ACCOUNTING APPROACHES

Accounting Accounting Theory: Theory:

Roles and Roles and ApproachesApproaches

Lectured by S. SutthachaiLectured by S. SutthachaiAccounting DepartmentAccounting Department

Faculty of Management ScienceFaculty of Management ScienceKhon Kaen UniversityKhon Kaen University

A Theory: DefinitionA Theory: Definition A theory: ‘a set of interrelated A theory: ‘a set of interrelated

constructs (concepts), definitions, and constructs (concepts), definitions, and propositions that present a systematic propositions that present a systematic view of the phenomenon by specifying view of the phenomenon by specifying relationships among variables with the relationships among variables with the purpose of explaining and predicting the purpose of explaining and predicting the phenomenon’phenomenon’

A theory includes propositions linking A theory includes propositions linking concepts in the form of hypotheses to be concepts in the form of hypotheses to be tested.tested.

A Theory: DefinitionA Theory: Definition Elements of a theory include:Elements of a theory include:

ConceptsConcepts: the main units of a theory : the main units of a theory and it is devised to refer to and it is devised to refer to identifiable characteristics or identifiable characteristics or phenomena. phenomena. : The better the concept, the better : The better the concept, the better the theory.the theory.: A formation of concept starts from : A formation of concept starts from the idea or percept generating a the idea or percept generating a concept designated by terms.concept designated by terms.


Propositions:Propositions: establish relation establish relation between the concepts of a theory.between the concepts of a theory.

: designated by a sentence.: designated by a sentence. : characterized by 1) the : characterized by 1) the number and degree of predicates; and number and degree of predicates; and 2) the degree of generality.2) the degree of generality.


Hypotheses:Hypotheses: a proposition about a a proposition about a relationship whose truth or falsity is yet relationship whose truth or falsity is yet to be determined by an empirical test.to be determined by an empirical test. : Confirmation of a theory is the : Confirmation of a theory is the extent to which a hypothesis is capable extent to which a hypothesis is capable of being shown to be empirically true, of being shown to be empirically true, that is, of describing the real world that is, of describing the real world accuratelyaccurately : Falsification?? : Falsification??

Functions of a TheoryFunctions of a Theory Descriptive functionDescriptive function: using the : using the

constructs or concepts and their constructs or concepts and their relationships so as to provide the best relationships so as to provide the best explanation of a given phenomenon and explanation of a given phenomenon and the forces underlying it.the forces underlying it.

Delimiting functionDelimiting function: selecting the : selecting the favorite set of events to be explained and favorite set of events to be explained and assigning a meaning to the formulated assigning a meaning to the formulated abstractions of the descriptive stage.abstractions of the descriptive stage.

Functions of a TheoryFunctions of a Theory Generative FunctionGenerative Function: the ability to : the ability to

generate testable hypotheses or to generate testable hypotheses or to provide hunches, notions, and ideas provide hunches, notions, and ideas from which hypotheses could be from which hypotheses could be developed.developed.

Integrative FunctionIntegrative Function: the ability to : the ability to present a coherent and consistent present a coherent and consistent integration of the various concepts and integration of the various concepts and relations of a theory.relations of a theory.

Evaluation of a TheoryEvaluation of a Theory A theory is evaluated to prove the A theory is evaluated to prove the

adequacy of what it proposes.adequacy of what it proposes.

Criteria to evaluate a theory??? Criteria to evaluate a theory???

Accounting Theory: Accounting Theory: DefinitionDefinition

Accounting theory: A set of broad Accounting theory: A set of broad principles that: principles that:

1) provides a general frame of 1) provides a general frame of reference by which accounting reference by which accounting practice can be evaluated; and practice can be evaluated; and

2) guides the development of new 2) guides the development of new practices and procedures.practices and procedures.


Accounting theory should explain an Accounting theory should explain an d predict accounting phenomena. d predict accounting phenomena.

The primary objective of accounting t The primary objective of accounting t heory is to provide a basis for the pre heory is to provide a basis for the pre

diction and explanation of accounting diction and explanation of accounting behaviour and events. behaviour and events.


Accounting theory should have 3 Accounting theory should have 3 elements:elements:

1) encoding of phenomena to symbolic 1) encoding of phenomena to symbolic representation;representation;

2) manipulation or combination 2) manipulation or combination according to rules; andaccording to rules; and

3) translation back to real-world 3) translation back to real-world phenomena.phenomena.

Formation of Accounting Formation of Accounting TheoriesTheories

Accounting practitioners and Accounting practitioners and researchers draw on different researchers draw on different images of accounting to elaborate images of accounting to elaborate different theories of accounting.different theories of accounting.

Views of accounting:Views of accounting: Accounting as an ideologyAccounting as an ideology Accounting as a languageAccounting as a language Accounting as a historical recordAccounting as a historical record

Formation of Accounting Formation of Accounting TheoriesTheories

Views of accounting (continue):Views of accounting (continue): Accounting as current economic Accounting as current economic

realityreality Accounting as an information systemAccounting as an information system Accounting as a commodityAccounting as a commodity Accounting as mythologyAccounting as mythology Accounting as rationaleAccounting as rationale Accounting as imageryAccounting as imagery

Accounting Theory: Accounting Theory: ApproachesApproaches

Deductive Approach: it moves from Deductive Approach: it moves from general (basic proposition about the general (basic proposition about the accounting environment) to the accounting environment) to the particular (accounting principles particular (accounting principles first and accounting techniques first and accounting techniques second).second).


Deductive approach used in Deductive approach used in formulating a conceptual framework of formulating a conceptual framework of accounting:accounting: Specifying the objectives of financial Specifying the objectives of financial

statementsstatements Selecting the ‘postulates’ of accountingSelecting the ‘postulates’ of accounting Deriving the ‘principles’ of accountingDeriving the ‘principles’ of accounting Developing the ‘techniques’ of accountingDeveloping the ‘techniques’ of accounting


Inductive Approach involves 4 stages:Inductive Approach involves 4 stages: Recording all observationsRecording all observations Analysis and classification of these Analysis and classification of these

observations to detect recurring observations to detect recurring relationships (‘likes’ and ‘similarities’)relationships (‘likes’ and ‘similarities’)

inductive derivation of generalizations and inductive derivation of generalizations and principles of accounting from observations principles of accounting from observations that depict recurring relationshipsthat depict recurring relationships

testing the generalizations.testing the generalizations.


Ethical Approach: the concepts of Ethical Approach: the concepts of fairness: fair, unbiased and impartial fairness: fair, unbiased and impartial

presentation presentation justice: equitable treatment of all justice: equitable treatment of all

interested parties interested parties true: true and accurate accounting true: true and accurate accounting

statements without misrepresentation.statements without misrepresentation.


Sociological Approach: Social Welfare Sociological Approach: Social Welfare the social effects of accounting techniques the social effects of accounting techniques

Socioeconomic accounting: to encourage t Socioeconomic accounting: to encourage t -he business entities that function in a free -he business entities that function in a free

market system to account for the impact of market system to account for the impact of their private production activities on the s their private production activities on the s ocial environment through measurement, i ocial environment through measurement, i

nternalisation, and disclosure in their fina nternalisation, and disclosure in their fina ncial statements. ncial statements.


Economic Approach: General Economic Approach: General Economic WelfareEconomic Welfare the choice of different accounting the choice of different accounting

techniques depends on their impact techniques depends on their impact on the national economic good.on the national economic good.

Accounting policies and techniques Accounting policies and techniques should reflect ‘economic reality’ and should reflect ‘economic reality’ and the choice of the techniques should the choice of the techniques should depend on ‘economic consequences’. depend on ‘economic consequences’.

A Role of Accounting A Role of Accounting TheoriesTheories

G A A P A ccou n tin g S tan d ard s A ccou n tin g P o lic ies

A ccou n tin g Tech n iq u es

A c cou n tin g P rin c ip les , C on cep ts an d P os tu la tes

A C on cep tu a l F ram ew ork

Accounting T heories

GAAPGAAPGAAP (Generally Accepted Accounting GAAP (Generally Accepted Accounting

Principles): a guide to the Principles): a guide to the accounting profession in the choice accounting profession in the choice of accounting techniques and the of accounting techniques and the preparation of financial statements preparation of financial statements in a way considered to be good in a way considered to be good accounting practice.accounting practice.

GAAPGAAP Conditions under which an Conditions under which an

accounting method will be accounting method will be deemed as generally accepted:deemed as generally accepted: The method will be in actual use;The method will be in actual use; The method would have support in The method would have support in

the pronouncement of the the pronouncement of the professional accounting societies;professional accounting societies;

The method would have support in The method would have support in the writing of a number of respected the writing of a number of respected accounting teachers and thinkers.accounting teachers and thinkers.

GAAPGAAP

Examples of pronouncements of the Examples of pronouncements of the

professional accounting societies!!!!professional accounting societies!!!!

In a new situation, what methods In a new situation, what methods

would be generally accepted????would be generally accepted????

GAAPGAAP Little GAAP and Big GAAPLittle GAAP and Big GAAP

A little GAAP for smaller and/or A little GAAP for smaller and/or closely held businesses.closely held businesses.

A big GAAP is for large companiesA big GAAP is for large companies

What is the definition of ‘small What is the definition of ‘small

businesses’?businesses’?

Accounting StandardsAccounting Standards

What are the differences between What are the differences between GAAP and accounting standards???GAAP and accounting standards???

Accounting StandardsAccounting Standards Accounting standards consist of 3 Accounting standards consist of 3

parts:parts: A description of the problem to be A description of the problem to be

tackled.tackled.

A reasoned discussion or ways of solving A reasoned discussion or ways of solving the problems.the problems.

in line with discussion or theory, the in line with discussion or theory, the prescribed solution.prescribed solution.

Accounting StandardsAccounting Standards Reasons to establish standards are:Reasons to establish standards are:

to ensure quality of financial informationto ensure quality of financial information

to be guidelines and rulesto be guidelines and rules

to be database for a governmentto be database for a government

to generate interests in principles and to generate interests in principles and theories.theories.

Accounting StandardsAccounting Standards Who should set accounting Who should set accounting

standards?standards? Theories of regulation:Theories of regulation:

Public-interest theoriesPublic-interest theories Interest-group or capture theoriesInterest-group or capture theories

The political ruling-elite theory of The political ruling-elite theory of regulationregulation

the economic theory of regulationthe economic theory of regulation

Accounting StandardsAccounting Standards Who should set accounting Who should set accounting

standards?standards? The free-market approachThe free-market approach

The private-sector approachThe private-sector approach

The public-sector regulation of The public-sector regulation of accounting standardsaccounting standards

Accounting StandardsAccounting Standards Standard-setting approach for Standard-setting approach for

developing countriesdeveloping countries The Evolutionary ApproachThe Evolutionary Approach

The Transfer of Technology ApproachThe Transfer of Technology Approach

The Adoption of International The Adoption of International Accounting StandardsAccounting Standards

Accounting StandardsAccounting Standards- Standard setting Procedures- Standard setting Procedures (IASB Due (IASB Due

Process)Process):: Setting the agendaSetting the agenda Project planningProject planning Development and Publication of a Development and Publication of a

discussion paperdiscussion paper Development and publication of an Development and publication of an

exposure draftexposure draft Development and publication of an IFRSDevelopment and publication of an IFRS Procedures after an IFRS is issuedProcedures after an IFRS is issued

Accounting PoliciesAccounting PoliciesThe specific accounting principles and The specific accounting principles and

the methods of applying those principles the methods of applying those principles that are judged by the management of that are judged by the management of the entity to be the most appropriate in the entity to be the most appropriate in

the circumstances to present fairly the circumstances to present fairly financial position, changes in financial financial position, changes in financial position, and results of operations in position, and results of operations in accordance with generally accepted accordance with generally accepted

accounting principles.accounting principles.

ACCOUNTING APPROACHES

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