TM 01 Chap03

Chapter 3
Traditional
approaches to the
formulation of an
accounting theory
Traditional approaches to
accounting theory
• Non-theoretical approaches
• Deductive approach
• Inductive approach
• Ethical approach
• Sociological approach
• Economic approach
The nature of accounting:
various images
Accounting as:
– language
– historical record
– current economic reality
– information system
– commodity
– ideology
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
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
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
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
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
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
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
Definitions of
accounting theory
Hendriksen defines accounting theory
as ‘a set of broad principles that:
1. provides a general frame of
reference by which accounting
practice can be evaluated
2. guides the development of new
practices and procedures’
Definitions of accounting theory
(cont’d)
McDonald argues that a theory must
have three elements:
1. encoding of phenomena to
symbolic representation
2. manipulation or combination
according to rules
3. translation back to real-world
phenomena
How accounting meets these
criteria
Accounting employs:
1. symbols (debit and credit)
2. translation rules
3. rules of manipulation
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
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
The deductive approach
Steps used to derive the deductive
approach
1. Specifying the objectives of
financial statements
2. Selecting the ‘postulates’ of
accounting
3. Deriving the ‘principles’ of
accounting
4. Developing the ‘techniques’ of
accounting
The inductive approach
Four stages
1. Recording all observations
2. Analysing and classifying these
observations to detect recurring
relationships
3. Inductive derivation of
generalisations and principles of
accounting from observations that
depict recurring relationships
4. Testing the generalisations
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
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:
1. conformity with GAAP
2. disclosure
3. consistency
4. comparability
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
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’
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

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Chapter 3

• Balance sheets and income statements

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