This document provides an overview of accounting theory. It defines theory and discusses the need for theory to understand the world and guide decision making. There are two main types of accounting theory: positive theories, which describe and explain current practice and make predictions; and normative theories, which suggest what should happen. Developing and testing theories involves research, which can be exploratory, experimental, or quantitative/qualitative. Research is used to better understand accounting and consider questions about its role and impact.
2. Accounting Theory
• Accounting viewed as a practical discipline
– Rule focussed
– With little use for theory
• However, theory is necessary to
– Understand the world we live in
– Provide a basis for decision making
3. Accounting Theories
• All accounting is premised on theories
– Concepts of Materiality
– Recognition Criteria
• Relevance
• Faithful Representation
– The Conceptual Framework
– Measurement Bases
4. Theory Defined
• Theory can mean a lot of different things
• In common usage
– “I have a theory…”
– “In theory…”
5. Dictionary Definitions
• A belief or principle that guides actions or
behaviour
• An idea or set of ideas that is intended to
explain something
• The set of principles on which a subject is
based or of ideas that are suggested to explain
a fact or event
6. Accounting Theory
• A description, explanation or a prediction [of
accounting practice] based on observations
and/or logical reasoning
• Logical reasoning in the form of a set of broad
principles that (1) provide a general
framework of reference by which accounting
practice can be evaluated and (2) guide the
development of new practice and procedures
7. Why Is Theory Needed
• To provide an explanation of what is
happening
• To help us predict what will happen
• Even partial or inaccurate theories can be of
(limited) use
8. The Affect Of Theories
• Theories drive many real world situations
• Theory informs decisions about
– Tax
– Interest Rates
– Global Warming
– Education
– Construction
• Almost every aspect of our lives
9. Different Theories
• Some of these theories explain
• Some of these theories predict
• Some of these theories conflict
10. Different Accounting Theories
• Some accounting theories
– Describe and explain current practice
• Capital Market Theory
– Predict practice
• Agency Theory
– Provide principles for decision making
– Identify problems and deficiencies and offer
solutions
• The conceptual framework
11. Types Of Theories
• Theories are often placed into two categories
– positive theories
– normative theories.
12. Positive Theories
• Positive theories are about the world as it is.
• They
– Describe what is happening
– Explain what is happening
– Make predictions about what will happen
• Based around Hypotheses
• Also called empirical theories
14. Example:
Positive Accounting Theory
• Initial Observation
– Some oil companies choose policies that reduce
income or assets. These companies were often
involved in litigation.
• Theory and Prediction
– Oil companies being sued choose policies that
reduce profit and assets.
• Observation and Testing
– Further research appeared to support the theory
15. Normative Theories
• Make suggestions about
– What should happen
– What ought to be
• Observations or facts are considered in
development of normative theories
16. Example:
Normative Accounting Theory
• Goal
– To reduce corporate impacts on the environment
• Premises
– Companies that are fined for environmental
breaches tend to under report this fact
– Better disclosure leads to better performance
• Conclusion
– Companies that are successfully sued for
environmental breaches should be required to
clearly report this fact
17. Evaluating And
Testing Theories
• There are often competing theories about an
issue or observation
– E.g. how should accounting items be measured
• Which theory is correct?
• A range of approached are taken
– Simple: Intuitive or anecdotal approaches
– Systematic Approaches
– Scientific Approaches
18. Acceptance of Theories
• A good theory should
– Be logical in its construction
– Be clearly articulated
– Be testable
– Be consistent with observation
• A theory can never be proved true
• A single observation can prove a theory false
19. Understanding The
Role Of Research
• Research is the ‘diligent and systematic
enquiry or investigation into a subject in order
to discover facts or principles’.
• Research is often repeated and adjusted, so
that knowledge is expanding.
• Most research studies will not provide
definitive answers
• Instead each study should contribute to our
understanding of the issue.
20. Relationship Between
Theory and Research
• Research is used at all stages of the theory
process
• Research can be
– Exploratory
– Experimental
– Observational
– Theoretical
– Quantitative
– Qualitative
21. Research Of or About
Accounting
• Research of or about accounting considers the
role of accounting itself
• It considers questions such as:
– What is the role of accounting?
– Is accounting information useful in investment
decisions?
– Should accountability or decision usefulness be the
key goal of accounting?
– What impact does culture have on accounting?
– What role has accounting played in the rise of
capitalism or environmental degradation?
22. Research In Accounting
• Research in accounting focuses at the more
micro level on issues within accounting
• It considers questions such as:
– What measurements are being used?
– What measures should be used?
– What impact do changes in specific accounting
policies have on share prices?
23. Research Areas
In Accounting
• Capital Markets Research
• Accounting Policy Choice Research
• Accounting Information Processing Research
• Critical Accounting Research
• International Accounting Research
