Topic 2: Development of Accounting Theory

After completed this topic, you should be able to: Describe the classifications to the development of accounting theory: pragmatic approach, normative approach, positive approach and behavioral approach.

DBF 213 ACCOUNTIG THEORY AND PRACTICE

 How can we know that a particular

accounting theory is useful to us? By classify the theories according to the assumptions they rely on, how they formulate the theories and explain.

DBF 213 ACCOUNTIG THEORY AND PRACTICE

1. Pragmatic Approach
Based on observation of the behavior of

the accountants or the users of FS generated by accountants Effect of words/symbol to people Accounting principles were found to be useful and generally accepted, regardless whether they were tested for any relevance to a particular problem
DBF 213 ACCOUNTIG THEORY AND PRACTICE

1. Pragmatic Approach
Descriptive Pragmatic Approach Developed from continual observing of the behavior of accountants, so that it can be copied (inductive) Critics: i) not analyze whether the accountants are reporting in the manner they should reporting (e.g: classroom, new accountant) ii) focusing on accountants behavior
a)
DBF 213 ACCOUNTIG THEORY AND PRACTICE

1. Pragmatic Approach
b) Psychological Pragmatic Approach Examine closely to the users responses to the accountants output Critic: i) some users react illogical manner, not realistic

DBF 213 ACCOUNTIG THEORY AND PRACTICE

2. Normative Approach
1950s and 1960s
Approach concern on what should be

done rather than analyzing and explaining current or accepted practice Criticism: i. Based on prediction ii. No verification

DBF 213 ACCOUNTIG THEORY AND PRACTICE

Features on Normative Approach

1. Market based approach
2. Difference concept of true income 3. Assume that primary goal of

management is profit maximisation 4. Provision of information for decision making as main function of decision making

DBF 213 ACCOUNTIG THEORY AND PRACTICE

3. Positive Approach
1970s
Testing or relating accounting hypothesis

to the experience or real world Concerned with:

Explaining the reasons for current practice Predict the role of accounting and information in the economic decision (individual, firms etc)
DBF 213 ACCOUNTIG THEORY AND PRACTICE

3. Positive Approach
Positive theories being tested using

scientific methods to gather the evidence. The evidence must be unbiased, external and can be verified Critics: i) not much development

DBF 213 ACCOUNTIG THEORY AND PRACTICE

4. Behavioral Approach
Psychology, sociology and

organizational theories To discover why people behave as they do Behavioral approach focus on:

Judgement and decision making of accountants and auditors The influence of the output on users judgement and decision making
DBF 213 ACCOUNTIG THEORY AND PRACTICE