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Accounting Case

Essay by   •  March 18, 2012  •  Essay  •  774 Words (4 Pages)  •  1,837 Views

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A review of accounting theory construction reveals that there are many different approaches to theory formulation in accounting. This chapter classified and explains some of these approaches. Whereaas the previous chapter focuses on theory in general, this chapter extends that discussion to focus on theory construction in relation to accounting.

LO.1 HOW PRAGMATIC APPROACHES TO THEORY DEVELOPMENT APPLY TO ACCOUNTING

Accounting wa s dominated by descriptive pragmatic approaches to theory development or syntatic explanation of pragmatic relationships before the late 1950s. Pragmatic approaches are inductive approaches designed to learn from what accountants do (destription pragmatic approach) or how users respond to accounting information (psychological pragmatic approach), in order to replicate accounting procedures and principles.

LO.2 CRITISMS THAT HAVE BEEN LEVELLED AT HISTORICAL COST ACCOUNTING AS A THEORITICAL MODEL

Historical cost accounting has been critisied for a number of reasons, some of which are explored in later chapters. In this chapter we explored why traditional historical cost has been critisied for poor syntax, whreby different types of monetary measures are added, and for semantic deficiences since there is no independent emprically observable correspondent to concepts such as 'profit' or 'asset'. In later chapters we explore whether alternative accounting theories compensate for these deficiences.

LO.3 NORMATIVE TRUE INCOME THEORIES AND THE DECISION-USEFULNESS APPROACH TO ACCOUNTING THEORY

The 1950s and 1960s saw accounting theory formulated using a normative approach to prescribe how accountants should report either to derive the 'true income' for an organization or to generate information that is useful for decision making. 'True Income' theorists concentrated on deriving a single, correct measure of income. However, 'true income' is a concept that was never defined to the satisfaction of all parties. Decision usefulness approaches focused on developing theories to ensure that accounting reports would provide the information most useful for making decisions that the theorists believed to be most important. This period saw accounting theory develop mostly in relation to measurement theories of value and adjustments to take into account how inflation affected values. Normative theorists relied mostly on syntatic logic in deriving theories, and concentrated on measurement.

LO 4 HOW POSITIVE THEORIES ARE CONSTRUCTED.

From the early 1970s ,accounting theory became more involved in imperial or positive theory development and testing Positive accounting theorists concentrate on understanding the assumptions that formative theorists take for granted .Unlike normative theories ,which prescribe particular courses

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