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Foundation and role of accounting theory

Foundation and role of accounting theory

INTRODUCTION

Theory as a framework for profession practices is a veritable tool, which without it, the practical aspect of the very discipline would be baseless and cannot be said to scientifically in nature. Purpose of theory plays an important part in any field. This applies to accounting also. The most important utility of theories in any field of inquiry is that it is a source of new knowledge as they change with new insights by continuous research in any particular field by the researchers who are acknowledged by the profession because of their expertise, integrity, experience and knowledge in that field. In this context, accounting needs theories so that it can develop new knowledge continually. Accounting which is a field of study cannot be left alone, accounting theory are formulated overtime to serve as guide to the practice of accounting. Theories like positive, normative, pragmatic, sociological, eclectic, agency and others are theories which are develop to guide accountant in treatment of economic transactions and events. Therefore formed the very foundation for accounting practice. The nature of accounting is primarily a statement which has some basic principles and concepts. That is the nature of accounting theory. From this stand point, one can infer that the foundation of accounting as a profession today, started from some set of theories which have not only made it easier for practice but also a scientifical academic field of study.

The Foundation and Role of Accounting Theory

     The role of accounting theories are numerous to mention, as accounting cannot be practice without these professional framework which have made the field amenable for practice. According to Ijiri(2001), accounting theories are developed from empirical observations of situations yearning to be address through a framework as reference for the practice.

Accounting theories or methods are by all concern in business environment where there lots of financial or accounting transactions. The nature accounting which allows for economic events which can be express monetarily, has always remain the same but it scope have capture all areas of human endeavors where resources are need to be accounted for. Essentially, theories are generalizations which serve to organize otherwise meaningless masses of data, and which thereby establish significant relationships in respect of such data. The construction of theories requires a process of reasoning about the problems implied in the data under observation, as a means of sorting out the most basic relationships. Thus, theory construction is also a process of simplification, which requires assumptions which permit the representation of reality by a generalization which is easily understood. The close association of theory and data, or facts, is fundamental to the notion of good theory, for the reliability of a theory is dependent not only upon the facts to which it refers, but also upon an interpretation of those facts requiring validation and continuous re-assessment.

Different Approaches of Accounting Theory and Practice

Accounting theories are develop as the need arise on given fields give light for the practice in that particular area of life. In this view, many approaches of accounting theories have been, some of which are given below:

  1. events
  2. behavioural
  • human information processing
  1. predictive

 

 

Events Approach

The events approach was developed in 1969 by George Sorter and was defined as ‘providing information about relevant economic events that might be useful in a variety of decision models’. The events approach leaves the user to aggregate and assign weights and values to the event. The accountant would only provide information on the economic event to the user; he would not assume a decision model. Thus, for example, the event approach income statement would not indicate financial performance in a period but would communicate events that occurred during the period without any attempt to determine a bottom line.

Research has shown that structured/aggregate reports are preferable for high-analytic decision makers but for low-analytic decision makers. Thus, the success of the events approach is dependent on the analytical skills of the user.

Users, in attempting to evaluate all information provided, may reach ‘information overload’.

No criteria have yet been developed for the choice of events to be reported.

It will probably prove difficult to measure all characteristics of an event.

Behavioural Approach

The behavioural approach attempts to take into account human behavior as it relates to decision making in accounting. Devine (1960) stated the following:

On balance it seems fair to conclude that accountants seem to have waded through their relationships to intricate psychological network of human activity with a heavy handed crudity that is beyond belief,. Some degree of crudity may be excused in a new discipline, but failure to recognize that much of what passes as accounting theory is hopelessly entwined with unsupported behavior assumptions.

Human Information Processing Approach

This is similar to a behavioural approach in that if focuses on how users interpret and use the information provided.

 

 

Predictive Approach

This approach attempts to formulate an accounting theory by focusing on the predictive nature/ability of a particular method of reporting an event that would be of use to the user. Such approaches are most prevalent in what could be regarded as management accounting. Efficient market hypothesis, Beta models, chaos theory are all examples of this approach.

Other important accounting theories include the positive and normative theories which are explained below:

The positive theory is mainly explaining existing accounting practices and observed accounting phenomena (Schroeder, Richard et al., 2001). Belkaoui (1992) believes that positive accounting theory is looking into why accounting practices have developed into the way they are today. Then, the positive theory explains or predicts accounting events. Many positive accounting theory supporters are optimistic due to that positive approach is getting more supporters.

Belkaoui noted criticism of positive theory including the point that the theory concept is based on an obsolete philosophy of science and that theories of empirical science do not have positive statements on “what is.”

The normative theory focuses on what should be instead of what is. Therefore, it is on the contrary side to positive theory. This theory is based on a set of objectives. It was developed using the deductive approach that uses logic. Normative theory advocates agree on a set of objectives, believing that these objectives are the best for accountants. Then they deduce their hypotheses and principles. Their next step is to apply this theory to real life accounting practices and events. Actually, normative theory will depend on its advocates and the level of harmony they can reach on the agreed set of goals.

Although the normative approach is very important in regulating the industry and developing new accounting practices, it may not handle possible future effects caused by new theories that may change accounting practice in the future.

 

Regulatory Approaches

Many would regard this as the approach we currently have to accounting theory. They hold this view because to them it does not appear that standards, even those of the IASB, are based on broad, relevant theories but are developed as solutions to current conflicts that emerge in our attempts to provide useful information to users. Indeed, they might argue that new standards are only developed when a particular user complains about misinformation or non – information. But there are questions to consider if we do adopt this approach to the development of accounting theory. In the main, these questions centre on whether we should adopt a free market approach to the regulation, a private sector regulatory approach.

This regulatory approach is also one that tends to identify solutions to difficulties that have occurred in our reporting rather than providing us with a theory that anticipates the issues.

 

RELATIONSHIP BETWEEN ACCOUNTING THEORY AND PRACTICE

‘Accounting theory no doubt is the backbone for accounting practice, meaning that theories of accounting streamline how the accounting events are treated practically. Accounting theory may also be used to explain existing practices to obtain a better understanding of them. Accounting to hendriksen (2007), the primary concern of accounting theory is to provide basis for accounting practice. Accounting practice without the theories, would be difficult to practice as there would not be any logical guild on how certain financial items are to be treated. This implies that accounting practice cannot be separated from accounting theories since the two cannot work individually. Also certain accounting theories today are offering accounting ideas from practice, which are given translated into accounting theory so as to create theoretical frame work for such idea. Hence the two are positively related.

 

 The Influence/Impact of Accounting Policy Maker on the Development of Accounting Theory

Accounting has become a universal field of endeavor, cut across all area of human knowledge. Overtime, the user of accounting information may require that certain information needed be treated in manner that is comprehensible. So there arises the need for recording and summarizing these transactions when they occur and the necessity of finding out the net result of the same after the expiry of a certain fixed period.

The form of accounting information reported to decision makers depends on the practices adopted. These practices are imposed by accounting policy makers who, having knowledge of accounting theories, have the responsibility of responding to the needs financial statement users accounting practice, and the use of accounting information, will impair the usefulness of an accounting information service. Thus, the failure of policy makers to incorporate research findings in the policies they devise may reduce the potential usefulness of accounting information.

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