1. Traditional approaches to the formulation of an accounting theory
Chapter 3
Traditional approaches to the formulation of an accounting theory

2. Traditional approaches to accounting theory
Non-theoretical approaches
Deductive approach
Inductive approach
Ethical approach
Sociological approach
Economic approach

3. The nature of accounting: various images
Accounting as:
language
historical record
current economic reality
information system
commodity
ideology

4. Accounting as an ideology
Accounting has been perceived as:
a means of sustaining and legitimising the current social, economic and political arrangements:
Karl Marx maintained that accounting perpetuates a form of false consciousness and mystifies rather than reveals the true nature of social relationships
accounting has been perceived as a myth, symbol and ritual that permits the creation of a symbolic order within which social agents can interact
an instrument of economic rationality and a tool of the capitalistic system

5. Accounting as a language
Accounting is perceived as the language of business
According to Hawes, a language has two components, being symbols and grammatical rules:
numerals and words and debits and credits are examples of the symbols unique to accounting
in accounting, grammatical rules refer to the general set of procedures used

6. Accounting as a historical record
Accounting records provide a history of the manager’s stewardship of the owner’s resources
Measurement of the stewardship concept has evolved over time, in the following periods:
pure custodial period
traditional custodial period
asset-utilisation period
open-ended period

7. Accounting as a current economic reality
Balance sheets and income statements should both be based on economic reality rather than on historical costs
The main objective of this image of accounting is the determination of true income

8. Accounting as an information system
Accounting links an information source or transmitter (usually the accountant), a channel of communication and a set of receivers (external users)
This view of accounting:
assumes that the accounting system is the only formal measurement system in the organisation
raises the possibility of designing an optimal accounting system capable of providing useful information

9. Accounting as a commodity
Accounting exists because specialised information is in demand and accountants are willing and capable of producing it
There is a market for accounting information with its derived demand and supply

10. The nature of accounting theory
The primary objective of accounting theory is to provide a basis for the prediction and explanation of accounting behaviour and events
No single comprehensive theory of accounting exists at present

11. Definitions of accounting theory
Hendriksen defines accounting theory as ‘a set of broad principles that:
provides a general frame of reference by which accounting practice can be evaluated
guides the development of new practices and procedures’

12. Definitions of accounting theory (cont’d)
McDonald argues that a theory must have three elements:
encoding of phenomena to symbolic representation
manipulation or combination according to rules
translation back to real-world phenomena

13. How accounting meets these criteria
Accounting employs:
symbols (debit and credit)
translation rules
rules of manipulation

14. The two methodologies Descriptive methodology:
attempts to describe accounting practices that exist and are deemed useful
Normative methodology:
attempts to justify what ought to be rather than what is

15. Non-theoretical approaches
The pragmatic approach:
consists of the construction of a theory that conforms to real-world practices and suggests practical solutions
The authoritarian approach:
consists of issuing pronouncements for the regulation of accounting practices

16. The deductive approach
Steps used to derive the deductive approach
Specifying the objectives of financial statements
Selecting the ‘postulates’ of accounting
Deriving the ‘principles’ of accounting
Developing the ‘techniques’ of accounting

17. The inductive approach
Four stages
Recording all observations
Analysing and classifying these observations to detect recurring relationships
Inductive derivation of generalisations and principles of accounting from observations that depict recurring relationships
Testing the generalisations

18. Comparing deductive and inductive approaches
In the inductive approach, the truth or falsity of the propositions does not depend on other propositions, but must be empirically verified
In the inductive approach the truth of the propositions depends on the observation of sufficient instances of recurring relationships
Accounting propositions that result from inductive inference imply special accounting techniques only with high probability
Accounting propositions that result from deductive inference lead, on the other hand, to specific accounting techniques with certainty

19. The ethical approach
The basic core consists of the concepts of fairness, justice, equity and truth
In general, the concept of fairness implies that accounting statements have not been subject to undue influence or bias
The committee on auditing procedures refers to ‘fairness of presentation’ as:
conformity with GAAP
disclosure
consistency
comparability

20. The sociological approach
Emphasises the social effects of accounting techniques
According to this approach, a given accounting principle or technique is evaluated for acceptance on the basis of its reporting effects on all groups in society
Implies that accounting data will be useful in making social welfare judgements

21. The economic approach
Emphasises controlling the behaviour of macroeconomic indicators that result from the adoption of various accounting techniques
The choice of different accounting techniques depends on their impact on the national economic good
Accounting policies and techniques should reflect ‘economic reality’, and the choice of accounting techniques should depend on ‘economic consequences’

22. Eclectic approach
In general, the formulation of accounting theory and the development of accounting principles have followed an eclectic approach (a combination of approaches), rather than just one school of thought