BA412 Accounting Theory

Introduction to Accounting Theory

(Background perspective)

Wolk: Accounting Theory © 2017 SAGE Publications, Inc.

 ICE Breaker Question

“It is impossible for a man to learn

what he thinks he already knows.”

Epictetus (CE 55–135): Discourses II

Wolk: Accounting Theory © 2017 SAGE Publications, Inc.

 Accounting History

How far has accounting been

around?

Why do we do Accounting, the

way it is prescribed?
The history of accounting or accountancy can be traced to ancient
 civilizations.

1. The early development of accounting dates back to ancient 

Mesopotamia, and is closely related to developments in writing, 
counting and money and early auditing systems by the ancient 
Egyptians and Babylonians. 

2. By the time of the Roman Empire, the government had access to

detailed financial information.

3. In India Chanakya wrote a manuscript similar to a financial

management book, during the period of the Mauryan Empire. His
book "Arthashasthra" contains few detailed aspects of maintaining
books of accounts for a Sovereign State.
The Italian Luca Pacioli, recognized as The Father of accounting
and bookkeeping was the first person to publish a work on 
double-entry bookkeeping, and introduced the field in Italy.
Double-entrybookkeepingsystem- LucaPacioli

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 Double-entry bookkeeping system
Luca Pacioli
Pacioli saw accounting as an ad-hoc ordering system devised by the merchant. Its regular use provides the merchant with continued information about his business, and allows him to evaluate how things are going and to act accordingly. Pacioli recommends the Venetian method of double-entry bookkeeping above all others.

Three major books of account are at the direct basis of this system:
the memoriale (Italian: memorandum)
the giornale (Journal)
the quaderno (ledger)
The ledger classes as the central document and is accompanied by an alphabetical index
 Modern Accounting
Modern Accounting is a product of centuries
of thought, custom, habit, action and
convention. Two concepts have formed the
current state of the accountancy profession.
* Firstly, the development of the double-entry
book-keeping system in the fourteenth and
fifteenth century and
* Secondly, accountancy professionalization
which was created in the nineteenth and
twentieth centuries. 
 Modern Accounting
The modern profession of the chartered
accountant originated in Scotland in the
nineteenth century.
During this time, accountants often belonged
to the same associations as solicitors, and
the latter solicitors sometimes offered
accounting services to their clients.
Early modern accounting had similarities to
today's forensic accounting:
• What Is Accounting Theory?

• Accounting Theory & Policy Making

• Measurement

Wolk: Accounting Theory © 2017 SAGE Publications, Inc.

ACCOUNTING THEORY
 Accounting Theory Is Defined As . . .
• The basic . . . • The reporting of . . .
– Assumptions – Accounting
– Definitions – Financial information
– Principles
– Concepts that • Applicable to financial
accounting
underlie the rule
making by a
legislative body • Not applicable to
governmental or
managerial bodies

Wolk: Accounting Theory © 2017 SAGE Publications, Inc.

Accounting Theory & Policy Making
 Accounting Theory & Policy Making
• Three inputs to policy-making function
1. Accounting Theory - Developed and refined by
the process of accounting research.
2. Political Factors - Refers to the effect upon policy
making of those who are subject to it
3. Economic Conditions - Classic example is the
high inflation rates of 1970s that forced FASB to
disclose price level information

Wolk: Accounting Theory © 2017 SAGE Publications, Inc.

 Accounting Theory & Policy Making

• Once policy is made . .

– Accounting practice implements the policy

– Users observe effects of implementation

Wolk: Accounting Theory © 2017 SAGE Publications, Inc.

 Policy Regulatory &
Implementation Bodies
 In PNG
• The Accounting Standards Board (ASB) is
responsible under the Companies Act of 1997
to establish national Accounting and Auditing
standards.

• The Accountants Act of 1996 also gives the

Certified Practicing Accountants of Papua
New Guinea (CPAPNG) authority to establish
Accounting and Auditing standards.
• Accountants Registration Board (Governing
Body)

• Registers and give Certification to

Accountants and Auditors, through CPAPNG
 Measurement
in Accounting Theory
 Measurement Categories
• Direct or Indirect
– Direct is preferable; managers like
– Indirect is roundabout way of making the
measurement
• Assessment and Prediction
– Assessment measures are concerned with
particular attributes of objects
– Prediction measures are concerned with factors
that may be indicative of conditions in the future

Wolk: Accounting Theory © 2017 SAGE Publications, Inc.

 Quality of Measurements
• Objectivity (Verifiability)
– The degree of agreement among measurers
– Statistically, this means the less variance there is, the higher the
objectivity
• Bias (Usefulness)
• Timeliness
– Financial statement data should be up-to-date
• Cost Constraint

Wolk: Accounting Theory © 2017 SAGE Publications, Inc.

What is Accounting theory??

Accounting
Theory
 Accounting Theory
• Defined :
A set of broad principles that provides a general
frame of reference by which accounting practice
can be evaluated and guides development of
new practices and procedures
It developed through observation , analysis ,
examination and scanning of day to day
accounting practices.
 What is Accounting Practice??

Accounting
Practice

.
 Accounting Practice
• Defined :
Is application of such accounting theory

It developed by successful application of those

established and generally accepted theories and
principles.
 Accounting Theory vs. Accounting Practice
••
 Accounting Theory vs. Accounting Practice
••
 Critical Thinking and Analysis
• Is Accounting Theory really necessary for the
making of accounting rules?

• Discuss
– Is regulation and Standards necessary?

– What, if any, unifying themes arose before the

existence of any standard-setting body?

Wolk: Accounting Theory © 2017 SAGE Publications, Inc.