INTRODUCTION TO ACCOUNTING

THEORYMutiara Inas Sari 041013039

Nadia Citranti 041013080

Julita Rachmadewi 041013256

ACCOUNTING THEORY

CONSTRUCTION

Pragmatic theories

Descriptive pragmatic approach:○ based on observed behaviour of

accountants○ theory developed from how

accountants act in certain situations○ tested by observing whether

accountants do act in the way the theory suggests

○ is an inductive approach

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Pragmatic theories

Criticisms of descriptive pragmatic approach:does not consider the quality of an

accountant’s actiondoes not provide for accounting practices to

be challengedfocuses on accountants’ behaviour not on

measuring the attributes of the firm

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Pragmatic theories

Psychological pragmatic approach:○ theory depends on observations of the

reactions of users to the accountants’ outputs

○ a reaction is taken as evidence that the outputs are useful and contain relevant information

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Pragmatic theories

Criticisms of the psychological pragmatic approach:some users may react in an illogical mannersome users might have a preconditioned

responsesome users may not react when they should

Theories are therefore tested using large samples of people

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Syntactic and semantic theories

Semantic inputs are the transactions and exchanges recorded in vouchers, journals and ledgers

• The inputs are then manipulated on the basis of the premises and assumptions of historical cost accounting

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Syntactic and semantic theories

Criticised because there is no independent empirical verification of the calculated outputs

The outputs may be criticised for poor syntax inaccurate e.g. different types of monetary measures are added together

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Syntactic and semantic theories

The outputs may be syntactically accurate but nevertheless be valueless due to a lack of semantic accuracy (a lack of correspondence with real-world events, transactions or values)

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Syntactic and semantic theories

Historic cost accounting may produce ‘accurate’ outputs but which nevertheless have little or no utility

That is, they are not useful for economic decision making except to verify accounting entries

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Normative theories 1950s and 1960s ‘golden age’

policy recommendations what should be concentrated on deriving:

○ true income (profit)○ practices that enhance decision-

usefulness based on analytic and empirical propositions

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Financial statements should mean what they say

Financial statements should mean what they say

Normative theories

True income:a single measure for assetsa unique and correct profit figure

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Normative theories

Decision usefulness:the basic objective of accounting is to aid

the decision-making process of certain ‘users’ of accounting reports by providing useful accounting data

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Normative theories

The decision process

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Accounting system of

company X

Accounting system of

company X

Prediction model of

user

Prediction model of

user

Decision model of

user

Decision model of

user

Positive theories

• Expanded during the 1970s• Based on ‘experiences’ or ‘facts’ of the

real world• Explain the reasons for current practice• Predict the role of accounting

information in decision-making

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Positive theories

The main difference between normative and positive theories is thatnormative theories are prescriptivepositive theories are descriptive, explanatory

or predictive

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DIFFERENT PERSPECTIVE OF

ACCOUNTING

AICPA Terminology

Accounting : art of recording, classifying, transaction reviewing, and financial events which are in effective and efficient manner and in the form of monetary unit and interpret the result of the process.

Accounting as Ideology

Accounting : viewed as ideology phenomenon to support and to legitimate social structure, economy, and political nowadays. Karl Marx said that accounting shaped social relationships becoming productive effort.

Accounting as Language

Accounting : already viewed as business language. It can be a way to communicate information about business. Grammar language refers to set of general procedures used and followed in making all of the financial data for business needs.

Accounting as Record of Past Events

Generally accounting is viewed as a presentation way of company history and transaction done with other parties.

Accounting as Current Economic Reality

Main argument supporting this perspective is that whether statement financial position or income statement has to be reported based on estimation that depict current economic reality rather than historical cost.

Accounting as Information System

This assumes accounting as a process correlating information source or transmitter, communication channel, and receivers (external users) . And also it could be defined as process of encoding some of observation into information system language, manipulating reporting system signal, decoding, and transmitting the results.

Accounting as Commodity

Commodity here is defined as accounting output in the form of information needed on the process of decision-making

Accounting as Responsibility

This elaborates that source of wealth which is managed can be traced in order to be media to take the responsibility of company or institute management.

Accounting as Technology

Bambang Sudibyo (1987) said that accounting is software technology. It does not use for explaining and predicting certain economic / social variables but for control those variables to fix economic status because of the practitioner’s social status.

ACCOUNTING THEORY

What is a theory? Hendriksen’s definition:

…the coherent set of hypothetical, conceptual and pragmatic principles forming the general framework of reference for a field of inquiry.

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What is an accounting theory? Hendriksen’s definition:

…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.

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Whether a theory is accepted depends on how:well it explains and predicts realitywell it is constructed both theoretically and

empiricallyacceptable its implications are

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