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Topic 1 Accounting Theory 1 2002
Topic 1 Accounting Theory 1 2002
Learning Objectives
Appreciate what is meant by
accounting theory and the purpose it has served over time Explain the importance of understanding accounting theories
Key Terms
Theory
Accounting theory Nature and role of accounting
Conceptual framework
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Definition of Theory
What is a theory? the coherent set of hypothetical, conceptual and pragmatic principles forming the general framework of reference for a field of inquiry (Hendriksen) theories are composed of words or other symbolsthey are statements and do not have a physical form
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Accounting Theory
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 (Hendriksen).
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communicating economic information to permit informed judgements and decisions by users of information (AAA, A statement of Basic Accounting Theory)
Receiver: Decision-Maker e
the firm; b). Measures them in a way which is conducive to the preparation of a message in the form of a financial report; c). After the transactions and events have been measured, the accountant prepares a message in the form of a financial report; d). The receiver interprets the message; e). Obtains an image of the firm; f). Which is then used as the basis for decisions.
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BEHAVIOUR Accounting practitioners - concerned with procedures largely determined by convention or authority Accounting researchers - systematic study of accounting. Development of theories.
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Function of Theories
Theories which explain (e.g. accountants do
not do X because of Y) Theories which predict (e.g. cosmetic accounting policy changes will have no impact on share price) Theories which recommend/ prescribe (e.g. current cost accounting should be used to provide more useful information)
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Evaluating theories
Consider logic and
Use of emotional words False credentials Appeal to authority
evidence Using all instead of some Repeated affirmation Argument by analogy only
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Recap
Nature of accounting: The Measurement Communication System
Accounting theories prescriptive (normative) descriptive (positive) NOW The Conceptual Framework (a prescriptive model) and the Measurement-Communication System
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Receiver: Decision-Maker
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Historically
Accounting seen as pragmatic, procedural
endeavour Rules, practices and procedures developed on an ad-hoc basis usually in response to recording and reporting issues that presented themselves for resolution Repetition and general acceptance has provided support and legitimacy to the practitioners rules.
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GAAP
Think of Generally Accepted Accounting
Practices:
What are some conventions? What are some doctrines? What are some principles?
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terminology Each book usually contains a mixture of axioms, conventions, generalisations, methods, rules, postulates, practices, procedures, principles and standards. These terms cannot all be synonymous. Littleton
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Accounting Postulates
Entity Postulate Going Concern Postulate
Theoretical Concepts
Theoretical Concepts
Proprietary Theory
Entity Theory
Fund Theory
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Accounting Principles
Cs ot Rv n e ee u R c g itio eo n n M tc in a h g
F ll u D c s re is lo u
M te lity a ria
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GAAP from practices gives no guidance for dealing with unusual or different situations Piecemeal approach introduced inconsistencies Creative accounting SO due to
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problems from a lack of a general theory permissiveness of accounting practice inconsistency of practices defense against political interference a normative method of theory development was proposed (CONCEPTUAL FRAMEWORK). It is premised on user needs driving the formulation of rules and other operational procedures for use in practice.
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Summary
Meaning of theory
History of accounting theories Types of accounting theories
accounting practices
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