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Chapter 1 - Introduction

This document provides an overview of accounting theory and its development over time. It discusses the major periods including pragmatic accounting, normative accounting, and positive accounting. Normative accounting sought to establish best practices but debates led to its demise. Positive accounting seeks to empirically explain and predict practices. Recent developments include joint IASB and FASB efforts to harmonize standards through a consistent conceptual framework and set of IFRS.

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Ivonne Wijaya
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© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
60 views

Chapter 1 - Introduction

This document provides an overview of accounting theory and its development over time. It discusses the major periods including pragmatic accounting, normative accounting, and positive accounting. Normative accounting sought to establish best practices but debates led to its demise. Positive accounting seeks to empirically explain and predict practices. Recent developments include joint IASB and FASB efforts to harmonize standards through a consistent conceptual framework and set of IFRS.

Uploaded by

Ivonne Wijaya
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 13

9/15/2020

GODFREY
HODGSON
HOLMES
TARCA

CHAPTER 1
INTRODUCTION

Overview of Accounting Theory


What is a theory?
Hendriksen’s definition:
…the coherent set of hypothetical, conceptual and
pragmatic principles forming the general
framework of reference for a field of inquiry.

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Overview of Accounting Theory


What is an accounting theory?
Hendriksen’s definition:
…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.

Overview of Accounting Theory


• Whether a theory is accepted depends on
how:
– well it explains and predicts reality
– well it is constructed both theoretically and
empirically
– acceptable its implications are

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Overview of Accounting Theory


• Accounting theory is a modern concept
compared to mathematics or physics
• Even Pacioli’s treatise on double-entry
accounting focused on documenting
practice and did not explain the underlying
theoretical basis for it

Overview of Accounting Theory


The development of accounting
theory has been mostly unstructured

Chambers:
Accounting has frequently been described as a
body of practices which have been developed in
response to practical needs rather than by
deliberate and systematic thinking.

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Overview of Accounting Theory


• Was developed to resolve problems as they
arose – reactive
• Ad hoc approach
• Led to inconsistencies in practice
– e.g. different depreciation methods
• Accounting standard setting
– Conceptual framework projects have not resolved
inconsistency in practice

Pragmatic accounting (1800– 1955)


• The ‘general scientific period’
– based on empirical observation of practice
– provided an explanation of accounting practice
– focused on the existing ‘viewpoint’ of accounting

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Normative accounting (1956-1970)


• Sought to establish ‘norms’ for the best
accounting practice
• Focused on what should be (the ideal) v.
what is

Normative accounting (1956-1970)


• Degenerated into battles between competing
viewpoints
• Two groups dominated:
– conceptual framework proponents
– critics of historical cost

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Normative accounting (1956-1970)


• Factors prompting the demise of the
normative period include:
– the unlikelihood of one particular normative
theory being generally accepted
– the application of financial economic principles
– the availability of empirical data and new testing
methods

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Normative accounting (1956-1970)


• The major criticisms of normative theories
were:
– they do not necessarily involve empirical
hypothesis testing
– they are based on value judgements

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Positive accounting (1950 to the


present day)
• A shift to a new form of empiricism called
‘positive theory’
• Had its origins in the ‘general scientific period’
• It seeks to explain the accounting practices
being observed

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Positive accounting (1950 to the


present day)
• Its objective is to explain and predict
accounting practice
e.g. the bonus plan hypothesis

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Positive accounting (1950 to the


present day)
• It helps predict the reactions of ‘players’, such
as shareholders, to the actions of managers
and to reported accounting information

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Positive accounting (1950 to the


present day)
• Major deficiencies are:
– ‘wealth maximisation’ has become the answer to
explain all accounting practices and reported
information
– it relies excessively on agency theory and dubious
assumptions about the efficiency of markets

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Positive accounting (1950 to the


present day)
• Behavioural research:
– concerned with the sociological implications of
accounting numbers and the associated actions of
‘key players’
– emerged in the 1950s

– despite growing acceptance since the 1980s,


positive accounting theory still dominates

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Recent developments
• Academic and professional developments in
accounting theory have tended to take
different approaches
• Academic research focuses on capital markets,
agency theory and behavioural aspects
• The profession has sought a more normative
approach – what accounting practices should
be adopted

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Recent developments

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Recent developments
• Conceptual framework – resurrected (bring
back to life) in 1980s
– states the nature and purpose of financial
reporting
– Establishes criteria for deciding between
alternative accounting practices
– SACs 1–4

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Recent developments
• Conceptual framework – Recent Developments
– Joint project between IASB & FASB
– International harmonisation of accounting
practices through a single consistent set of
international financial reporting standards (IFRS)

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Recent developments
• The conceptual framework underpinning the
IFRS favours a move toward
– accounting practices that provide information for
enhancing decision making by investors and
others
– recognising all gains and losses in the accounting
periods in which they occur
– measurement using exit values

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Content outline
• Part 1: Accounting theory (chapters 1 – 3)
• Part 2: Theory contributing to practice
(chapters 4 – 10)
• Part 3: Accounting and research (chapters 11 –
14)

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Summary
• Accounting theory
• Major periods of accounting theory
development
• Normative accounting
• Positive accounting
• Conceptual framework
• IFRS

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Key terms and concepts


• Theory
• Accounting theory
• Normative theory
• Positive theory
• Behavioural theory
• Conceptual framework
• IFRS

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