INTRODUCTION TO

ACCOUNTING THEORY (1.2)

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DEFINITION OF ACCOUNTING
Belkaoui (2004);
Accounting is the art of recording, classifying, & summarizing
in a significant manner & in terms of money, transactions, &
events which are, in part at least, of a financial character, &
interpreting the result thereof. (AICPA)

From broader perspective;
The process of identifying, measuring, & communicating
economic information to permit information judgments &
decisions by user of information

Quantitative information;
Accounting is a service activity. Its function is to provide
quantitative information, primarily financial in nature about
economic entities that is intended, to be useful in economic
decisions, in making resolve choices among alternative
course of action.




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FROM THE DEFINITION;
ACCOUNTING: AN ART OR SCIENCE?
Accounting deals with enterprise, which are certainly social
groups;

It is concerned with transactions & other economic events
which have social consequence & influence societal
relationship;

It produces knowledge that is useful & meaningful to human
beings being engaged in the activities having social
implications;

On the basis of the guidelines available, accounting is a social
science (The scientific study of human society and social
relationships. A subject within this field, such as accounting,
economics, or politics)

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THE NATURE OF ACCOUNTING
Accounting as;
1. Ideology
2. Language
3. Historical record
4. Current economic reality
5. An information system
6. Commodity
7. Mythology
8. Rationale
9. Imagery
10. Experimentation
11. Distortion



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1. AS AN IDEOLOGY (BELIEFS, IDEAS, THOUGHT,
PRINCIPLES)
As a means of sustaining & legitimizing the current
social, economic & political arrangement.
Perceptions of accounting as an instrument of
economic rationality.
Capitalist practice turns the unit of money in a tool
of rational cost-profit calculations, of which towering
monument is double-entry
bookkeepingprimarily the product of the
evolution of economic-rationality; the cost-profit
calculus, in turn reacts on the rationality; by
crystallizing and defining numerically, it powerfully
propels (push forward) the logic of enterprise
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2. ACCOUNTING AS LANGUAGE OF
BUSINESS
Communicating information about a business.
Recognized in accounting profession, which
published accounting bulletin & empirical literature,
to measure the communication of accounting
concepts.

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3. HISTORICAL RECORD
As a means of providing the history of the
organization & its transaction with environment.
History of managers stewardship of the owners
resources.
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4. REFLECTING CURRENT ECONOMIC
REALITY
Both balance sheets & income statement should be
based on valuations basis that is more reflective of
economic reality than historical cost.
Determination of true income (concept of changing
of wealth of the business over a period of time)
Which method best measure, has generated more
prolific (producing much) debate in accounting
literature.
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5. INFORMATION SYSTEM
Process that link information source of transmitter
(accountant), a channel of communication, & set of
receivers (users)
the process of encoding (convert into a coded
form) observations in the language of accounting
system, of manipulating the signs & the statements
of the system & decoding (convert (a coded
message) into intelligible language) & transmitting
the result
The behaviors of the sender is important,
(behavioral research in accounting)

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6. COMMODITY (PRODUCT)
Demand & supply of accounting information.

Accounting provides ideal ground for policy & contracts
between the organization & environment.

In accounting research;
the emergence of the image of accounting as a
commodity again provide a striking example of the
manner in which accounting thought reflects its social
content. It has arisen in an are of mushrooming
regulation & increasing concern with the public interest
in a situation of scarce resources & many contemplating
demand . It has provided the rationale for accounting
policies which seek to aid the allocation of resources in
the service of public interest.
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7. MYTHOLOGY (SYMBOLIC
RITUALS/PRACTICE)
Myth that there are an easy way of understanding
of economic world & explaining complex
phenomena,
For the users in a more simplified & understandable
manner, thereby creating more myths (simple story)
than realities.
Like witchcraft (the practice of magic), accounting
embrace a system of values that regulate human
conduct & explains to humans when things going
wrong or right.

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8. RATIONALE
Used to attach the meanings to events & therefore
provide a justification for future occurrence.
Accounting provide a shield of guarantee or a
certification of authority to these numbers &
provides a rationale for actions to be based on
them.
Organizational decisions, need to be justified,
legitimized, & rationalized, accounting provides
useful means of action.
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9. IMAGERY
Creating a picture or an image of an organization
through a selective choice of events & accounts
impinging (impress) of an organization.
The image created through selective interpretation
& representation of events in turn creates a stable
& certain environment & basis for decision making.
Also view as financial map-making (complex
phenomena are mapped into financial statement)
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10. EXPERIMATATION
It flexible enough to accommodate various
situations, adopt new solutions, to new problems, &
adapt to the most complex case.
As an experiment, accounting allows itself to go
through trial & error phases towards a search for
the most contingent solution to a given environment
& a desire response & behavior repertoire (The
entire range of skills or devices used in a particular
field or occupation).
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11. DISTORTION
Since accounting used to control or influence of
actions of both internal & external users, it become
an ideal target to those seeking & manipulate the
nature of message view by the user.
The method used can be categorized into six board
categories; smoothing, biasing, focusing, gaming,
filtering & illegal acts.
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WHAT IS AN ACCOUNTING
THEORY?
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DEFINITION OF THEORY
Popper, K (1968) ,The Logic of Scientific Discovery-
emphasizes empirical nature of the theory rather
than logical-

Theories are nets cast to catch what we call the world,
to rationalize, to explain and to master it
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Hendriksen (1970):
1the coherent (logical) set of hypothetical, conceptual and
pragmatic principles forming the general framework of
reference for a field of inquiry.
2logical reasoning in the form of a set principles provide a
general framework of reference by which accounting practices
can be evaluated and guided the development of new
practices and procedures.
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McDonald argues that a theory must have three
elements:
1. encoding of phenomena to symbolic
representation
2. manipulation or combination according to
rules
3. translation back to real-world phenomena
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Belkaoui (2000)
..a set of interrelated constructs (concepts), definitions,
and propositions that present a systematic view of
phenomena by specifying relations among variables
with the purpose of explaining and predicting the
phenomena.
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DEFINITION OF ACCOUNTING THEORY
Godfrey et. al. (2010), classified accounting theory as:
Theory as Language
Theory as Reasoning
Theory as Script
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B
K
A
F
3
0
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3

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A. THEORY AS LANGUAGE
As language of business
Three question that should asked about language,
word, phrases
What effect will the words have on listeners?
What meaning, if any, do the words have?
Do the word make logical sense?

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I. PRAGMATICS
This relation pertains to the effect of words or symbols
on people
How accounting concepts, and their real world
corresponding events or objects, affect peoples behavior.
Observe how people react to the same message in
different ways same financial information, some would
buy shares, some would sell shares
Relates to decision model is that accounting information
must satisfy the information needs of users
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PARTS OF A THEORY
Pragmatics


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Accounting should provide useful
information for decision making to certain
interested parties
II. SEMANTICS
Links the basic concepts of a theory to object in the
real world.
Concern the relationship of a word, sign or symbol
to a real world object or event.
To make a theory realistic and meaningful.
For instance, A = L + E is purely abstract, the
equation only realistic and meaningful if we
correlate with real world objects.
Not concern to the line of logic argument.

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Semantics
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Premise 1: All asset accounts have debit balances.
Premise 2: The sales returns account is not an asset account.
Conclusion: The sales returns account has a debit balance.
III. SYNTACTIC
Rules of the language employed
Refer to rules of grammar & mathematics
Analytical methodology basically relied upon syllogism
If the combination of premise is valid, so the conclusion
was also true.
Do not need to know the meaning of something to see
that the syllogism is logical.
By themselves, syntactic propositions have no empirical
content.
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PARTS OF A THEORY
Syntactics


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Premise 1: All accounts relating to assets have debit balances.
Premise 2: The accumulated depreciation account relates to assets.
Conclusion: The accumulated depreciation account has a debit balance.
B. THEORY AS REASONING
The debate whether the theory is argument flow:
Generalization to specifics (deductive). Accountants
usually deduce accounting principles or postulates to
provide concrete applications or rules
Specifics to generalizations (inductive).
Accounting principles are induced from the best current
practice.
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I. DEDUCTIVE REASONING
Example,
P1: All asset accounts have debit balances.
P2: The cash account is an asset account
C : The cash account has a debit balances

Objective are important part of deductive process.
P1 & P2 are more generalize. C is more specifically
to cash account.
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Advantages of the method;
If postulates or premises is false, conclusion may also
false
To provide the basis for practical rules.

Criticism;
Misunderstand the meaning of theory


The main objective of theory to provide a
framework for the development of new ideas or new
procedures and to help making choices among
alternative procedures.

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II. INDUCTIVE REASONING

Arguments begins with a set of a particular
examples, claim that it will representative of
some greater whole, then infer some
generalization about that whole.
Advantages;
Not necessarily constrained by a structure
Free to make relevant observation
Disadvantages
Influenced by the idea of relevant relationship/observed


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Example,
P1: The cash account is an asset account and has a debit
balance.
P2: The Vehicles account is an asset account and has a
debit balance.
P3: The land account is an asset account and has a debit
balance.
C : All asset accounts have debit balances

P1, P2, &P3 is so specific for each account.
C is generalization from all P.
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C. THEORY AS SCRIPT
The theory may be
To set forth and explain what and how financial
information is presented and communicated to users of
accounting data (descriptive or positive)
To prescribed what data ought to be communicated and
how they ought to be presented (prescriptive or
normative)

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I. NORMATIVE (PRESCRIPTIVE)
1950s & 60s
Explain more on what should be done rather than what
it is
Attempts to discover the best way of accounting for a
transaction & useful in making decision.
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II. POSITIVE (DESCRIPTIVE)
1970s
More on the inductive theory nature
Attempts to discover how management and others
decide which is the best way for them.
More on explanation on what and how, testing
assumptions made by normative theories.
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TESTING A THEORY
Criteria of truth
Dogmatic basis
believe what we read and statements made by
others simply because they have been made by
an authority
Self-evident basis
Reasonableness of a statement based on our
general knowledge, experience and observation
Scientific basis
Through testing, research, experimentation and
so on (support with empirical evidence)
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EMPIRICAL ACCOUNTING RESEARCH
PROGRAM
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1. Identify
research problem
2. Develop
theoretical framework
3. State
hypothesis
4. Construct
research design
5. Observe

6. Analyse

7. Evaluate

8. Assess limitations
and constraints
Theory plane (Steps 2,3&4)
Observation plane (Steps 1,5,6,7&8)
SUMMARY
A number of conflicting theories have developed
A theory generally consists of
three parts syntactic, semantic and pragmatic
relations.
There are several criteria for judging a theory
Persuasiveness (sound reasoning or argument)
of evidence
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