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Accounting Theory Summary CH 2 and 16
Accounting Theory Summary CH 2 and 16
Definition of Accounting
AICPA said that Accounting is the art of recording, classyfying and summarizing
in a significant manner and in terms of money, transactions and events which
are, in part at least, of a financial character, and interpreting the results thereof.
While AAA, description of Accounting is the process of identyfying, measuring,
and communicating economic information to permit informed judgement and
decision by users of the information.
In the double entry system, the main concern is to keep count of the amount of
the total assets and its changes in the context of theri physical and equity traits.
2. Causal View
With the double entry errors can be found more readily and imposes a
systematic and orderly accounting of transactions. A lack of Accountatbility
cannot occur with the double entry, because oen transaction cannot be isolated
into one account.
Authoritative Bodies
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Accounting Theory
Theory is an abstraction, a construct, as opposed to something that is
operational in the real world. The theory of accounting envisioned here is an
elaborate deductive system consisting of three distinct levels of statements of
decreasing generality, At first level, at the top, consist of most general
statements. These are the postulates or basic assumption of accounting. The
second Level consists of principle or standard of accounting, and the last level is
composed of the statements on the specific procedures of accounting, such as
straight line depreciation method.
For a long time, there is no general theories in accounting studies, FASB and
other Accounting organizaton tried to looked for the theory and decided that the
Conceptual Framework can be viewed as a general theory of accounting with
respect to business firm. FASB said that a general theory hope to lead to
consistent standard and... prescribe the nature, function, and limits of financial
stataments.
Objectives of Accounting
FASB Concept statement No. 1 : Financial report should provide information that
is useful to present and potential investors and creditors and other users in
making rational investment, credit, and similar decision.
Accounting information for the external users is based on the past events
but the orientation on the decision making itself is for the future. FASB
states investors, creditors and others need information to help them
form rational expectations... . Current value is the most relevant value for
decision making, but historical cost is still relevant for the decion making.
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Users of externally reported accounting information are present and
potential investor, creditor, and other users.
a. Society Users
a. Circumscribed view
b. Allocation to capital
1. Market Inefficiency
Inefficient means that investor are not able to interpret new information
accurately, adn when a investor placed much higher value on the
company prospect it can lead into a disaster. Market efficiency cannot be
proved directly and it can only be inferred on the basis of empirical
findings that do not reject the hypothesis.
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EMH point out that securities market will be efficient, but it is not. Because
if EMH is valid, every one would expect that and poeple will recognize the
face and act in a manner consistent with its implications, but the action
taken by managers indicate a disbelief in EMH.
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The Scientific View and Accounting
Theory Formulation
1. What is Theory
Theories can be defined as hypothesis or proportions, a tehory need to
have a general scope and must have a wide application.
2. Parts to Theory
Syntatics (Logical Relation), the one who linked the basic concepts.
Semantics, the one who linked the concepts to objects in real world,
sometimes reffred as rules of correspondence, or operational definition
and the more precise the relation, the less possibility of
misunderstanding or error.
Pragmatics, not many theories involve the pragmatics aspect and
pertain to the effect of words or symbol on people.
3. Paradigms and Scientific Development
4. Accounting Theory
FSAB generate a conceptual framework rather than a overall theory and this
conceptual framework reveral the intituitive comprehension of various statment
that make up the theory of accounting. This Comprehersive theory should twll us
how to measure income and capital properly, theory is seen as an instrument
used by accountants to derive proper rules and procedures. And it lead to
interpreting this as explaination that lead to prediction. But the thory of
accounting do not have the explaination and prediction value, so this means that
theory of accounting is a set of assumption, definition, recognition and
measurement principles and procedures for the purpose of determinign income
and capital.
a. Information Needded
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b. Pedagogic demand
c. Justification demand
The misconception in positive theory is when the positive phylosophy fail to note
the difference between a theory that has to do with accounting entities and a
theory concerning the behavior of individuals.
Testing of Theories
1. Criteria of Truth
a. Dogmatic Basis
b. Self-evident Basis
c. Scientific Basis
In this basis, there are two categories that need to be filled, first are those
statements can be ascertained to be true or false by logic or reasoning
alone. Second, are those statement whose truth or falsity can only be
known by reference to empirical evidence. Numoreous proposition in
accounting relating certain variables to each other are tested
scientifically,but the evidence is often weak. In accounting practices,
Assertion are not ususally generally descriptive, but prescriptive or
singular in nature. Signular statement are nor in meaningful in scientific
testing whuile prescriptive statement can only be tested in pragmatic way.
Measurement Theories
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1. What is Measurement
2. Scales
The rule to assign number create scale. A scale shows how much
information the numbers represent.
a. Nominal Scales
Number are used only as a labels. The nominal scales simply represent
classification.
b. Ordinal Scales
c. Interval Scales
In interval scale it is not only the rank order of the object is known but
also the difference between one to another is equal, and there is a
selected zero point in the scales. The difference between numbers can be
translated directly to reprents the difference in the characteristic of the
onjects. The weakness of the interval scale is that the zero point is
arbitrarily established so that the numbers do not convey as much
meaning for a ratio scale.
d. Ratio Scales
Ratio Scales is where (1) the rank order of the objects or events with
respect to a given property is known, (2) the interval between the objects
are equal and are known, (3) a unique origin, a natural zero point, exists
where the distance from it for at least one object is known.
The ratio scale allows for all the fundamental arithmetical operations of
addition, subtraction, multiplication, and division, and also algebra,
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analytic geometry, calculus, and statistical methods. A ratio scale remain
invariant over all transformation when multiplied by a constant.The
invarianve of a scale permit us to know the extent to which a theory or
rule remains basically the same, even though the scale is expressed in
different units, such as meter to inch.
Kinds of Measurement
1. Fundamental Measurement
2. Derived Measurement
3. Flat Measurement
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itslef is a measurement pertain to the precision with which a specific
property is measured by use of a given set of operations.
3. Accourate Measurement
Accuracy has to do with how close the measurement is to the true value
attribute measured, and even though the result is consistent, precision
and reliable it do not necessary lead to accuracy. The problem of this
measurement is when we did not know the true value. in accouunting, we
need to know what Attributes we should measure to achieve the purpose
of the measurement and the accounting objective itself is usefulness to
the information, which makes accuracy of measurement relate to the
pragmatic notion of usefulness. But some accountant are not agree in this
term and it is wise to change the accourate term to validity.
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Mattesich recommends a long-range cost benefits analysis of the
accounting system, while Sterling believe htat accounting is part of
decision theory. While FSAB recommenf that certain qualitative
characteristic be considered as criteria for the selection data to report.
This includes the characteristic of relevance, reliability, neutrality,
comparability, and materiality.
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