Accounting
What is a theory?
In this book we consider various theories of financial accounting. Perhaps, there¬fore, we should start by considering what we mean by a 'theory'. There are various perspectives of what constitutes a theory. The Oxford English Dictionary provides various definitions, including:
A scheme or system of ideas or statements held as an explanation or account (description) of a group of facts or phenomena. Explanation or Account (description) of a group of facts or phenomena.
Any theory consists of two elements: explanation & Phenomena
The accounting researcher Hendriksen (1970, p. 1) defines a theory as:
A coherent set of hypothetical, conceptual and pragmatic principles forming the general framework of reference for a field of inquiry.
The definition provided by Hendriksen is very similar to the US Financial Accounting Standards Board's definition of their Conceptual Framework Project (which in itself is deemed to be a normative theory of accounting), which is defined as
'a coherent system of interrelated objectives and fundamentals that can lead to consistent standards' (FASB, 1976). What the above definitions imply is that a theory should be based on logical (1. systematic and 2. coherent) reasoning i.e. explanation and account. As we will see, some accounting theories are developed on the basis of past observations (empirically based) of which some are further developed to make predictions about likely occurrences (and sometimes also to provide explanations of why the events occur). That is, particular theories may be generated and subsequently supported by undertaking numerous obser¬vations of the actual phenomena in question. Such empirically based theories are said to be based on inductive reasoning and are often labelled 'scientific', as, like many theories in the 'sciences', they are based on observation. Alternatively, other accounting theories which we also consider do not seek to provide
In this book we consider various theories of financial accounting. Perhaps, there¬fore, we should start by considering what we mean by a 'theory'. There are various perspectives of what constitutes a theory. The Oxford English Dictionary provides various definitions, including:
A scheme or system of ideas or statements held as an explanation or account (description) of a group of facts or phenomena. Explanation or Account (description) of a group of facts or phenomena.
Any theory consists of two elements: explanation & Phenomena
The accounting researcher Hendriksen (1970, p. 1) defines a theory as:
A coherent set of hypothetical, conceptual and pragmatic principles forming the general framework of reference for a field of inquiry.
The definition provided by Hendriksen is very similar to the US Financial Accounting Standards Board's definition of their Conceptual Framework Project (which in itself is deemed to be a normative theory of accounting), which is defined as
'a coherent system of interrelated objectives and fundamentals that can lead to consistent standards' (FASB, 1976). What the above definitions imply is that a theory should be based on logical (1. systematic and 2. coherent) reasoning i.e. explanation and account. As we will see, some accounting theories are developed on the basis of past observations (empirically based) of which some are further developed to make predictions about likely occurrences (and sometimes also to provide explanations of why the events occur). That is, particular theories may be generated and subsequently supported by undertaking numerous obser¬vations of the actual phenomena in question. Such empirically based theories are said to be based on inductive reasoning and are often labelled 'scientific', as, like many theories in the 'sciences', they are based on observation. Alternatively, other accounting theories which we also consider do not seek to provide