TUTORIAL 1 - Semester 2 2014
Deegan Topic 1:
Introduction to financial accounting theory
QUESTION 1 - Question 1.8:
What is the difference between developing a theory by induction and developing a theory by deduction?
As explained in this chapter, theory that is developed through induction is developed as a result of undertaking a series of observations of particular events, and on the basis of these observations, a theory is developed. Early theories of accounting (for example, in the 1960s) were often developed by observing what accountants were actually doing in practice. This led to the formulation of certain conventions and doctrines of accounting which were considered to be theories. As we discussed however, developing theory on the basis of observation typically does not allow us to address the issue of what would be the most appropriate behaviour in particular circumstances (and determining ‘appropriate behaviour’ will in turn be influenced by particular assumptions or value judgments made by the researcher). That is, it does not encourage us to evaluate what the accountants are doing.
By contrast, developing theory on the basis of deduction does not rely upon observation. Rather, it relies upon the use of logic to develop arguments and related theory. Some theories developed through deduction—such as positive accounting theories which are developed and then used to predict particular behaviour—can be tested (but not initially developed) through subsequent observation. Other theories developed through deduction—such as Chambers’ theory of accounting (Continuously Contemporary Accounting)—should not be evaluated through subsequent observation as he was prescribing a particular approach to accounting that was in stark contrast to what accountants were doing at the time.
QUESTION 2 - Question 1.9:
Is the study of financial accounting theory a waste of time for accounting students? Explain your