L/O/G/O

Introduction to
Accounting Theory
1. Theory and the Formulation
of Theory
Definition of Theory

Theory = Hypothesis = Proposition

Proposition
a priori a posteriori
Statements which the Statements which the
true value can be true value can be
defined with pure defined by seeing the
reasoning or analysis phenomenon or
reality
Example : Example :
2+2=4 If the color of ltraffics light
turns to red, the car have to
Triangle has 3 side
stop.
Theory

Hendriksen said

Theory is the coherent set of hypothetical,

conceptual and pragmatic principles forming the
general framework of reference for a field of
inquiry.
Formulation of Theory

Theory

Phenomena

Questions needs answers Epistemology

Accountancy
Social science

Scientific method
Ways to review
Scientific theory
Naturalistic/ ianteractive method
Formulation of Theory
cont

A. Theory as language
words
development of theory
symbol semiology

abstract

real

Semiology:
Syntactic - are the symbols used consistently and logically?
Semantic what is the meaning of each words/symbol used in theory?
Pragmatic how the effect of words/symbol to people?
Formulation of Theory
cont

B. Theory as a reasoning
How the theory is formed, whether through the arguments of deductive
or inductive.

C. Theory as a justification (normative theory)

Theory recognize as tools to guideline the accountants in practice about
what have to do, based on value judgement used in formulating the
theory.

D. Theory as an explaination and prediction (positive theory)

Theory is free from value. Theory is formulated based on empirical
evidence to explain what happened in practice and to predict what will
be happen in case there is certain change of conditions.
2. Various Image of Accounting
Various Image of
Accounting
Accounting as an Art
Accounting as an Ideology
Accounting as a Language
Accounting as a Historical Record
Accounting as Current Economic Reality
Accounting as an Information System
Accounting as a Commodity
Accounting as a Technology
Accounting as an
Ideology
As a means of sustaining and legitimizing
the current, social, economic, and political
arrangements.
As myth, symbol, and ritual that permits
the creation of a symbolic order within
which social agents can interact.
As an instrument of economic rationality
and as tool of a capitalistic system.
Accounting as a
Language
It communicates information about a
business.
Accounting as a
Historical Record
Accounting records provide a history of the
managers stewardship of the owners
resources to the owner and other
shareholders of a company.
Accounting as Current
Economic Reality
The both balance sheets and income
statements should be based on a
valuation basis that is more reflective of
economic reality than historical cost for the
determination of true income and wealth of
the firm over period of time.
Accounting as an
Information System
It is a process that links an information
source or transmitter (usually the
accountant), a channel of communication,
and a set of receivers (external users).
Accounting as a
Commodity
A commodity that results from an
economic activity.
The information is in demand and
accountants are willing and capable of
producing it.
3. Accounting Theory and the
Formulation of Accounting
Theory
Accounting Theory

Hendriksen said:
Accounting Theory is logical reasoning in
the form of a set of broad principles that
provide a general framework of reference
by which accounting practice can be
evaluated and
guide the development of new practices
and procedures.
Methodologies for the
Formulation
Normative Theory Positive Theory
An attempt to justify what An attempt to justify what
ought to be. is by codifying accounting
practices.
Prescriptive
Descriptive, explanatory,
It is based on the or predictive
values/idealism,
It is based on the facts,
(good/bad)
(true/false)
Basis for drawing Basis for drawing
conclusion is conclusion is objective
subjective/reasoning
It uses judgment
Semantic and
Syntactic
Semantic
It studies about symbolizing the activities or
realities becoming symbols or elements of
financial statement.
Syntactic
It studies about the measurement,
acknowledgment, and presentation of
elements of financial statements and
accounting structure.
Scientific vs.
Naturalistic
Semantic

Semantic shows the meaning or relationship between

word, sign, or symbol with object in reality.
The main consideration: what is the meaning of each
words/symbol used in theory?

Example :
Accounting basic equation: Asset = Liability + Equity (abstract)
1.000.000 = 0 + 1.000.000 (from the shareholders) realistic

The true value or accuracy of semantic statement is based on

the descriptive accuracy in the reality / observation results.
Syntactic

Syntactic is the study of language structure or the

relationships between the symbols.
The main consideration: - are the symbols used
consistently and logically?
How to analyze? using the analytical method based on
silogisme

Example :
Statement 1: If all electron has the magnetic components
Statement 2: And particle X has not magnetic components
Conclusion: Therefore particle X is not an electron
Approaches to the
Formulation
The Traditional Approaches
1. Non Theoretical, Practical, or Pragmatic
(Informal)
2. Theoretical
a. Deductive
b. Inductive
c. Ethical
d. Sociological
e. Economic
f. The Eclectic
Non Theoretical
Approaches
a pragmatic approach
(it consists of the construction of a theory
characterized by its conformity to real-word
practices that is useful in terms of suggesting
practical solutions)

an authoritarian approach
(it is employed primarily by professional
organizations, consists of issuing
pronouncements for the regulation of accounting
practices)
 Pragmatic

The main consideration : how the effect of words/symbol

to people?
Pragmatis related to how the concepts and accounting
practice influence the peoples behavior.
Popular approach use is descriptive pragmatic approach,
an inductive approach based on continual observation of
the behavior of accountants in order to copy their
accounting procedures and principles.
(how accountancy fullfill the information needed by users).
Another approach use is psycological pragmatic approach,
where theorists observe users responses to the
accountant outputs, such as financial reports.
Deductive Approach
This approach moves from general (basic propositions
about the accounting environment) to the particular
(accounting principles first and accounting techniques
second)
The steps:
Specifying the objectives of financial statements
Selecting the postulates of accounting
Deriving the principles of accounting
Developing the techniques of accounting
Inductive Approach

It leads from the particular (accounting information

depicting recurring relationships) to the general
(postulates and principles of accounting)
The stages:
Recording all observations
Analysis and classification of these observations to
detect recurring relationships (likes and similarities)
Inductive derivation of generalizations and principles
of accounting from observations that depict recurring
relationships
Testing the generalizations
Ethical Approach

The basic core consists of the concept of:

Fairness
Justice
Equity
Truth
(by Scott)
Sociological Approach

It emphasizes the social effects of

accounting technique.
It centers on a broader concept of fairness
social welfare.
A given accounting principle or technique
is evaluated for acceptance on the basis of
its reporting effects on all groups in society
and the accounting data will be useful in
making social-welfare judgments.
Economic Approach

It emphasizes controlling the behavior of

macroeconomic indicators that result from
the adoption of various accounting
techniques.
It focuses on a concept of general
economic welfare.
The Eclectic Approach

A combination of approaches that is

mainly the result of numerous attempts by
individuals and professional and
government organizations to participate in
the establishment of a concept and
principles in accounting.
DEFINITIONS

ACCOUNTING IS THE ART OF RECORDING, CLASSIFYING, AND

SUMMARIZING IN A SIGNIFICANT MANNER AND IN TERMS OF
AICPA, 1953 MONEY, TRANSACTIONS AND EVENTS WHICH ARE, IN PART AT
LEAST, OF A FINANCIAL CHARACTER, AND INTEPRETING THE
RESULTS THEREOF.

THE PROCESS OF IDENTIFYING, MEASURING, AND

ASOBAT, 1966 COMMUNICATING ECONOMIC INFORMATION TO PERMIT
INFORMED JUDGMENTS AND DECISIONS BY USERS OF THE
INFORMATION.

ACCOUNTING IS A SERVICE ACTIVITY. ITS FUNCTION IS TO

APB Statement PROVIDE QUANTITATIVE INFORMATION, PRIMARILY FINANCIAL IN
NATURE ABOUT ECONOMIC ENTITIES THAT IS INTENDED TO BE
No 4, 1970 USEFUL IN MAKING ECONOMIC DECISION, IN MAKING RESLOVED
CHOICES AMONG ALTERNATIVE COURSES OF ACTION.
BODY OF THEORY
LEVEL 1
BODY OF THEORY
LEVEL 2 AND 3

Source: Kam, 1992,42

ACCOUNTING
POSTULATES

1. BUSINESS ENTITY
2. GOING CONCERN
3. ACCOUNTING PERIOD
4. MONETARY UNIT OF MEASURE
5. COST ATTACH
6. EFFORTS AND ACCOMPLISHMENT
 THE THEORETICAL OF
ACCOUNTING
1. THE PROPRIETARY THEORY
2. THE ENTITY THEORY
3. THE FUND THEORY
4. THE COMMANDER THEORY
5. THE ENTERPRISE THEORY
THE ACCOUNTING
PRINCIPLES
1. THE COST PRINCIPLE
2. THE REVENUE PRINCIPLE
3. THE MATCHING PRINCIPLE
4. THE OBJECTIVITY PRINCIPLE
5. THE CONSISTENCY PRINCIPLE
6. THE FULL-DISCLOSURE PRINCIPLE
7. THE MATERIALITY PRINCIPLE
8. THE UNIFORMITY AND COMPARABILITY
PRINCIPLE
RATIONALE OF
DOUBLE-ENTRY
TWO DIFFERENT CLASSIFICATIONS ARE
MADE
INVENTORY 100.000
ACCOUNTS PAYABLE 100.000
CLASSIFICATIONAL

DESCRIBE CAUSE-EFFECT RELATIONSHIP

BETWEEN AN INCREMENT AND DECREMENT
IN ONE CLASSIFICATION.
INVENTORY 100.000
CAUSAL CASH 100.000