INDUCTIVE
: From specific to general conclusion
4. VALIDITY AND CONCLUSION
DEDUCTIVE
: Conclusion can be proven valid if the premise is true
INDUCTIVE
: Conclusion may be incorrect even the argument is strong and premise is true
ETHICAL APPROACH
Concepts of fairness, justice, equity and truth
Fairness implies that accounting statements have not been subject to undue influence or bias.
The committee on auditing procedures refers to fairness of presentation as conformity with GAAP, disclosure, consistency and comparability.
ECONOMIC APPROACH
Emphasizes controlling the behavior of macroeconomic indicators that result from the adoption of various accounting techniques.
Different accounting techniques depends on their impact on the national economic good.
premises of economic approach
resources limited
consumers act rationally
Accounting policies and techniques should reflect ‘economic reality’ and the choice of accounting techniques should depend on ‘economic consequences’
ECLECTRIC APPROACH
Method of language teaching that combine various approaches and methodologies to teaching depends on the aims of lessons
This approach is mainly the results of various attempt by professionals and government to participate in establishment of concepts and principles in accounting.
SOCIOLOGICAL APPROACH
Emphasizes the social effects of accounting techniques
technique is evaluated for acceptance on the basis of its reporting effects on all groups in society
Implies that accounting data will be useful in making social welfare judgments.
3. ACCOUNTING THEORY CONSTRUCTION
PRAGMATIC
Descripetive Pragmatic approach :
Observe behavior accountants
Phycological pragmatic approach :
Observe users responses to the accounts output such as financial reports
NORMATIVE
| 1950s - 1960s
How to derive
true income
for accounting period
single measure of asset
unique and correct profit figure
useful type of information for economic decisions
Market-based theories which use methods other than historical cost method
Assume profit maximisation is the primary goal of management
Regard the provision of information for decision making as the main function of financial statements
Constructed on the basis of deductive reasoning
POSITIVE
| 1970s
Testing theories to find the reasons experience facts of the real world
Explain the reasons for current practice
Predicting the role of accounting information in decision-making
1. FINANCIAL REPORTING ENVIRONMENT
Regulators bodies and Enforcement Authorities
Its to
reducing information disparity
protecting public interest
Its concern Standards setting
Monitoring and Enforcement
Corporations or Preparations of Financial Statements
To communicating Financial and operating performance to public and investors
Maintenance
Legal risks
Confidentiality
Users and Capital Markets
purposes to help in Decision Making
Relevance and Reliability