LECTURE 1

AN INTRODUCTION TO
ACCOUNTING THEORY

ARTHIK DAVIANTI, SE. MSI. AK. CA.

AN OVERVIEW
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OVERVIEW OF 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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OVERVIEW OF ACCOUNTING
THEORY
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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OVERVIEW OF
ACCOUNTING THEORY
Whether a theory is accepted depends on
how:

 well it explains and predicts reality

 well it is constructed both
theoretically and empirically
 acceptable its implications

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OVERVIEW OF
ACCOUNTING THEORY

Accounting theory is a modern concept

compared to mathematics or physics

Even Pacioli’s treatise on double-entry

accounting focused on documenting practice
and did not explain the underlying
theoretical basis for it

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OVERVIEW OF
ACCOUNTING THEORY
The development of accounting
theory has been mostly unstructured

Chambers:
Accounting has frequently been described
as a body of practices which have been
developed in response to practical needs
rather than by deliberate and systematic
thinking.
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OVERVIEW OF
ACCOUNTING THEORY
Was developed to resolve problems as
they arose – reactive
Ad hoc approach
Led to inconsistencies in practice
e.g. different depreciation methods
Accounting standard setting
Conceptual framework projects have
not resolved inconsistency in practice
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 HISTORIC FRAME OF
ACCOUNTING THEORY
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PRE-THEORY (1400S – 1800)
Goldberg:

No theory of accounting was devised from

the time of Pacioli down to the opening of
the nineteenth century.

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PRAGMATIC ACCOUNTING
(1800– 1955)
The ‘general scientific period’

 based on empirical observation of

practice
 provided an explanation of accounting
practice
 focused on the existing ‘viewpoint’ of
accounting

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NORMATIVE ACCOUNTING
(1956-1970)
Sought to establish ‘norms’ for the best
accounting practice
Focused on
what should be (the ideal) vs what is
Degenerated into battles between
competing viewpoints
Two groups dominated:
 conceptual framework proponents
 critics of historical cost 12
NORMATIVE ACCOUNTING
(1956-1970)
Factors prompting the demise of the
normative period include:

 the unlikelihood of one particular

normative theory being generally accepted
 the application of financial economic
principles
 the availability of empirical data and new
testing methods

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NORMATIVE ACCOUNTING
(1956-1970)
The major criticisms of normative
theories were:

 they do not necessarily involve

empirical hypothesis testing
 they are based on value judgements

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POSITIVE ACCOUNTING
(1950 TO THE PRESENT DAY)
A shift to a new form of empiricism called
‘positive theory’
Had its origins in the ‘general scientific
period’
It seeks to explain the accounting practices
being observed
Its objective is to explain and predict
accounting practice
e.g. the bonus plan hypothesis
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POSITIVE ACCOUNTING
(1950 TO THE PRESENT DAY)
It helps predict the reactions of ‘players’,
such as shareholders, to the actions of
managers and to reported accounting
information
Major deficiencies are:
 ‘wealth maximisation’ has become the
answer to explain all accounting practices
and reported information
 it relies excessively on agency theory and
dubious assumptions about the efficiency
of markets 16
POSITIVE ACCOUNTING
(1950 TO THE PRESENT DAY)
Behavioural research:
 concerned with the sociological
implications of accounting numbers
and the associated actions of ‘key
players’
 emerged in the 1950s
 despite growing acceptance since the
1980s, positive accounting theory still
dominates

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RECENT DEVELOPMENTS
Academic and professional developments
in accounting theory have tended to take
different approaches
Academic research focuses on capital
markets, agency theory and behavioural
aspects
The profession has sought a more
normative approach – what accounting
practices should be adopted

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RECENT DEVELOPMENTS

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 RECENT DEVELOPMENTS
Conceptual framework – resurrected in 1980s
 states the nature and purpose of financial
reporting
 Establishes criteria for deciding between
alternative accounting practices
 SACs 1–4
Joint project between IASB & FASB
International harmonisation of accounting
practices through a single consistent set of
international financial reporting standards
(IFRS)
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 RECENT DEVELOPMENTS
The conceptual framework underpinning the
IFRS favours a move toward

 accounting practices that provide

information for enhancing decision
making by investors and others
 recognising all gains and losses in the
accounting periods in which they occur
 measurement using exit values

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