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INTRODUCTION TO ACCOUNTING
THEORYMutiara Inas Sari 041013039
Nadia Citranti 041013080
Julita Rachmadewi 041013256
ACCOUNTING THEORY
CONSTRUCTION
Pragmatic theories
Descriptive pragmatic approach:○ based on observed behaviour of
accountants○ theory developed from how
accountants act in certain situations○ tested by observing whether
accountants do act in the way the theory suggests
○ is an inductive approach
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Pragmatic theories
Criticisms of descriptive pragmatic approach:does not consider the quality of an
accountant’s actiondoes not provide for accounting practices to
be challengedfocuses on accountants’ behaviour not on
measuring the attributes of the firm
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Pragmatic theories
Psychological pragmatic approach:○ theory depends on observations of the
reactions of users to the accountants’ outputs
○ a reaction is taken as evidence that the outputs are useful and contain relevant information
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Pragmatic theories
Criticisms of the psychological pragmatic approach:some users may react in an illogical mannersome users might have a preconditioned
responsesome users may not react when they should
Theories are therefore tested using large samples of people
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Syntactic and semantic theories
Semantic inputs are the transactions and exchanges recorded in vouchers, journals and ledgers
• The inputs are then manipulated on the basis of the premises and assumptions of historical cost accounting
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Syntactic and semantic theories
Criticised because there is no independent empirical verification of the calculated outputs
The outputs may be criticised for poor syntax inaccurate e.g. different types of monetary measures are added together
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Syntactic and semantic theories
The outputs may be syntactically accurate but nevertheless be valueless due to a lack of semantic accuracy (a lack of correspondence with real-world events, transactions or values)
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Syntactic and semantic theories
Historic cost accounting may produce ‘accurate’ outputs but which nevertheless have little or no utility
That is, they are not useful for economic decision making except to verify accounting entries
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Normative theories 1950s and 1960s ‘golden age’
policy recommendations what should be concentrated on deriving:
○ true income (profit)○ practices that enhance decision-
usefulness based on analytic and empirical propositions
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Financial statements should mean what they say
Financial statements should mean what they say
Normative theories
True income:a single measure for assetsa unique and correct profit figure
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Normative theories
Decision usefulness:the basic objective of accounting is to aid
the decision-making process of certain ‘users’ of accounting reports by providing useful accounting data
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Normative theories
The decision process
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Accounting system of
company X
Accounting system of
company X
Prediction model of
user
Prediction model of
user
Decision model of
user
Decision model of
user
Positive theories
• Expanded during the 1970s• Based on ‘experiences’ or ‘facts’ of the
real world• Explain the reasons for current practice• Predict the role of accounting
information in decision-making
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Positive theories
The main difference between normative and positive theories is thatnormative theories are prescriptivepositive theories are descriptive, explanatory
or predictive
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DIFFERENT PERSPECTIVE OF
ACCOUNTING
AICPA Terminology
Accounting : art of recording, classifying, transaction reviewing, and financial events which are in effective and efficient manner and in the form of monetary unit and interpret the result of the process.
Accounting as Ideology
Accounting : viewed as ideology phenomenon to support and to legitimate social structure, economy, and political nowadays. Karl Marx said that accounting shaped social relationships becoming productive effort.
Accounting as Language
Accounting : already viewed as business language. It can be a way to communicate information about business. Grammar language refers to set of general procedures used and followed in making all of the financial data for business needs.
Accounting as Record of Past Events
Generally accounting is viewed as a presentation way of company history and transaction done with other parties.
Accounting as Current Economic Reality
Main argument supporting this perspective is that whether statement financial position or income statement has to be reported based on estimation that depict current economic reality rather than historical cost.
Accounting as Information System
This assumes accounting as a process correlating information source or transmitter, communication channel, and receivers (external users) . And also it could be defined as process of encoding some of observation into information system language, manipulating reporting system signal, decoding, and transmitting the results.
Accounting as Commodity
Commodity here is defined as accounting output in the form of information needed on the process of decision-making
Accounting as Responsibility
This elaborates that source of wealth which is managed can be traced in order to be media to take the responsibility of company or institute management.
Accounting as Technology
Bambang Sudibyo (1987) said that accounting is software technology. It does not use for explaining and predicting certain economic / social variables but for control those variables to fix economic status because of the practitioner’s social status.
ACCOUNTING THEORY
What is a theory? Hendriksen’s definition:
…the coherent set of hypothetical, conceptual and pragmatic principles forming the general framework of reference for a field of inquiry.
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What is an accounting theory? Hendriksen’s definition:
…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 and
○ guide the development of new practices and procedures.
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Whether a theory is accepted depends on how:well it explains and predicts realitywell it is constructed both theoretically and
empiricallyacceptable its implications are
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