Prepared by Arabella Volkov University of Southern Queensland

Introduction Reference Text Chapter 1

Learning Objectives At the conclusion of this lecture, you should have an appreciation of: what is meant by ‘accounting theory’ and the purpose it has served over time the structure of this book and how it logically sequences its discussion of accounting theory

Overview of Accounting Theory What is a theory? Hendriksen’s definition: …the coherent set of hypothetical, conceptual and pragmatic principles forming the general framework of reference for a field of inquiry.

Overview of Accounting Theory What is an accounting theory? Hendriksen: 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.

Accounting Theory Modern concept Pacioli’s treatise compared to mathematics or physics Pacioli’s treatise Double-entry accounting Documenting process but not explaining basis for recording

Accounting Theory 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

Accounting Prescriptions Developed to resolve problems as they arose – reactive Ad hoc Led to inconsistencies in practice e.g. Asset revaluations Accounting standard setters Conceptual framework projects

Accounting Theory Development Pre-1400s little accounting theory 1400s Pacioli 1494 – Double entry Main emphasis was on practice Pre-theory period 1400s until 1800s

Accounting Theory Development Pre-Theory Period (1400s-1800s) Goldberg: No theory of accounting was devised from the time of Pacioli down to the opening of the nineteenth century. Suggestions of theory appear here and there, but not to the extent necessary to place accounting on a systematic basis

Accounting Theory Development General Scientific Period 1800–1955 explanations of accounting practice theory based on observations of current practice empirical analysis

Accounting Theory Development Normative period 1956–1970 norms for best practice what should be v. what is Two dominant groups: conceptual framework proponents critics of historical cost

Accounting Theory Development Normative period End of the normative period started in the early 1970s Unlikely a normative theory would be accepted Availability of financial economic principles and testing methods

Accounting Theory Development Specific Scientific Theory / Positive Era 1970–present day dissatisfaction with normative theories positive accounting theory explain & predict e.g. bonus plan hypothesis

Accounting Theory Development Behavioural research: Sociological implications of accounting numbers and the associated actions of ‘key players’ emerged in 1950s but despite growing acceptance, positive accounting theory still dominates

Accounting Theory Development Recent Events Corporate collapses e.g. Enron, Worldcom Could comprehensive theory have prevented this? Increased legislative reporting requirements

Accounting Theory Timeline

Accounting Theory Conceptual framework – 1980s nature and purpose of financial reporting criteria for deciding between alternative accounting practices SACs 1–4

Accounting Theory Conceptual framework – Recent Developments Joint project between IASB & FASB Harmonisation of accounting practices through international accounting standards

Summary Definition of accounting theory Major periods of accounting theory development Conceptual framework Recent events

Key terms and concepts Accounting Theory Normative theory Positive theory Conceptual framework

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