Accounting Theory

Accounting theory

The word 'theory' is also used at different levels in the literature of accounting. Thus, references to 'accounting theory' may mean purely speculative interpretations or empirical explanations. These references usually do not indicate the level of theory which is implied.

According to Hendriksen,

'Accounting theory may be defined as logical reasoning in the form of a set of broad principles that (1) provide a general frame of reference by which accounting practice can be evaluated, and (2) guide the development of new practices and procedures. Accounting theory may also be used to explain existing practices to obtain a better understanding of them. But the most important goal of accounting theory should be to provide a coherent set of logical principles that form the general frame of reference for the evaluation and development of sound accounting practices.' (Hendriksen, 2015.)

The role played by theory in accounting is very different from that played in the natural sciences, where theories are developed from empirical observations. In effect, the reverse is the case in accounting, since practice may be changed to accommodate theory. According to Ijiri,

'Contrary to the fields of linguistics, meteorology or chemistry, accountants can change their practices relatively easily. Therefore, it becomes an essential problem for accountants to know how accounting practices should be developed in the future. The sanctions by which accounting policies have become implemented are quite essential in understanding the field of accounting, since it is possible to change practices to fit theories!! This is unthinkable for scientists in other fields for whom phenomena are almighty. No matter how beautiful and elegant the theory may be, if it does not fit the empirical phenomena, it is replaced by one which fits better.' (Ijiri, 2001.)

The form of accounting information reported to decision makers depends on the practices adopted. These practices are imposed by accounting policy makers who, having knowledge of accounting theories, have the responsibility of responding to the needs of users of accounting information.

It is evident that deficiencies in the four significant areas, namely, accounting theory, policy making (by the profession and the government), accounting practice, and the use of accounting information, will impair the usefulness of an accounting information service. Thus, the failure of policy makers to incorporate research findings in the policies they devise may reduce the potential usefulness of accounting information.


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Read on: The Role of Accounting Theory

The role of accounting theory

Underlying the discussion of accounting as an information system is the important question of the field of knowledge to which accounting information refers. This question raises issues about the nature and significance of accounting theory, the different approaches to developing accounting theory and the relationship between accounting theory and accounting practice.

The purpose of this section of the website is to consider these various problems with a view to establishing the role of accounting theory.

The nature of theories
The Role of Accounting Theory