CHAPTER-2

ACCOUNTING THEORY
ACT 421
 TEAM MEMBERS

Student ID Name
1903015 Arun Roy
1903016 Tasmeya Neshat
1903017 Md. Mehedi Hasan
1903018 Md. Nazim Ahmed
1903019 Mehedi Hasan
1903020 Md. Rubel Alam
1903021 Tanvir Ahmed
 Introduction
Theories provide certain 'expectations' or 'predictions' about phenomena and
when these expectations occur, they are said to 'confirm' the theory. When
unexpected results occur, they are considered to be anomalies which eventually
require a modification of the theory or the construction of a new theory.

 A Differentiate between traditional and new approaches to accounting theory

construction.
 Focuss on the different concepts in the ethical, social and economic approaches
to the development of accounting theories.
 Distinguish between the deductive approach and the inductive approach to
accounting theory formulation.
 TRADITIONAL APPROACH

Traditional approach:
Traditional approach, customs, beliefs, or methods are ones that have existed for a long time without changing.
In the traditional approaches to accounting theory, construction, accounting practice and verification are
considered synonymous.
The traditional approaches are:
1. Non-theoretical, practical or Pragmatic(informal)
2. Theoretical

 The pragmatic approach:

Aims to construct a theory characterized by its conformity to real world practices and that is useful in
terms of suggesting practical solutions. According to this approach, accounting techniques and principles
should be chosen because of their usefulness to users of accounting information and their relevance to
decision making processes. Usefulness, or utility, means that attribute which fits something to serve or to
facilitate its intended purpose. The pragmatic approach to the devlopments of accounting principles has
been followed by accounting authority in the past, and attempts to reduce conflicting practices have until
recently been extremely cautions and tentative.
 TRADITIONAL APPROACH

 Authoritarian Approach:
The authoritarian approach to the formulation of an accounting theory, which is used mostly by
professional organizations, consists of issuing pronouncements for the regulation of accounting
practices. Because the authoritarian approach also attempts to provide practical solutions, it is
easily identified with the pragmatic approach.

 Both approaches assume that accounting theory and the resulting accounting
techniques must be predicted on the ultimate uses of financial reports if
accounting
 The Deductive Approach
In accounting, this approach begins with the "basic accounting propositions or premises and proceeds to
derive by logical means the accounting principles that serve as guides and bases for the development of
accounting techniques.
The steps used to derive the deductive approach in accounting will ordinarily include the following:
 1. Specifying the objectives of financial statements
 2. Selecting the "postulates" -the basic accounting propositions or premises
 3 . Deriving the "principles" of accounting
 4. Developing the "techniques of accounting

 The inductive approach

The inductive approach to a theory, Belkaoui says, involves the following four stages:
 1. Observations, and recording of all the observations
 2. Analysis and classification of these observations to detect recurring relationships
 3. Inductive derivation of generalizations and principles of accounting from those observations that
depict recurring relationships
 4. Testing of the generalizations.
 The Ethical Approach :
The basic core of the ethical approach consists of the concepts of fairness, justice
equity . This approach should not be taken as an independent approach to
construction of accounting theory. In fact, the ethical aspect is always kept in view
who formulating an accounting theory based upon other approaches. These
approach as already mentioned, are interdependent.

 The Sociological Approach :

It has become increasingly well recognized that corporate activities have economic
as well as social impacts, The economic impact of corporations is measured by
financial accounting methods and reported in financial. According to the
sociological approach, a given accounting principle or technique is evaluated for
acceptance on the basis of its reporting effects on all groups in society Also implicit
in this approach is the expectation that accounting data will be useful in making
social welfare judgments.
 The Economic Approach:
The economic approach to the formulation of an accounting theory emphasises
controlling techniques.The economic approaches focuses on a concept of "general
economic welfare". According to the approach, the choice of different accounting
techniques dipend on their impact on the on the national economic good.

 The Eclectic Approach:

The formulation of an accounting theory formulation and the development of
accounting principles have followed an eclectic approach, or a combination of
approach. For example, the Indian's Government policy is to establish a social
soicety.
 New Approaches :
The aim of developing the new approaches has been to verify as well as to construct
accounting theory. The new approaches have not yet been accepted by the various users of
accounting information. The accounting profession has also not accepted them. There is
always a time gap between theory and practice.
These new approache are identify as
1. The event approach
2. The decision model approach
3. The behavioural approach
4. The predictive approach
5. The information economic approach

 The Event Approach :

To Formulate accounting theory on the basis of relevant of economic event
affecting the users decision is known as event approach.
 The decision model approach:
In this approach, an appropriate decision model is developed based on the hypothesized needs of
financial statement users. The theorist establishes a set of normative assumptions about the goals,
decisions and the information needs of the users, and given these assumptions, derives the
accounting principles and methods best suited for meeting these needs. In this model, it is
acknowledged that different information may be needed for different users of the financial
statements or for different kinds of decisions.

 The behavioural approach:

The behavioural approach has generated in accounting research an enthusiasm and a new impetus
focussing on the behavioural structures within which accountants function. The behavioural
approach to the formulation of an accounting theory is concerned with human behaviour as it
relates to accounting information and problems.