TOPIC 1: INTRODUCTION TO ACCOUNTING THEORY

After completed this topic, you should be able to: Define nature of theory and its accounting context Identify the range of accounting theory Describe the development of accounting theory

ACCOUNTING THEORY AND PRACTICE

INTRODUCTION
What is Accounting?
ACCOUNTING is the SYSTEM of

identifying, classifying, recording, summarizing, analyzing & reporting of FINANCIAL DATA & INFORMATION of ORGANISATION in accordance with ACCEPTED PRINCIPLES,CONCEPTS, CONVENTIONS, STANDARDS & REGULATION
ACCOUNTING THEORY AND PRACTICE

INTRODUCTION
IDENTIFYING is to CHOOSE

FINANCIAL TRANSACTIONS from all TRANSACTIONS. CLASSIFYING is to GROUP FINANCIAL TRANSACTIONS into ASSETS, LIABLITIES, EXPENSES & INCOMES. RECORDING is to enter TRANSACTIONS into RELEVANT BOOKS OF ACCOUNT.
ACCOUNTING THEORY AND PRACTICE

INTRODUCTION
SUMMARISING is to TOTAL UP groups

of FINANCIAL TRANSACTIONS in a certain TIME PERIOD. ANALYSING is to COMPARE TRANSACTIONS vertically or horizontally. REPORTING is to INFORM RELEVANT USERS of financial data relating to an organisation.
ACCOUNTING THEORY AND PRACTICE

INTRODUCTION
What is Theory? Theories are analytical tools for understanding, explaining, and making predictions about a given subject matter Fundamental assumptions + argument = final conclusion Example: Maslow Theory

ACCOUNTING THEORY AND PRACTICE

INTRODUCTION
Theory is derived from observation of

situations/events/result of logical reasoning Theories exist until they are replaced by a better theory

ACCOUNTING THEORY AND PRACTICE

Why Accounting Theory?

Provide more consistent treatment
As a general framework of reference Evaluation of the existing practices

(Syed Musa Al-Habshi, 2003) Guide development of a new practices and procedures

ACCOUNTING THEORY AND PRACTICE

Why Accounting Theory?

Financial world is never so simple
Accountants required to impose some

logical and quantitative order to imprecise events. So that can disclose the financial implication of these events or transaction.

ACCOUNTING THEORY AND PRACTICE

Why Accounting Theory?

Accounting theories are often developed

from different perspectives which may lead to many interpretations of accounting practices. Example: measurement issues of whether the assets and liabilities should be valued using historical cost or current cost.
ACCOUNTING THEORY AND PRACTICE

The role of Accounting

Accounting as a/an: Historical record To record about the past event Language Numbers which can be communicated and understood by users Intra corporate politics More efficient department (able to read FS) may request more resources
ACCOUNTING THEORY AND PRACTICE

The role of Accounting

Political process

Standard setting will involve many parties One party may influence one another Mythology Accounting as professional Magic Make-up balance sheet (ENRON)
ACCOUNTING THEORY AND PRACTICE

The role of Accounting

Communication- decision information

FS to influence decision Economic Goods Information provider for macroeconomics, taxation, political Social commodity To promote social welfare

ACCOUNTING THEORY AND PRACTICE

The role of Accounting

Ideology and Exploitation

Especially during Industrial Revolution Use accounting information to exploit workers and society Social Club Promote group interest and culture

ACCOUNTING THEORY AND PRACTICE

Accounting Development
<1400s : emphasis on practices not written 1494 Luca Pacioli wrote about double entry
1450-1750 Pre- theory period. Not systematic development

1956 - 1970 Normative Period what should happen

1800 1955 General Scientific Period Explanation of practices

1750 1920s Formalization of accounting practices (due to 3 factors)

1970s 2000 Specific Scientific Period / Positive Era

1980s now Behavioral Research

ACCOUNTING THEORY AND PRACTICE