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ACCOUNTING THEORY
AND
STANDARDS
Dr. BALAMURUGAN MUTHURAMAN
Chapter - 1
A THEORY: DEFINITION
A theory: ‘a set of interrelated constructs (concepts), definitions, and propositions that present a systematic view of the phenomenon by specifying relationships among variables with the purpose of explaining and predicting the phenomenon’
A theory includes propositions linking concepts in the form of hypotheses to be tested.
A THEORY: DEFINITION
Elements of a theory include: ◦ Concepts: the main units of a theory and it is
devised to refer to identifiable characteristics or phenomena.
: The better the concept, the better the theory.
: A formation of concept starts from the idea
or percept generating a concept designated by terms.
A THEORY: DEFINITION
Elements of a theory include: ◦ Propositions: Establish relation between the
concepts of a theory. : Designated by a sentence.
: Characterized by 1) The number and degree of
predicates; and 2) The degree of generality.
A THEORY: DEFINITION
Elements of a theory include: ◦ Hypotheses: a proposition about a relationship
whose truth or falsity is yet to be determined by an empirical test.
: Confirmation of a theory is the extent to which a hypothesis is capable of being shown to be empirically true, that is, of describing the real world accurately
: Falsification??
ACCOUNTING THEORY -
MEANING
“. . . a set of basic conceptsand assumptions and related
principles that explain and
guide the accountant’sactions in identifying,
measuring, and
communicating economic
information.”
WHY ACCOUNTING THEORY IS
IMPORTANT
Many individuals have to make decisions
about external accounting reports.
◦ Corporate managers
◦ Public accountants
◦ Officers of lending institutions
◦ Investors and financial analysts
◦ Individuals in accounting standard-setting
bodies
Accounting theory provides a logical framework
for accounting practice.
ASSUMPTIONS
PRINCIPLES
RULES
STRUCTURE OF ACCOUNTING
THEORY FORMAL APPROACH
FUNCTIONS OF A THEORY
Descriptive function: using the constructs
or concepts and their relationships so as to
provide the best explanation of a given phenomenon and the forces underlying it.
Delimiting function: selecting the favorite
set of events to be explained and assigning
a meaning to the formulated abstractions of the descriptive stage.
FUNCTIONS OF A THEORY
Generative Function: the ability to
generate testable hypotheses or to provide
hunches, notions, and ideas from which hypotheses could be developed.
Integrative Function: the ability to present
a coherent and consistent integration of the various concepts and relations of a theory.
ACCOUNTING THEORY: DEFINITION
Accounting theory: A set of broad principles that:
1) provides a general frame of reference by
which accounting practice can be evaluated; and
2) guides the development of new practices
and procedures.
ACCOUNTING THEORY: DEFINITION
Accounting theory should explain and predict accounting phenomena.
The primary objective of accounting
theory is to provide a basis for the
prediction and explanation of accounting behaviour and events.
ACCOUNTING THEORY: DEFINITION
Accounting theory should have Three
elements:
1) Encoding of phenomena to symbolic
representation;
2) Manipulation or combination according
to rules; and
3) Translation back to real-world
phenomena.
A ROLE OF ACCOUNTING THEORIES
GAAP Accounting Standards Accounting Policies
Accounting Techniques
Accounting Principles, Concepts and Postulates
A Conceptual Framework
Accounting Theories
GAAP
GAAP (Generally Accepted Accounting
Principles): a guide to the accounting
profession in the choice of accounting
techniques and the preparation of financial
statements in a way considered to be good accounting practice.
Conditions under which an accounting method will be deemed as generally accepted: ◦ The method will be in actual use; ◦ The method would have support in the
pronouncement of the professional accounting societies; ◦ The method would have support in the
writing of a number of respected accounting teachers and thinkers.
GAAP
ACCOUNTING STANDARDS
What are the differences between GAAP and accounting standards???
ACCOUNTING STANDARDS
Accounting standards consist of Three parts: ◦ A description of the problem to be
tackled.
◦ A reasoned discussion or ways of solving the problems.
◦ In line with discussion or theory, the prescribed solution.
ACCOUNTING STANDARDS
Reasons to establish standards are:
◦ To ensure quality of financial information
◦ To be guidelines and rules
◦ To be database for a government
◦ To generate interests in principles and theories.
ACCOUNTING STANDARDS
Who should set accounting standards?
◦ Theories of regulation: Public-interest theories
Interest-group or capture theories
The political ruling-elite theory of regulation
The economic theory of regulation
ACCOUNTING POLICIES
The specific accounting principles and the
methods of applying those principles that
are judged by the management of the entity
to be the most appropriate in the
circumstances to present fairly financial
position, changes in financial position, and
results of operations in accordance with generally accepted accounting principles.