Accounting Theories

1. The Demand for and Supply of
Accounting theories: The Market for
excuses
By: Ross L. Watts and Jerold L. Zimmerman
Presented By: Binod Paudel 327045
Janak Pandit 325629
Simanta Acharya 324555

2. Overview
● Introduction
● Demand of Accounting theory
● Supply of Accounting theory
● Relationship between Government intervention and
Accounting theory
● Conclusion
● Critical review

3. Introduction
● Normative to Positive approach
● Accounting theory as an economic good having
Demand and Supply
● No single theory is generally accepted

4. Objective
● Aims to build a theory to determine a Accounting
theory
● Proposed theory is positive
● To understand the factors that affect to determine the
accounting standards

5. Demand of Accounting Theory
1) In Unregulated Economy
i)Agency cost
ii) Function of theories
a) Pedagogical demand
b) Information Demand
c) Justification Demand

6. Demand of Accounting Theory
2) In Regulated Economy
Accounting and Political Process
- Wealth maximization is the motive affected by political process
Effect of Govt. Intervention on Demand for Accounting
theories
- Give rise to pedagogic, information and justification demand
- Justification theory is said to be based on public interest but started with self
interest

7. Market failure Justification
- Justification of new intervention through
policies,to maximize social welfare
Rationality/ Theory Illusion
- High political transaction cost makes theories less
accurate

8. Supply of Accounting theory
Demand for accounting theories is the outcome of
Political process
Flow of Research Funds to theorists who deal with
contemporary accounting issues of "Vested Interests"

9. Supply of Accounting theory
Accounting theorists work as the supplier of these
demands
Accounting Theory leads or lag the political process

10. Relationship between
Government Intervention and
Accounting theory
How accounting theories and practices were affected by
several major types of legislation
1) Railroad Legislation
2) Income Tax
3) Securities Act

11. Contd...
1) Railroad Legislations
● charging depreciation as an expense
● With the Gladstons Bill of 1844, parliament restrict the
profit of railway in U.K
● In 1887 Federal legislation established interstate
commerce commission- started the new classification
“ Operating Expenses”
● This is followed by other utilities to bring the new
regulations

12. 2) The income tax Laws
Practice of charging depreciation to the net income
rather than treating it as an allocation of profit
1909 Excise Tax law brings 1% tax on net income of
corporations in excess to $5000
1913 Income Tax Law
Deducting
Expenses,losses, including allowance

13. Contd...
3)The Securities Act
Two major effect of Securities Act
i) Shift in the objective- Informative objective
○ Prior to the securities act :
■ Control role of Accounting theories
■ Managers as important user
○ After the securities act: From steward to
informative
● Financial informations: from management to creditors

14. Contd...
ii) Stimulate the search for accounting Principle
Practice based principle
Patons and Cunnings ideas were also motivated by
securities act
Advocate for public interest

15. Conclusion
Although the purpose of accounting theory was to
promote pure logic, due to government influence, it
always served as justification tools
“The predominant function of accounting theory is now to
supply excuses which satisfy the demand created by the
political process”.( Watts & Zimmerman, 1979)

16. Limitations
● Theoretical model used was based on the economic
model of demand and supply and no if and but of this
economic model was also considered!!
● Conflicting Citations and reference exist ( page 290)
● Hypothesis based on a very small sample size which
include:
● Three Acts (Railroad Act, Income Tax Law Act and
Securities Act
● Two Major Economys (US and US)