16-06-2014, 10:21 AM
ACC 518- Current Developments in Accounting Thought
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ACCOUNTING THEORY:
A single generally accepted accounting theory does not exist at this time. Accounting theory in its simplest form is an explanation of a certain phenomena, a set of observations. The theory can be understood as a generalisation used to organise data into meaningful information. It also needs a 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 procedure
According to H.Chakravorty “Accountancy is the science of recording, classifying and summarizing transactions so that relation with outsiders is exactly determined and result of operation during a particular period can be calculated, and the financial position as the end of the period may be shown”
According to Hendriksen and Van Breda(1992) define accounting theory that “a coherent set of hypothetical, conceptual , and pragmatic principles forming a general frame of reference for inquiring into the nature of accounting”
In other words we can say that Accounting theory is to develop a conceptual framwork for what accountants do or expected to be doing. This can also be applied into practical areas of interest. An accounting theory makes it easier to understand accounting in a professional way. Main purpose of accounting theory is to find the accounting measurement which is related to decision models and decision making, it also helps the accountants to relate the various principles of measurement and valuation in order to analysis during decision making process.
According to some researchers there are different approaches used to develop accounting theories. Currently there is no universally accepted global accounting theory.
Based on this statement, I have generated the main ideas of Accounting researchers:
• The predictive power of accounting measurement
• The behavioral implications of accounting measurements
Therefore, accounting theory helps in set up the principles according to the relative framework, generates new ideas, help in decision making on the financial statements of the company.
Frame work → Relate → Principles →Financial statements
Relationship between Accounting Theory and Accounting Practice:
Accounting theory examines practical and theoretical issues in accounting practices such as historical costs, decision making, generating ideas, portfolio risk, fair-value-oriented standards and executive management compensation and earnings. In addition, it also discusses economic and political issues and criteria related to accounting practices required by accounting governing bodies such as Canadian Institute of Chartered Accountant (CICA), Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB).
In accounting, for every action or transaction there is a logic or theory, and in practice we have to use those theories. According to Prof .Hendriksen, “Accounting Theory may be defined as logical reasoning in the form of a set of broad principles that provide a general frame of reference by which accounting practice can be evaluated and guide the development of new practices and procedures.”
Because accounting is a human activity we cannot have ‘accounting’ without accountants, theories of financial accounting will consider such things as people’s behaviour or people’s needs as regards financial accounting information, or the reasons why people within organisations might elect to supply particular information to particular stakeholder groups. For example, we consider, among others, theories which prescribe how, based upon a particular perspective of the role of accounting, assets should be valued for external reporting purposes and this leads to Accounting practices.
Accounting Practice is revealed from the observation and experience of past behaviour. For example, it could be observed that accountants tended to be very prudent in measuring both revenues and expenses. Where judgement is necessary to observe that accountants usually underestimate revenues and overstate expenses. The result is a conservative measure of profit. Similarly, it could be observed that accountants behave as if the value of money, which is the unit of account, remains constant. These observations of accounting practice led to the formulation of a number of hypotheses such as ‘that where judgement is needed, a conservative procedure is adopted’ and ‘that it is assumed that the value of money remains constant’. These hypotheses were confirmed by many observations of the behaviour of accountants who followed the Accounting theories.
Positve Accounting Theory Cognitive:
A positive theory begins with some assumptions and, through logical deduction, enables some predictions to be made about the way things will be. If the prediction is sufficiently accurate when tested against observations of reality, then the story is regarded as having provided an explanation of why things are as they are. For example, in climatology, a positive theory of rainfall may yield a prediction that, if certain conditions are met, then heavy rainfall will be observed. In economics, a positive theory of prices may yield a prediction that, if certain conditions are met, then rapidly rising prices will be observed. Similarly, a positive theory of accounting may yield a prediction that, if certain conditions are met, then particular accounting practices will be observed.
Positive theories of accounting do not seek to tell us that what is being done in practice is the most efficient or equitable process. For example, while we have a (positive) theory of accounting, developed to predict which accounting methods most accountants will use in particular circumstances (Positive Accounting Theory), this theory will not tell us anything about the efficiency of what is being done.
As Watts and Zimmerman (1986, p. 7) state:
It [Positive Accounting Theory] is concerned with explaining [accounting] practice. It is designed to explain and predict which firms will and which firms will not use a particular [accounting method] . . . but it says nothing as to which method a firm should use.
As noted above, normative theories of accounting are not necessarily based on observation and therefore cannot (or should not) be evaluated on whether they reflect actual accounting practice. In fact they may suggest radical changes to current practice
We can achieve positive accounting theory by changing accounting policies, Managing discretionary accruals. It can also achieved PAT by the timing of adoption of new accounting standards, Changing real variables--R&D, advertising, repairs & maintenance, SPEs (Enron), and try to capitalize operating expenses