an idea or set of ideas that is intended to explain
something (such as Darwin’s theory of evolution)
the set of principles on which a subject is based or
of ideas that are suggested to explain a fact or event (such as economic theory or the theory of relativity)
more generally, a conjecture or an opinion.
Accounting theory :
‘A description, explanation or a prediction [of
accounting practice] based on observations and/or logical reasoning’
‘Logical reasoning in the form of a set of broad
principles that
(1) provide a general framework of reference by
which accounting practice can be evaluated and
(2) guide the development of new practice and
procedures’. Why is theory helpful? Theories describe and explain what is happening. make predictions about what will happen. theories will also make suggestions or guide action (i.e. say what should happen). Different Accounting Theories
Describe Predict
Guide Improve Different Accounting Theories 1. Describing and explaining current accounting practices. For example: − Capital market theory
2. Predicting accounting practice. For
example: − Agency or contracting theory (Ch.5) Different Accounting Theories 3. Providing principles to take into account( or to be guided with) when taking action or making decisions. For example: − Theories of capital budgeting − A theory of asset recognition
4. Helping to identify problems and
deficiencies with current accounting practice and improve accounting practice. For example: − The conceptual framework. TYPES OF THEORIES
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Positive theories
Positive theories are used to represent
theories that are about the world as it is. Positive theories • describe what is actually happening • explain what is happening • make predictions about what will happen. Positive theories
Examples of positive theories are:
• theories of how contagious diseases are
spread
•theories that explain why managers prefer
or choose particular accounting methods or policies over others. Positive theories Positive theories are often referred to as ‘empirical’ theories.
‘Empirical’ means ‘derived from or guided
by experience or experiment’ Positive theory Most positive theories are developed from observation and by the process of induction and deduction. Normative theories Normative theories do not describe, explain or predict what is happening, but rather make suggestions or recommendations as to what should happen or what ‘ought to be’. they prescribe. The prescriptions or recommendations of these theories aim to achieve some goal or objective. Normative theories example 1 There are theories about what should be done to reduce greenhouse gas emissions with the aim of reducing the rate of global warming and the environmental damage it results in. Example 2 There are theories in accounting that propose that fair values should be used to measure assets in the financial statements with the aim to ensure that more relevant information is provided to users of financial statements. Evaluating and testing theories There are a number of reasons theories might be accepted without ‘first hand’ or direct knowledge. These include: − the authority of the source of the theory whether the theory makes sense and fits with personal experiences and beliefs whether other people accept the theory. Evaluating and testing theories A researcher or professional in a particular discipline would be expected to apply more legitimate, independent and justifiable methods in assessing and evaluating theories. These include: