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FORMULATION AND VERIFICATION OF ACCOUNTING THEORY - Coggle Diagram
FORMULATION AND
VERIFICATION OF ACCOUNTING THEORY
Characteristics
of ideal theory
should have a
descriptive
approach in
general
and a
normative
(prescriptive) approach in
particular
.
It must be widely
accepted
.
The ability to
evaluate
and explain
current events
correctly.
The ability to
analyze past events
and
forecast future events
the potentiality of
solving the problems
created by the
happening of an event.
Pragmatic theory
Refer to approaches that
focus on the practical application and real-world implications
of accounting concepts and their corresponding events or objects on people's behavior
These theories aim
to understand how accounting practices and information influence the actions
and decisions of various stakeholders
There are two main approaches within pragmatic theories:
Descriptive pragmatic approach: This approach is
based on the observed behavior of accountants
and is developed from
how accountants act in certain situations
. It is tested by observing
whether accountants act in the way the theory suggests
.
Psychological pragmatic approach: This approach
depends on observations of the reactions of users
to the accountants' outputs. It assumes that a
reaction is evidence
that the outputs are useful and contain relevant information.
Criticism:
However, it has been criticized for
not considering the quality
of an accountant's action and for not providing a means for accounting practices to be challenged. Additionally, it
focuses on accountants' behavior rather than measuring the attributes
of the firm
However, criticisms of this approach include the possibility that some
users may react in an illogical manner
, have a
preconditioned response
, or may
not react when they should.
Theories within this approach are tested using large samples of people
Behavioural approach
The behavioral approach in accounting theory is derived from disciplines such as psychology, sociology, and organizational theories. Its objective is
to discover why people behave as they do
and how they use and process accounting information
This approach encompasses
the judgment and decision-making of accountants
and auditors, as well as the
influence of the output
on users' judgments and decision-making.
The importance of behavioral accounting:
Its ability
to identify how people use and process accounting information
. Specifically, it examines the decision-making activities of the preparers, users, and auditors of accounting information.
Provides valuable insight
into the ways of how different decisions are produced, and processed
and how people react to particular items of accounting information and communication. By
improving the decision-making process
, users of financial information
can avoid making bad decisions
that lead to losses, and preparers and auditors of financial information can avoid being sued
In summary, the behavioral approach in accounting theory focuses on understanding how people use and process accounting information and how it influences their behavior and decision-making. It uses various research methods to study the behavior of individuals and groups and develops theories and models to explain and predict behavior in accounting contexts.
Normative theory
Normative theory in accounting refers to an approach that is based on
value judgments or personal opinions
about what is
right and good
It is concerned with prescribing
how accountants should behave to achieve an outcome that is judged to be right
and good.
aim to guide how accounting practices should be conducted.
Normative theories work by providing a set of principles or guidelines that accountants should follow
to ensure that their actions are ethical
and in line with the values of society.
Positive theory
Positive theory in the context of accounting refers to an approach that focuses on
describing, explaining, and predicting
actual accounting practices and behaviors based on empirical evidence and observations
Concepts:
Descriptive, Explanatory, and Predictive Nature:
Positive theories are descriptive, explanatory, or predictive. They seek
to describe how people behave
in the context of accounting, explain why people behave in certain ways, and predict how people will react or behave in the future based on empirical evidence and observations. These theories are concerned with understanding and interpreting the actual behaviors and practices of individuals and organizations within the accounting domain.
Testing and Empirical Evidence:
Positive theories rely on testing accounting hypotheses and theories using observation and experience evidence derived from real-world observations and experiences. This empirical approach involves gathering data, conducting analyses, and testing hypotheses to validate or refute the proposed theories. By grounding their findings in empirical evidence, positive theories aim to provide a more objective and evidence-based understanding of accounting phenomena.
Economic and Behavioral Assumptions:
Positive theories often assume that accounting information is an economic and political commodity and that individuals and organizations act in their self-interest. These assumptions form the basis for understanding how economic incentives and behavioral motivations influence accounting practices and decision-making processes.
Formulation of accounting theory
Deductive
The deductive approach in accounting theory is a method of developing theories that begins with a set of
general principles
or postulates and then derives
specific conclusions or predictions
from them
Steps:
Specifying Objectives:
The first step in the deductive approach is to
specify the objectives of financial statements
. This involves identifying the purpose of financial reporting and the information needs of various stakeholders.
Selecting Postulates:
The next step is
to select the postulates of accounting
, which are the underlying assumptions or principles that guide accounting practices. These postulates are often
based on normative theories and ethical principles.
Deriving Principles:
Once the postulates have been selected, the next step is
to derive the principles of accounting.
These principles are
specific guidelines or rules
that are derived from the postulates and are used to guide accounting practices.
Developing Techniques:
The final step in the deductive approach is
to develop the techniques of accounting.
These techniques are specific methods or procedures that are used to implement the principles of accounting and achieve the objectives of financial reporting.
Inductive
The inductive approach in accounting theory is a method of developing theories that
begins with observations and specific
instances and then
seeks to derive general principles
or conclusions from them
This approach is based on the idea that by observing recurring relationships and patterns in specific instances, general principles or theories can be derived.
Steps:
Recording Observations:
The first step in the inductive approach is
to record all relevant observations, phenomena, events, or patterns
in accounting practices and financial reporting.
Analyzing and Classifying Observations:
Once the observations have been recorded, they are
analyzed and classified to identify recurring relationships or patterns
. This involves identifying common themes or trends in the observed data.
Inductive Derivation of Generalizations:
Based on the recurring relationships and patterns identified through analysis, generalizations, and principles of accounting are derived. These generalizations represent the broader principles or theories that can be inferred from the observed data.
Testing the Generalizations:
The final step in the inductive approach is t
o test the generalizations derived from the observed data
. This involves validating the general principles or theories by examining additional instances and assessing their applicability and validity.
other approach
sociological approach
Emphasizes the social effects of accounting techniques.
economic approach
Emphasizes controlling the behavior of
macroeconomic indicators that result from the adoption of various accounting techniques.
ethical approach
The basis core consists of the concepts of
fairness, justice, equity and truth
eclectic approach
In general, the formulation of accounting
theory and the development of accounting principles have followed an eclectic approach ( a combination of approaches), rather than just one school of thought.