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TOPIC -4 THE ROOTS OF ACCOUNTING THEORY
TOPIC -4 THE ROOTS OF ACCOUNTING THEORY
TOPIC -4 THE ROOTS OF ACCOUNTING THEORY
The roots of accounting theory are located in decision theory, measurement theory and
information theory.
1. Decision Theory
Traditionally, the focus of attention among accountants has been the measurement of profits
(income). But in last 20 years, the changing social attitudes, the developments in information
technology, quantitative techniques and the behavioral sciences have all combined to shift the
focus of attention in accounting away from income theory towards decision theory.
Decision theory as noted by Glautier and Underdown (1978) is said to be partly descriptive and
partly normative. It is descriptive in the sense that, it attempt to explain how decisions are made,
it is normative in that, it attempts to throw light on how decisions ought to be made i.e. it is
concerned with establishing standards for the best, or optimal, decision.
The decision theory is based on the, premise that a proper understanding of accounting may be
obtained only by seeing its essential purpose as providing information for decision making.
2. Measurement Theory
Measurement has been defined as the assignment of numbers to the attributes or properties of
objects being measured. It should be clear that we do not measure objects themselves but rather
something that might be termed the Naira, dollar, pound “numerosity” or “how – much ness”
that relates to a particular attribute of the object.
Types of Measurements
The relationship between the measuring system its self and the attributes of the objects being
measured determines the type of measurement. The most widely used types of measurements
available include the following:
Nominal Scale: A nominal scale is nothing more than a simple classification system, a
system of names. An instance is to assume that all the M.Sc (Accounting), UDUS come
from three states i.e. Kano, Lagos and Enugu. Under the nominal scale, if one wishes to
classify the students by state, a 1(one) might be assigned to Kano, a 2 (two) to those from
Lagos and a 3 (three) to Enugu students. In this example the numbering system serves no
other purpose than to classify by state. In accounting however, a chart of accounts
provides a good instance of nominal classification.
Ordinal Scale: The next in the measurement rigor is the ordinal scale. Numerals assigned
in ordinal rankings indicate an order of preference. However, the degree of preference
among ranks need is not necessarily the same. Assume that Four candidate are running
for NUASA’s presidency. A voter’s ranking might be Abdul first, John second, Hassan
third, and Jacob fourth. However, the voter may see a virtual toss – up between Abdul,
John and Hassan, either of whom is vastly prepared to Jacob. In accounting, however,
ordinal measurement is used to determine liquidity in the balance sheet.
Interval Scale: In the interval scales, unlike ordinal rankings, the change in the attribute
measured among assigned numbers must be equal. An instance is a Fahrenheit
temperature scale, the increase in warmth from 5 o to 6o is the same as that from 15 o to 16o
or any other increase in temperature of 1o
Ratio Scale: Like the interval scale, the ratio scale assigns equal value to the intervals
between assigned numbers, but it also has additional feature.
3. Information Theory
The purpose of information as it is argued, is to enable an organization to reach its objectives,
through proper and efficient utilization of its other resources such as human, machine, materials,
and other assets and funds (money).
Given the fact that information is also a resource, the information theory concentrates or
considers the problems of its utilization. These problems are costs associated with the collecting
and processing data and disseminating information as out put to users. The total cost of
producing information increase directly with the volume of information disseminated; because
extending disclosure of information may require more staff and beyond certain extent, or point,
installing expensive data processing equipment and gadgets and hence the MC (Marginal Cost)
of producing information tends to increase at increasing rate with volume.
The relationship between marginal cost of information and its marginal value could be expressed
as: As the volume of information increases the marginal cost increases at a faster rate and as
such the additional benefit or marginal utility of the information decreases.