Accounting Theory and Practice

Accounting Theory and Practice

This led to the formulation of certain conventions and doctrines of accounting which were considered to be theories. As we discussed however, developing theory on the basis of observation typically does not allow us to address the issue of what would be the most appropriate behavior in particular circumstances (and determining ‘appropriate behavior’ will in turn be influenced by particular assumptions or value judgments made by the researcher). That is, it does not encourage us to evaluate what the accountants are doing. By contrast, developing theory on the basis of deduction does not rely upon observation.

Rather, it relies upon the use of logic to develop arguments and related theory. Some theories developed through deduction-?such as positive accounting theories which are developed and then used to predict particular behavior-?can be tested (but not initially developed) through subsequent observation. Other theories developed through deduction-?such as Chambers’ theory of accounting (Continuously Contemporary not be evaluated through subsequent observation as he was prescribing a particular approach to accounting that was in stark contrast to what accountants were doing at the time. QUESTION 2 Question 1. : Is the study of financial accounting theory a waste of time for accounting students? Explain your answer. Some interesting answers should be given here. The perspective adopted by the author Of your textbook, and many other accounting academics, is that the outputs of the accounting system are used in many decisions throughout society and hence it is important to consider how particular accounting methods, or changes thereto, will impact various groups. If we only considered how to calculate accounting numbers, without considering their impacts, then we would be only getting a fraction of the total ‘story.

People involved in accounting logically need to have some perspective about how people will react to different accounting numbers or forms of disclosure; accounting theories can provide us with such insight. Apart from considering how accounting numbers might impact different groups, people involved in accounting should arguably understand the different factors which might have influenced accounting standard-setters when they developed particular requirements. They should also be aware of research that suggests improvements to current practices (with such information perhaps being derived from different normative theories of accounting).

As you will see throughout the textbook, there are various perspectives about why organizations might adopt particular accounting methods. If we are ultimately involved in reading financial statements, then understanding the possible motivations of those in charge of preparing the financial statements will be useful. For example, some theories suggest that managers will want to use those accounting methods that provide the greatest benefits to homeless personally (from Positive Accounting Theory).

Other theoretical perspectives suggest that a reporting entity will be motivated to provide information primarily to powerful stakeholders (from Stakeholder Theory), or that the managers of reporting entities provide information to legitimate the entity’s ongoing existence (from Legitimacy Theory). Chapter 12 of the book provides a perspective (a critical perspective) that suggests that financial accounting is a mechanism to further the interests of those people who currently have wealth, and to undermine the interests of those without wealth.

As this brief discussion shows, there are numerous views about the implications of accounting, and the factors which cause managers to select one accounting method in preference to another. Such insights might be useful when interpreting particular accounting disclosures. If we do not read about accounting theory then these insights might not be available to us. QUESTION 3 – Question 1. 26: Would you reject as ‘insignificant and useless’ a positive theory of accounting on the basis that in a particular research study the results derived failed to support the hypotheses and the related theory? Explain your answer.

We would probably not reject a theory as ‘insignificant and useless’ on the basis that a particular study failed to provide support for the theory. Since theories, by necessity, are ‘abstractions of reality’ they cannot be expected to generate predictions that will always hold. Theories about human behavior (such as the behavior of accountants) rely upon a number of assumptions about human behavior. These assumptions will not necessarily always reflect actual behavior. Hence, we would generally not be inclined to abandon a theory because a particular research project generated results hat did not support the theory.

Also, it is possible that the results failed to support the theory because there were problems with how the underlying data was gathered and analyses, or how the theoretical variables were defined. Obviously, if a theory continued to be unsupported by many studies then we might ultimately question its relevance. QUESTION 4 – Question 1. 27 (NEW): The International Accounting Standards Board has a number Of roles, including formulating accounting standards and developing a conceptual framework. Is the work they do in developing an accounting standard or the inception framework normative or positive in nature?

The SAAB Conceptual Framework for Financial Reporting and accounting standards are normative documents in the sense that they tell us how we should do general purpose financial reporting. The Conceptual Framework is considered to represent a normative theory of accounting which is based on various key assumptions about such things as the objective of general purpose financial reporting the users of general purpose financial reports, the knowledge Of accounting expected to be possessed by users Of general repose financial reports, the required qualitative requirements that financial accounting information should possess, and so forth.

Whilst these documents are normative in nature, they are backed by a deal of research that is positive in nature. For example, bodies such as the SAAB review and even fund research that looks at how various stakeholders react to accounting information. They also consider research that investigates what motivates organizations to provide particular information, or adopt particular accounting methods, in preference to others. Such research is positive in nature.

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