DIFFERENT APPROACHES TO FORMULATE FOR Accounting THEORY

1. DIFFERENT APPROACHES TO FORMULATE
FOR
ACCOUNTING THEORY
Under the guidance of
Sundar B. N.
Asst. Prof. & Course Co-ordinator
GFGCW, PG Studies in Commerce
Holenarasipura
Pooja J V
1st M.com

2. CONTENT
1.Introduction
2.Traditional approach
• The Pragmatic approach
• The Authorization approach
• The Deductive approach
• The Inductive approach
• The Ethical approach
• The Sociological approach
• The Economic approach
• The Electric approach
3.New approach
• The Events approach
• The Decision model approach
• The Behavioural approach
• The Predictive approach
4. Conclusion
5.Reference

3. INTRODUCTION
IN COMMERCE THEY BELIVE THERE IS A SOLUTION TO
EVERY ACCOUNTING PROLEM
NO IT IS FAR AWAY FROM THE TRUTH BECAUSE THERE ARE
MANY ISSUES REMAIN UNDERSOLVED. AFTER HAVING THE
KNOWLEDGE OF MERE ACCOUNTING PRACTICES AND
PROFESSION FOR THE MATTER AND REASON THE
ACCOUNTING THEORY PROVIDES THE KNOWLEDGE OF
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAPS),
CONTEMPORARY ISSUES AND OTHER DEVELOPMENT IN THE
FAILD SO WE SHOULD UNDERSTAND THEORY AND IT’S MAIN
ISSUES LIKE THEORY APPROACHES OF CONSTRUCTING THE
THEORY NEED OF ACCOUNTING THEORY.

4. Meaning
Although there is no single comprehensive theory of
accounting various accounting theories of a middle ranges
have resulted from the use of different approach .For the sake
of clarity. We will limit our discussion In this work to be
traditional approach and approaches to the formulation of an
accounting theory.
Traditional approaches: most of these approaches are
thearitical Expect pragmatic & an authorization approaches
are practical.

5. We shall discussion in brief the different approach to the
formulate accounting theory under two heads:
1.The traditional approach: In these approaches, to accounting
theory construction, accounting practices and verification are
considered synonymous.
2.The new approach: In these approaches, to accounting theory
construction, attempt are made to logically or empirically verify
the theory.
In should however, be understood clearly that these
approaches are not independent of one another generally, more
than one approach, is used in the development of accounting

6. The Traditional approach
1. The pragmatic approach
2. The Authorization approach
3. The Deductive approach
4. The Inductive approach
5. The Ethical approach
6. The Sociological approach
7. The Economic approach
8. The Eclectic approach

7. 1.THE PRAGMATIC APPROACH
•This approach consists of the formulation of a theory
which is conformity with real(current) .
• Based upon the concept of utility or useful-(utility
approach).
•In this approach, accounting principles are chosen
because they are useful to the different categories of
“users of accounting information and their relevance to
find a practical solution.

8. 2. THE AUTHORIZATION
APPROACH
• This approach is used by professional organization and the government.
• It consist of issuing pronouncements for the regulation of accounting
practices.
• In developing economies, where financial accounting and reporting
practices differ a lot.
• This approach has its own utility. It also attempts to provide practical
solutions.
• In this (utility) approach, the emphasis is on accounting practices, and the
logical conclusion is that accounting theory is to be derived from practices.

9. 3. THE DEDUCTIVE APPROACH
•In accounting, this approach begins with basis
accounting proposition (Assumptions) and
proceeds to derived by topical means the
accounting principles.
Steps used to derive the deductive approach in accounting
:
1. Specifying the objectives of financial statements.
2. Selecting the ‘assumptions’ of- basic accounting
proposition s – of accounting.

10. 3.Deriving the ‘principles’of accounting.
4.Developing the “techniques of accounting”.
Thus, the sequence objectives – assumptions- principles-
techniques.

11. 4.THE DEDUCTIVE APPROACH
•In this approach we go from particular to general. On the basis
of particular observation and measurement, generalized
conclusion are draw.
•The Inductive approach in accounting “beings with observation
of financial information of business enterprise and proceeds to
draw generalization and principles of accounting”.
•Thus, accounting and financial information leads to the
formulation of principles.

12. The inductive approach to a theory involves the following four
stage
• Observation, and recording of all observations
•Analysing and classification these observation.
•Inductive deprivation of generalization and principles of
accounting from observations .
•Testing the generalizations.
It will be noted that to develop accounting theory, there has been
an application of both the approaches. Principles are derived by
deductive process, while the general proportion are formulated
through an inductive process. A combination of the two
approaches has been used by most authors.

13. 5.THE ETHICAL APPROACH
• This approach should not taken as on independent approach.
• The basis core consists of the concepts of fairness, Justice (equity),
and truth. These concept s as the main criteria in the formulation of
accounting theory.
1. “Fairness: refers to the basic concept that accounting data should
be fair unbiased”.
2. “Justice: equitable treatment to all interested parties”.
3. “Truth: true and accurate financial accounting statements with out
misrepresentations”.

14. •In general the purpose of having these approach that
accounting statements have not been subject to undue
influence or bias.
•The word “true and faire” have to be special mentioned
in audit reports.

15. 6.THE SOCIOLOGICAL APPROACH
• Corporate activities have economic as well as social impact.
• The economic impact of corporation is measured by financial accounting
methods and reported in financial statements, however no established
methods and standards for measuring and reporting on corporate social
performance.
• Emphasizes the social effects of accounting Techniques
• Implier that accounting data will be useful in making social welfare
judgments.
• Accounting to this approach a given accounting principles or technique is
evaluated on the basis of its reporting effects on all groups in society.

16. 7.THE ECONOMIC APPROACH
• We have noted that ethical approach focuses on the
concept of “fairness”, and the sociological approach
focused on “ Social welfare”.The economic approach
focuses on the concept of “General economic
welfare”.
•The choice of different accounting techniques depends
on their impact on the national economic.
•Accounting policies and techniques should reflect
“economic reality”.and the choice of accounting

17. • THE CHOICE ACCOUNTING TECHNIQUES
DEPENDS ON THE PARTICULAR ECONOMIC
SITUATION.
EXAMPLES: DURING THE INFLATION, THERE IS
WIDESPREAD SHIFT FROM FIFO TO LIFO FOR
INVENTORY VALUATION PURPOSES.

18. 8. ECLECTIC APPROACH
•In general the formulation of accounting theory and the
development of accounting principles have followed on
eclectic approach ( a combination of approach), rather
than just one school of thought.
•Eclectic Approach means a combination of approach. To
reflect the view point of professional institutes, industry,
government and individuals, the establishment of
concepts and principles of accounting results in the

19. One great weakness in traditional approach is accounting practice
and verification are considered synonymous. No attempt is made
to logically the theory. In these new approaches to accounting
theory construction, attempt are made to logically or empirically
verify the theory.

20. NEW APPROACH
As mentioned, the new approach to accounting theory construction, attempts are made
logically or empirically the theory.
The new approaches have not yet been accept by various users of accounting
information.
Ther is always a time gap between theory and practices.
The new approaches that have been discussed in brief are.
1. The event approach
2. The decision model approach
3. The behavioral approach
4. The predictive approach
5. The information economic approach

21. 1.THE EVENT APPROACH
• “An event is an accurance phenomenon, or transaction that is assumed to
be observable”.
• The characteristics of event monitory values and non monitory values are
directly observed and significant to the users.
• The events suggests that the purpose of accounting is ‘to provide
information about relevant economic events that might be useful in a
variety of decision models.
• The events approach suggests a huge expansion of the accounting data
presented in financial reports.
• It is not yet certain that the events approaches will lead to better

22. 2.THE DECISION MODEL APPROACH
1. In the decision model approach, accounting theory is developed by a
normative. Assumption about how accounting information should be
used (goals, decision and information needs of users).
2. Derives the accounting principles and method best suited for meeting
theres needs.
• In this model it’s acknowledged that different information may be needed
for different users of the financial statements or for different kind of
decisions.

23. 3. THE BEHAVIORAL APPROACH
• The behavioral approach to accounting theory formulation is concerned
with human behavior as it relates to accounting information and problems.
• In this approach the behavioral of users of financial information is an
important consideration in the selecting of an important consideration in
the selecting of an accounting technique.
• The behavioral approach to accounting theory formulation emphasizes the
relevance to decision making of the information being communicated, and
of the individual and group behavior caused by the information being
communicated.

24. It’s control Ributio
1. Exchange the accounting function from bookkeeping system to
information system.
2. Identify the users of information.
3. Management accounting.
4. Concentrate on relevance characteristic.
5. Establishment of theoretical principles of financial reports which
multi purposes.

25. 4.THE PREDICTIVE APPROACH
The predictive approach to the formulation of accounting theory users
the criterion of predictive ability. Accounting measurement
alternatives, which has the greatest predictive power will be regarded
as the best by users.

26. 5.THE INFORMATION ECONOMIC APPROACH
This approach suggests that all accounting reporting decision should
be evaluated within the cost benefit framework.
So the information approach implies that the efficiency of the utilization
of information as a resources is measured by matching the costs of
information against the benefits.

27. Conclusion
The traditional theory consists of theory views more rather
practical. It is able to give theoretical base to mythologies
techniques followed in accounting. It sets out accounting
relationship with other fields of human knowledge. These
theories constructed with some Subjectively also. Under it
sequence of events are made &after observing a
phenomena lead to set up hypothesis and hypothesis
tested accordingly test results a generalization can be
stated and after it principle is introduced.

28. Reference
• Intruduction to different approach to formulate
accounting theory, (retrived from),
https://www.slideshare.net/mobile/AbuHusanHNhiyan/a
pproaches-to-the-formulation-of-accounting-theory
•Different approach to formulate accounting theory
reports, (Retrived
from),https://slideplayer.com/slide/10513956/.