Accounting Theory Solution Chapter 2

Topics: Scientific method, Balance sheet, Depreciation Pages: 7 (2625 words) Published: May 7, 2012
1.‘A theory that is purely syntactic is sterile.’ Comment. How can this statement relateto accounting? A syntactic theory is one that is capable of testing on the basis that it is valid in terms of itslogical consistency. Thus the calculation of accounting profit and determination of assetvaluation can be valid in relation to their conformity with rules prescribing the measurementof accounting profit and asset valuations. This can be described as sterile as it does notnecessarily relate to the real world. Historical cost accounting has been represented as being purely a syntactic theory, with the semantic inputs to the system being the transactions andexchanges recorded in the accounting system, which are then aggregated and classified on the basis of the premises and assumptions of historical cost accounting. Examples of ‘rules’include the duality of the accounting entry system and assigning costs to assets and liabilitiesrather than market values. The output is verified via the auditing process. The sterility of thisapproach is based on the lack of imprecision of accounting concepts and the lack of association between the rules and how they produce output that is relevant to users of financial statements. 2.A pragmatic theory of accounting involves observing the practices and techniques of working accountants and teaching these to successive accountants. (a)Argue the advantages and disadvantages of such an approach. (b)Do you believe this method of teaching accounting is ‘correct’? (a)A pragmatic theory is where we observe the behaviour of practising accountants and thencopy their accounting procedures and principles.Advantages: • the solutions of practising accountants are related to the requirements of the business world •they have developed (and been handed down) over a number of centuries •it is a pragmatic approach to solving the problems of accounting.Disadvantages: •no logical assessment (not deductive)

•does not allow change (or change occurs slowly)
•we perpetuate current practice
•concentrates on pragmatics and ignores the measurement issues (semantics). (b)Tutors should be aware that this debate is a common one argued between practisingaccountants and some normative accounting theorists, and will invoke a number of responses from students. A number will argue that an approach that lacks a theoreticalcomponent (syntactics) will have the danger of becoming dogmatic or self-fulfilling. A pragmatic approach may mean that too much emphasis is placed on the practices and techniques of accountants, and little emphasis is placed on the meaning of the actual‘financial statements’. Accounting then may revert to a procedural art. On the other hand, others may rightly argue that accounting theory may become tooobtuse if a completely theoretical approach is taken without regard to the facts of the realworld. Theoretical argument without pragmatic application is likely to be of little benefitto business and society. Another point worth noting in this question is the meaning of ‘the facts of the real world’. Our analysis of testing a theory suggests that the above statement should be subjected to anumber of tests. 3.(a)Describe the semantic approach to accounting.

(b)Do you think that the outputs of the accounting system should be ‘verified’? Howcould this be achieved? (a)A semantic approach to accounting is the assignment of numbers to the components of accounting. It has two arms: •Input semantics — assigning numbers to the transaction inputs of accounting (for example, assets, liabilities, revenue, expenses). This transactions-based approach isoften criticised as a mathematical system divorced from logical analysis or outputsemantics. •Output semantics — testing the outputs of the accounting system against someexternal reference (for example, increases in profits against share price changes)). (b)This is a difficult question as there are very few external referents other than the stock market. Further,...
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