Accounting Theory

Name : Nabila Ika Sari
ID Number : 008201900007
Accounting Theory Construction

Pragmatic Theory
Descriptive pragmatic approach
The descriptive pragmatic approach is probably the oldest and most universally used
method of accounting theory construction. The descriptive pragmatic approach to accounting
theory construction is an inductive approach it is based on continual observation of the
behaviour of accountants in order to copy their accounting procedures and principles.
However, there have been several criticisms of this approach to accounting theory
construction:
 The descriptive pragmatic approach does not include an analytical judgement of the
quality of an accountant's actions, there is no assessment of whether the accountant
reports in the way he or she should.
 This approach does not provide for accounting techniques to be challenged.
 The descriptive pragmatic approach focuses attention on accountants' behaviour, not
on measuring the attributes of the firm, such as assets, liabilities and profit.
Psychological pragmatic approach
Psychological pragmatic approaches require theorists to observe users' responses to the

accountants' outputs (such as financial reports). A reaction by the user is taken as evidence
that the financial statements are useful and contain relevant information.
A problem with the psychological pragmatic approach is :
 Some users may react in an illogical manner
 Some might have a preconditioned response, and
 May not react when they should.
This deficiency can be overcome by testing a large sample of people.
Syntactic and Semantic Theories
The interpretation can be explained as follows: semantic input from the file systems are
transactions and exchanges that are recorded in vouchers, journals and ledgers business. Then
it is manipulated historical cost accounting assumptions.
For example, assume inflation is not recorded and the market values of assets and liabilities
are ignored.Then use double-entry accounting and historical cost accounting principles.
However, the accounts are rarely specifically audited for what and how people are going to
use it (pragmatic test) or in what terms it means (semantic test). In this way the historical cost
theory has been confirmed many times. If we assume Lakatosian Historical Cost forms a
negative heuristic and, in view of the dominant Khunian paradigm.
Normative Theories
The 1950s and 1960s saw what has been described as the 'golden age' of normative
accounting research. During this period, accounting researchers became more concerned with
policy recommendations and with what should be done.
This normative theory focuses on two things, namely true income and decision use.
1. True income
Concentrated on deriving a single measure for assetsand a unique (and correct) profit
figure.
2. Decision-usefulness
The basic objective of accounting is to aid the decision-making process of certain
'users' of accounting reports by providing useful, or relevant, accounting data.
They are normative in nature because they make the following assumptions:
 Accounting should be a measurement system
 Profit and value can be measured precisely
 Financial accounting is useful for making economic decisions
 Markets are inefficient or can be fooled by 'creative accountants'
 Conventional accounting is inefficient (in an information sense)
 There is one unique profit measure.
Because normative theory is a subjective personal opinion, it cannot be accepted, but must be
tested empirically in order to have a strong theoretical basis.
Positive Theories
During the 1970s, accounting theory saw a move back to empirical methodology, which is
often referred to as positive methodology. Positive accounting research first focused on
empirically testing some of the assumptions mzde by the normative accounting theorists. A
typical approach was to survey the opinions of financial analysts.
The main difference between normative and positive theories is that normative theories are
prescriptive, whereas positive theories are descriptive, explanatory or predictive.
 Normative theories prescribe how people such as accountants should behave to
achieve an outcome that is judged to be right, moral, just, or otherwise a 'good'
outcome.
 Positive theories do not prescribe how people (e.g. accountants) should behave to
achieve an outcome that is judged to be 'good'.
Different Perspectives
There are two research approaches in different perspectives:
1. The scientific approach
While observing real world behavior that is incompatible with the theory, treats that
anomaly as research problem and express it as a research problem to explain. Then
develop a theory and then following structured or predefined procedures for data
collection. This approach assumes that the world to be studied is objective reality
which can be tested in terms of large scale statistics or averages. This type of research
is carried out with additional hypotheses which are then combined to provide a greater
understanding, or better prediction, of accounting. The assumption is that good theory
operates under constant circumstances company, industry and time.
Criticism of the scientific method is that large-scale statistical research tends to
lump everything together. Hypotheses based on the use of stock market prices or
surveys render much of accounting research remote from the wcrld of practitioners.
2. The naturalistic approach
The naturalistic approach can be compared to 'scientific' accounting research, who are
more likely to combine the results from testing a number of hypotheses across order
to form a 'general theory of accounting'. Its main purpose is to answer the question
'What's going on here? ', not to provide generalizable conditions for a broad segment
of society.
Scientific approach applied to accounting

Misconceptions of purpose
The structure of the process in which these determinations reside made in such a way that no
one can claim the truth . Statements or theories get the status of 'confirmed' only after
sufficient evidence is sufficient persuasive.
Issues for Auditing Theory Construction

Auditing is a verification process that is applied to the accounting inputs and processes.
Auditors are not verifying outputs for conformance to one unique economic measure of
profit, but provide an opinion on whether the financial statements are in accordance with the
applicable reporting framework. Auditors provide an opinion on whether the statements
present fairly, in all material respects, or give a true and fair view.
The development of general audit theory has started since 1960 and is completely in line with
best audit practice. Recently, research has studied how an auditor makes decisions in an
attempt to predict auditor behavior, and positive theory explains the demand for audits and
audit fees using economic models.
The normative era of accounting theory and research also coincides with normatives audit
theory approach. In the early 1970's the American Accounting Association (AAA)
established a Basic Audit Concepts Committee to investigate this role and the audit function,
making recommendations for research projects, examining
evidentiary issues, and publish a position paper about the scope of the audit by accountant.
The report provides a normative statement about an audit with emphasis on concepts students
should learn, and suggestions for research which may lead to better fulfillment of the role of
auditing in society.

Accounting Theory

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Name : Nabila Ika Sari

Accounting Theory Construction

Psychological pragmatic approach

Psychological pragmatic approaches require theorists to observe users' responses to the

Syntactic and Semantic Theories

Scientific approach applied to accounting

Issues for Auditing Theory Construction

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