There is no generally accepted theory of accounting. There are a number of accounting theories (though a systematic attempt has been made by Financial Accounting Board (FASB) of USA and IASC and other to formulate a comprehensive theory of accounting). The definition of Accounting Theory given by Hendriksen as “a set of broad principles that (i) provide a general frame of reference by which accounting practice can be evaluated, and (ii) guide the development of new practices and procedures” lead us to perceive accounting theory as a basis of explanation and prediction.
The primary objective of accounting theory, as it follows from this definition, is to provide a coherent set of logically derived principles that serve as a frame of reference for explanation/prediction of accounting events and behavior. Classification of Accounting Theories There are several ways of classifying accounting theories. They may be classified, for example, according to time e. g. steward accounting, decision usefulness accounting, and accountability or societal responsibility accounting. Other ways of classifying theories can be (i) Inductive versus deductive, and (ii) normative versus positive.
Glautier and Underdown are of the view that the roots of accounting theory are decision theory, measurement theory, and informational theory. Hendirksen says that “a useful frame of reference is to classify theories according to prediction levels” there are, according to him, three main levels of theory. The levels are as follows: 1) Structural or syntactical theories. 2) Interpretational or semantical theories. 3) Behavioural or pragmatic theories. Behavioral or pragmatic theories: These theories emphasize the behavioural or decision-oriented effects of accounting reports and statements.
It has been noted that accounting is now regarded as a process of measurement and reporting information to the users- internal and external. Since 1945 onwards it is being realized that accounting is useful not merely to assess the result of past performance but also that it can be more useful in decision making by the management , shareholder, creditor, present and potential investors, government and others. The objective of accounting now is not only to provide information to management for decision making.
Outsider interested individual and groups of individuals are also supplied necessary and timely information for making rational decisions. The focus is on relevance of information being communicated to decision makers and the behavior of different users as a result of presenting of accounting information, e. g. an effort to and be made to find out the extent to which security prices reflect fully and promptly all available information or what is the impact of providing price-adjusted accounting information during inflation on decision makers.
It can thus, be seen that in recent times communication-decision orientation has been emphasized in the development of accounting theories. Behavioural theories attempt to measure and evaluate the economic, psychological and sociological effect of alternative accounting procedures and reporting media. ACCOUNTING is utilitarian. It represents a response to needs. The measure of its achievements at any point in time and in any particular context is the extent of this response to the needs of that particular time in that particular context. Underlying accounting standards represent the concept of usefulness.
The truth of this is evident in the decision-oriented accounting which forms such a large part of the accounting task. The accounting required to satisfy the demands of stewardship, law and regulation, and reporting minima, forms only a minor part of modern data processing and information systems. The detailed classifications and task-oriented analyses which are a feature of the modern system are justified only by their capacity to provide at the margin a value in excess of the incremental cost. Management needs information to use as a basis for decision-making.
The value we are concerned with is value to management An accounting system accumulating, classifying, analyzing and relating both financial and statistical data is the major source of managerial information. In the first place there is the value of the record itself. It is necessary to have ready access to facts, and reliable evidence of facts. For example, detailed and verifiable records of debtors’ current accounts are essential. In the second place, there is value in the analysis of the results of past activity and past decisions, particularly if this can be related to standards and to individual responsibilities.
Finally, there is value in data classified and accumulated for the purposes of projection. There is truth in the criticism that we are a long way from using the economic potential of electronic computers in the business sphere, and that the future will see an increasing use of computers in the scientific projection of past data to provide a constantly updated guide for managerial planning. Administrative accounting is a response to managerial needs. It is economic only insofar as it provides, at the margin, value at least equal to cost.
It follows that, in the rapidly changing scene which is typical of today, there is a need for a continual reassessment of needs, of responses, and of economics. It follows too that the administrative accountant is concerned not just with meeting general needs typical of the particular type of enterprise, but also the particular needs of those responsible for administering the particular enterprise. Finally, the administrative accounting that is done in a specific enterprise is the concern of the management of that enterprise rather than of the accountancy profession.
Accounting is a system-centered activity carried out to meet particular needs. But a study through time, and a study of systems in widely varying enterprises, reveal the existence of some broad needs and the development of some common methods and generally accepted standards in the meeting of those needs. In their valuable study of accounting continuity,’ Littleton and Zimmerman have traced three general and continuing needs which have been and continue to be the concern of accounting:
1. The need to record in order to report. This is the concept of stewardship; but is concerned too with the need for dependable facts. . The need to audit in order to trust. This is the concept of verification, ex-pressed in the modern context in the auditing function. 3. The need to analyze in order to understand. The need to interpret, they suggest, is the greatest of these needs, and by corollary the most important of the accounting tasks. Its systematic implementation is through classification, analysis, and comparison. Common needs might well be expected to stimulate common responses, though environmental factors will lead to differences in these responses.
Double entry accounting has been one such response, and its value is evidenced by its continuity after some six hundred years of experience. The social need for reliability and comparability of accounting reports has led to the concepts of “general acceptance” and “the true and fair view. ” But both methods and concepts require continuing’ review to determine, in a changing world, the extent to which they are meeting both broad needs and particular needs. Many accountants would maintain that the time honored double entry system, fundamentally based on flows of historic costs, is in-adequate to meet the needs of the modern era.
The Accounting: The Survival of Satisfactory The accounting bequeathed to us today as a gift from yesterday exemplified a response to past needs; but not necessarily of the “a survival satisfactory. One must ask the questions “Satisfactory to whom? ” and “Satisfactory for what purpose? If standards are to have a sharp cutting edge, then they need to be concerned with the particular needs of particular individuals or groups. The broader the group, and the more diverse the needs, the less incisive and useful are the standards. “Fairness to all” and “general acceptance” tend to reflect custom and com-promise.
Such concepts are not without value-the same value as Common Law has in our legal system. But where there is a potential towards bias, where there are vested interests, social interests, and interests requiring the protection of society the law tends to be more specific. And this is the situation in the external reporting field which is the particular concern of the accountancy profession. One result is that professional pronouncements on controversial matters have tended to lack clear definition and to give tacit acceptance to what Leonard Spacek has called “double standards.
Another result is that the reaction of accounting practice in re-porting to changing needs has tended to be very slow, and to receive its main stimulation from disaster rather than from the evolutionary process envisaged by Little-ton and Zimmerman. Let us assume that we have overcome the problem of definition of “the satisfactory. ” What conditions are necessary for the timely emergence of the satisfactory? I suggest that it requires a regular critical examination of current needs, objectives, standards, compromises, methods and rules, with an adequate testing of new concepts and methods.
The basis for testing should be the closeness of approach to the revised objectives, and the practicality and economics of the change (considered in the very broad sense). In fact our re-examination have tented to be spasmodic and uncritical. That testing is inadequate is clearly by the evidence negative reaction to the suggestion that supplementary statements be published, incorporating price level changes. Firm objectives to use as a basis for judgment are at least not clearly expressed-if they are expressed at all.
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Topic: Pragmatic Accounting
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