Topics: International Financial Reporting Standards, Financial statements, Decision theory Pages: 27 (9204 words) Published: January 31, 2013


THEORETICAL FRAMEWORK OF ACCOUNTING THEORIES INTRODUCTION In this topic we consider various theories of financial accounting. Perhaps, therefore, we should start by considering what we mean by a ‘theory’. Theory., which has a Greek root, .Theoria. meaning to .behold or view.. A popular definition given by Kerlinger defines theory as .a set of interrelated constructs (concepts), definitions and propositions that present a systematic view of phenomena by specifying relations among variables, with the purpose of explaining and predicting the phenomena… Arnold Rose.s view is similar to the above statement. He defined theory as an integrated body of definitions, assumptions and general propositions covering a given subject matter from which a comprehensive and consistent set of specific and testable (principles) can be deduced logically… There are other views which state theory as .a set of interrelated concepts at a fairly high level of generality..

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 of a group of facts or phenomena. The Macquarie Dictionary provides the following definition of a theory: A coherent group of general propositions used as principles of explanation for a class of 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). The use of the word ‘coherent’ in three of the above four definitions of theory is interesting and reflects a view that the components of a theory (perhaps including assumptions about human behaviour) should logically combine together to provide explanation or guidance in respect of certain phenomena. The definitions are consistent with a perspective that theories are not ad hoc in nature and should be based on logical (systematic and coherent) reasoning. 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

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undertaking numerous observations 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 explanations or predictions of particular phenomena, but rather, prescribe what should be done (as opposed to describing or predicting what is done) in particular circumstances. Llewelyn(2003) points out that the term ‘theory’ in accounting not only applies to ‘grand theories’ which seek to tell us about broad generalisable issues (like the theory of gravity in physics), but also applies to any framework which helps us make sense of aspects of the (social) world in which we live, and which helps provide a structure to understand our (social) experiences. We stress that different theories of accounting often have different objectives. .

The Process of Theory Construction
A theory, according to the definition...
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