Decision Analysis Lecture Summary Topics 1 to 5
Accounting Theory
* What is an accounting theory?
Hendriksen’s definition:
…logical reasoning in the form of a set of broad principles that * provide a general framework of reference by which accounting practice can be evaluated and * guide the development of new practices and procedures. * Whether a theory is accepted depends on how: * well it explains and predicts reality * well it is constructed both theoretically and empirically * acceptable its implications are
The development of accounting theory has been mostly unstructured
Chambers:
Accounting has frequently been described as a body of practices which have been developed in response to practical needs rather than by deliberate and systematic thinking. * Standards have mostly been ad hoc and reactive leading to inconsistencies in practice * Conceptual framework projects haven't resolved inconsistencies.
Pragmatic accounting (1800– 1955)
The ‘general scientific period’ * based on empirical observation of practice * provided an explanation of accounting practice * focused on the existing ‘viewpoint’ of accounting
Descriptive pragmatic approach: * based on observed behaviour of accountants * theory developed from how accountants act in certain situations * tested by observing whether accountants do act in the way the theory suggests * is an inductive approach
Psychological pragmatic approach: * theory depends on observations of the reactions of users to the accountants’ outputs a reaction is taken as evidence that the outputs are useful and contain relevant information
Normative accounting (1956-1970) * Sought to establish ‘norms’ for the best accounting practice * Focused on what should be (the ideal) v. what is concentrated on deriving:
- true income (profit) (single measure for assets, unique correct profit)
- practices that
* What is an accounting theory?
Hendriksen’s definition:
…logical reasoning in the form of a set of broad principles that * provide a general framework of reference by which accounting practice can be evaluated and * guide the development of new practices and procedures. * Whether a theory is accepted depends on how: * well it explains and predicts reality * well it is constructed both theoretically and empirically * acceptable its implications are
The development of accounting theory has been mostly unstructured
Chambers:
Accounting has frequently been described as a body of practices which have been developed in response to practical needs rather than by deliberate and systematic thinking. * Standards have mostly been ad hoc and reactive leading to inconsistencies in practice * Conceptual framework projects haven't resolved inconsistencies.
Pragmatic accounting (1800– 1955)
The ‘general scientific period’ * based on empirical observation of practice * provided an explanation of accounting practice * focused on the existing ‘viewpoint’ of accounting
Descriptive pragmatic approach: * based on observed behaviour of accountants * theory developed from how accountants act in certain situations * tested by observing whether accountants do act in the way the theory suggests * is an inductive approach
Psychological pragmatic approach: * theory depends on observations of the reactions of users to the accountants’ outputs a reaction is taken as evidence that the outputs are useful and contain relevant information
Normative accounting (1956-1970) * Sought to establish ‘norms’ for the best accounting practice * Focused on what should be (the ideal) v. what is concentrated on deriving:
- true income (profit) (single measure for assets, unique correct profit)
- practices that