Financial Accounting Theory and Analysis 10e
Chapter 1 - The Development of Accounting Theory
What is Theory?
Webster defines theory as “Systematically organized knowledge, applicable in a relatively wide variety of circumstances; a system of assumptions, accepted principles and rules of procedure to analyze, predict or otherwise explain the nature of behavior of a specified set of phenomena.”
Why is the development of a general theory of accounting important? The development of a general theory of accounting is because of the role accounting plays in our economic society. We live in a capitalistic society which is characterized by a self-regulated market that operates through the forces of supply and demand.
What is the relationship of accounting research to accounting theory? The goal of accounting theory is to provide a set of principles and relationships that explains observed practices and predicts unobserved practices. That is, accounting theory should be able to explain why companies elect certain accounting methods over others and should enable users to predict the attributes of firms that elect various accounting methods. And as in other disciplines, accounting theory should also be verifiable through accounting research. Accounting research is needed to attain a more general theory of accounting, and in this regard the various theories of accounting that have been posited must be subjected to verification.
The Early History of Accounting
* Accounting records have been found to date back several thousand years in various parts of the world. Discovered in 1915, the Zenon Papyri contained information Apollonius private estate for a period of about 30 years concerning construction projects, agricultural activities, and business operations during the 3rd century B.C. According to Hain, this “surprisingly elaborate accounting system” was used in Greece since the fi fth century B.C. “Zenon’s accounting system contained provisions for responsibility accounting, a written record of all transactions, a personal account for wages paid to employees, inventory records, and a record of asset acquisitions and disposals. In addition, there is evidence that all the accounts were audited.” The Impact of the Renaissance
* It wasn’t until approximately 1300-1500 the need arose for more accurate records due to the Italians merchants vigoursly pursing trade and commerce. Italian merchants borrowed Arabic numeral system and the basis of arithmetic and an evolving trend toward the present double entry book keeping system developed. * In 1494 an Italian monk, Fra Luca Pacioli, wrote a book on arithmetic that included a description of double-entry bookkeeping. Pacioli’s work, Summa de Arithmetica Geometria Proportioniet Proportionalita, did not fully describe double-entry bookkeeping; rather, it formalized the practices and ideas that had been evolving over the years. Double-entry bookkeeping enabled business organizations to keep complete records of transactions and ultimately resulted in the ability to prepare financial statements. The evolution of joint ventures into ongoing businesses
As ongoing business organizations replaced isolated ventures, it became necessary to develop accounting records and reports that reflected a continuing investment of capital employed in various ways and to periodically summarize the results of activities. By the nineteenth century, bookkeeping expanded into accounting, and the concept that the owner’s original contribution, plus or minus profits or losses, indicated net worth emerged. However, profit was considered an increase in assets from any source, as the concepts of cost and income were yet to be developed. Another factor that influenced the development of accounting during the nineteenth century was the evolution in England of joint ventures into business corporations. Under the corporate form of business, owners (stockholders) may not be management. Thus...
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