Financial Accounting Theory Note Topic 1

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Topic 1 Accounting and Society
Prepared by Graeme Wines.
 
One issue in Topic 1 that can be a little confusing is the distinction between inductive and deductive theories. The example of the topical area of climate change can be used to provide explanations of the distinction which may help your understanding.  

Inductive theory
A descriptive (explanatory/scientific) theory, as these terms imply, suggest that the theory is attempting to describe or explain a particular phenomenon, and that the theory is developed by application of the ‘scientific’ method. Such theories are developed primarily by induction, which involves reasoning from thespecific (ie specific observations) to the general (ie the general descriptive/explanatory theory). The theories are scientific (developed by the scientific method) in that a large enough number of specific observations (ie implying a suitable sample size) form a valid basis to make conclusions on the general theory (ie description/explanation of the particular phenomena).  

Take climate change research as an example. While there has been some questioning of the general conclusions drawn, the major view is that, given manyspecific observations of such things as global temperature changes over time, ice shelf melting in the Arctic and Antarctic, etc etc, the general theory has been advanced that climate change is indeed occurring.  

An example of a descriptive/explanatory theory in accounting is that of our system of doctrines and conventions/principles (developed especially in the period 1920 to 1940). Based on many specific observations of accountants in practice, and the manner in which they prepared accounting reports, the system of doctrines and conventions (eg conservatism, accounting period, historical cost, entity view) was developed as a general descriptive/explanatory theory. The aim of the general theory was to describe and explain accounting rules.  

Deductive theory
A normative or prescriptive theory seeks...
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