The Imporance of Accounting Theory to the Field of Accounting

Equity (finance), Accounting identity, Financial statement

The Importance of Accounting Theory to the Field Of Accounting

The objective of theory is to explain and predict. One of the basic goals of the theory of a particular discipline is to have a well-defined body of knowledge that has been systematically accumulated, organized, and verified well enough to provide a frame of reference for future actions. The Webster’s definition of theory is the 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. Theories may be described as normative or positive. Normative theories explain what should. Positive theories explain what is. The goal of accounting theory is to provide a set of principles and relationships that explains observed practices and predicts unobserved practices. Meaning, accounting theory should be able to both explain why business organizations elect certain accounting methods over other alternatives and predict the attributes of firms that elect various accounting methods. Accounting theory should also be verifiable research. As stated in the Financial Accounting Theory and Analysis, the development of general theory of accounting is important because of the role accounting plays in our economic society, which is characterized by a self-regulated market that operates through the forces of supply and demand. The role of accounting is to report how organizations or companies use those scarce resources and on the status or resources and claims to resources. Because accountings have to report these organizations, the reports are done in a formal way called financial statements. The financial statements that are the main focused in this paper is the income statement, the balance sheet and the statement of cash flows.

An income statement is a financial statement for companies that...
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