1. Advanced Accounting Theory

2. ACC 4303 - AAT Nature and Definition of Accounting
Conceptual Framework
Evolution of Accounting Thought
Recognition of Assets, Liabilities, Expenses, Revenue in Financial Statements
Concept of Goodwill
Valuation & Accounting for Goodwill

3. ACC 4303 - AAT The concept of true and fair view
Depreciation in Accounting
Accountability in Accounting
Social Responsibility Accounting
Human Resources Accounting
Creative Accounting
Accounting Standards
Accounting Theories
Process of accounting theory construction

4. ACC 4303 - AAT Examination Midterm Test (15 marks)
Assignment (15 marks)
Final Examination (70 marks)

5. ACC 4303 - AAT How to Tackle Theoretical Questions
No one correct answer (open ended questions)
Demonstrates how you evaluate different views (corresponds to how much you have read ?)
Finally express your own view
Outline: Main issue, different views and your own view
Give reference
Expected not a professor’s knowledge

6. ACC 4303 - AAT How to Tackle Theoretical Questions
No one correct answer (open ended questions)
Demonstrates how you evaluate different views (corresponds to how much you have read ?)
Finally express your own view
Outline: Main issue, different views and your own view
Give reference
Expected not a professor’s knowledge

7. Key Terms Theory Accounting theory Nature and role of accounting
Descriptive, normative and positive theories
Postulates, concepts and principles
Conceptual framework

8. Definition of Theory What is a theory?
…the coherent set of hypothetical, conceptual and pragmatic principles forming the general framework of reference for a field of inquiry (Hendriksen)
theories are composed of words or other symbols…they are statements and do not have a physical form

9. Why do we need theory?
To Systematically Create New Knowledge!

10. Accounting Theory
…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 (Hendriksen).

11. What is the Nature of Accounting?
…the process of identifying, measuring and communicating economic information to permit informed judgements and decisions by users of information (AAA, A statement of Basic Accounting Theory)

12. Function of Theories
Theories which explain (e.g. accountants do not do X because of Y)
Theories which predict (e.g. cosmetic accounting policy changes will have no impact on share price) - Positive
Theories which recommend/ prescribe (e.g. current cost accounting should be used to provide more useful information)
Normative

13. Accounting Theory Eras
‘General Scientific Period’ (up to 1955??)
‘What is’ theories (descriptive)
Based on observations
Empirical analysis
e.g. Choose ‘best’ depreciation method based on the one that has been used the most

14. Accounting Theory Eras
‘Prescriptive/Normative Period’
‘What should be’ (prescriptive)
Norms for best practice
Not necessarily based on observation
e.g. the development of current value accounting systems in the late 1960s - early 1970s

15. Some prescriptive theories
Decision usefulness theories
Decision makers: ask the users what they want
Decision models: researcher deduces what is necessary for efficient decisions to be made
Measurement Issues and Concept of Income
Conceptual framework projects

16. Accounting Theory Eras
‘Positive Period’:
‘Specific scientific theory’
Dissatisfaction with normative theories
Normally based on observation
Seek to explain and predict

17. Some descriptive/positive theories
capital market based research
behavioural research

18. Criticisms of PAT
Does not provide prescription so does not provide a means of improving accounting practice
Not value-free but rather value-laden
Underlying assumption of wealth maximisation
Issues being addressed have not shown any significant development
Scientifically flawed

19. Evaluating theories Consider logic and evidence Use of emotional words
Using ‘all’ instead of ‘some’
Repeated ‘affirmation’
Argument by analogy only
Use of emotional words
False credentials
Appeal to authority
Change in the meaning of terms during arguments

20. Historically Accounting seen as pragmatic, procedural endeavour
Rules, practices and procedures developed on an ad-hoc basis usually in response to recording and reporting issues that presented themselves for resolution
Repetition and general acceptance has provided support and legitimacy to the practitioners’ rules.

21. Hierarchy of the Elements of Structure of Accounting Theory

22. Accounting Postulates

23. Theoretical Concepts

24. Accounting Principles

25. Systems Concepts and Accounting

26. Systems Everywhere Solar System Eco-System Digestive System
Transportation System
Economic System
Political System
School System
... and on and on.

27. What is a System
A System is a set of parts (or components) coordinated to accomplish a set of goals.
Input
Output
Process

28. Characteristics of a System
Component Parts
A Process
Goal
Input
Output (Goal)
Process

29. Sub/Super Systems Subsystem Supersystem
a component may itself be a system
a subsystem
Supersystem
a system may itself be a component of a bigger system
the supersystem
Supersystem
Subsystem

30. Boundary and Environment
The Environment
Boundary
System
Interaction

31. Interfaces
System 2
System 1
Interface

32. Types of System Closed Systems Relatively Closed Systems Open Systems
No Interaction with environment
Relatively Closed Systems
Controlled interaction
Open Systems
Uncontrolled interaction
Feedback Control Systems
Portion of output returned as input

33. AIS as a System A Relatively Closed System Subsystems of AIS
Classified as Application Systems
Cash Disbursement
Accounts Receivables
Classified as Transaction Cycles
Revenue Cycle
Expenditure Cycle
Conversion Cycle
Financial Cycle

34. Environment
Environment
Customers
Vendors
Government
Owners
Creditors

35. AIS as a Subsystem AIS is a subsystem of MIS
Executive Information System
Budgeting and Responsibility
Reporting System
Transaction Processing System

36. Spectrum of Mgt. Info. Needs
Structured
Retrospective
Recurring
Unstructured
Prospective
Nonrecurring
Responsibility
Reporting
Systems
Budgeting
Systems
Decision
Support
Systems
Transaction
Processing
Systems