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Overview of Accounting Theory Development

This document provides an overview of the development of accounting theory from ancient times to the present. It discusses the major periods in theory development including pre-theory, pragmatic accounting, normative accounting, and positive accounting. Recent developments have focused on establishing a conceptual framework and harmonizing standards through the International Financial Reporting Standards. The goal of accounting theory is to provide a coherent framework to evaluate practice and guide new procedures.

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Jeslyn Felice
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10 views3 pages

Overview of Accounting Theory Development

This document provides an overview of the development of accounting theory from ancient times to the present. It discusses the major periods in theory development including pre-theory, pragmatic accounting, normative accounting, and positive accounting. Recent developments have focused on establishing a conceptual framework and harmonizing standards through the International Financial Reporting Standards. The goal of accounting theory is to provide a coherent framework to evaluate practice and guide new procedures.

Uploaded by

Jeslyn Felice
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd

CHAPTER 1 INTRODUCTION

OVERVIEW OF ACCOUNTING THEORY


 What Is A Theory?
 Hendriksen’s Definition:
 … The Coherent Set Of Hypothetical, Conceptual And Pragmatic Principles Forming The General Framework Of
Reference For A Field Of Inquiry
 What Is An Accounting Theory?
 Hendriksen’s Definition:
 … Logical Reasoning In The Form Of A Set Of Broad Principles That
 Provide A General Framework Of Reference By Which Accounting Practice Can Be Evaluated And
 Guide The Development Of New Practices And Procedures
 Whether A Theory Is Accepted Depends On How:
 Well It Explains And Predicts Reality
 Well It Is Constructed Both Theoretically And Empirically
 Acceptable Its Implications Are
 The Development Of Accounting Theory Has Been Mostly Unstructured
 Chamber:
 Accounting Has Frequently Been Described As A Body Of Practices Which Have Been Developed In Response To
Practical Needs Rather Than By Deliberate And Systematic Thinking
PRE – THEORY (1400s – 1800)
 Goldberg:
 No Theory Of Accounting Was Devised From The Time Of Pacioli Down To The Opening Of The Nineteenth
Century
GREEK IN 5TH CENTURY BEFORE CHRIST (BC)
 In 1915, Scientist Discovered “Zenon Papyri”
 Contains Information About The Construction Projects, Agricultural Activities And Business Operations Of The
Private Estate Of Apollonius For A Period Of About 30 Years During The 3 Rd
 A Written Record Of All Transactions, A Personal Account For Wages Paid To Employees, Inventory Records And
A Record Of Asset Acquisitions And Disposals
ITALY
 The Romans Kept Elaborate Records But Since They Expressed Numbers Through Letters Of The Alphabet, They
Were Not Able To Develop Any Structured System Of Accounting
ITALY (RENAISSANCE 1300 – 1500)
 The Italians Were Vigorously Pursuing Trade And Commerce, And The Need To Keep Accurate Records Arose
 Italian Merchants Borrowed The Arabic Numeral System And The Basis Of Arithmetic And An Evolving Trend
Toward The Double – Entry Bookkeeping System
ITALY, 1494
 An Italian Monk, Fra Luca Pacioli, “Summa De Arithmetica Geometria Proportioniet Proportionalita”, A Book On
Arithmetic
 Described Double – Entry Bookkeeping
 Formalized The Practices And Ideas That Had Been Evolving Over The Years
1600
 Statement Of Profit And Loss And Statement Of Balances
 The Primary Motive For Separate Financial Statements Was To Obtain Information Regarding Capital
 Balance Sheet Data Were Stressed While Income And Expense Date Were Viewed As Incidental
1800
 Evolution Of Joint Ventures Into Business Corporations In England
 Bookkeeping Expanded Into Accounting
 The Concept Of Net Worth (Owner’s Original Contribution Profits Or Losses) Emerged
 Periodic Reporting For Owners And Prospective Owners
 Companies Acts In England Stimulated The Development Of Accounting Standards And Laws To Safeguard
Shareholders Against Improper Actions By Corporate Officers
 Dividends Were Required To Be Paid From Profits And Accounts Were Required To Be Kept And Audited By
Persons Other Than The Directors
 Industrial Revolution
LATER PART OF 1800
 Industrial Revolution Arrived In The United States (U.S.)
 Railroad Industries Created The Need For Supporting Industries, Led To Increases In The Market For Corporate
Securities And An Increased Need For Trained Accountants
 Accountants Were Initially Trained Through An Apprenticeship System, Later Private Commercial College
Emerged
1900 – 1915
 The Concept Of Income Determination Was Not Well Developed
 Debate Over Which Financial Statement Should Be Viewed As More Important
 1904: International Congress Of Accountants In United States (U.S.) Which Formed American Association Of
Public Accountants
 In 1916, Many Universities Began Offering Accounting Courses
AFTER THE GREAT DEPRESSION
 1933: Securities Act
 1934: Securities Exchange Act Which Established Securities And Exchange Commission (SEC)
 1935: American Association Of University Instructions In Accounting Changed Into American Accounting
Association
 1936: American Institute Of Certified Public Accountants (AICPA)
PRAGMATIC ACCOUNTING (1800 – 1955)
 The “General Scientific Period”
 Based On Empirical Observation Of Practice
 Provided An Explanation Of Accounting Practice
 Focused On The Existing “Viewpoint” Of Accounting
NORMATIVE ACCOUNTING (1956 – 1970)
 Sought To Establish “Norms” For The Best Accounting Practice
 Focused On What Should Be (The Ideal) Vs. What Is
 Degenerated Into Battles Between Competing Viewpoints
 Two Groups Dominated:
 Conceptual Framework Proponents
 Critics Of Historical Cost
 Factors Prompting The Demise Of The Normative Period Include:
 The Unlikelihood Of One Particular Normative Theory Being Generally Accepted
 The Application Of Financial Economic Principles
 The Availability Of Empirical Data And New Testing Methods
 The Major Criticisms Of Normative Theories Were:
 They Do Not Necessarily Involve Empirical Hypothesis Testing
 They Are Based On Value Judgements
POSITIVE ACCOUNTING (1950 TO THE PRESENT DAY)
 A Shift To A New Form Of Empiricism Called “Positive Theory”
 Had Its Origins In The “General Scientific Period”
 It Seeks To Explain The Accounting Practices Being Observed
 Its Objective Is To Explain And Predict Accounting Practice
 E. g. The Bonus Plan Hypothesis
 It Helps Predict The Reactions Of “Players”, Such As Shareholders, To The Actions Of Managers And To Reported
Accounting Information
 Major Deficiencies Are:
 “Wealth Maximisation” Has Become The Answer To Explain All Accounting Practices And Reported
Information
 It Relies Excessively On Agency Theory And Dubious Assumptions About The Efficiency Of Markets
 Behavioural Research:
 Concerned With The Sociological Implications Of Accounting Numbers And The Associated Actions Of “Key
Players”
 Emerged In The 1950s
 Despite Growing Acceptance Since The 1980s, Positive Accounting Theory Still Dominates
RECENT DEVELOPMENTS
 Academic And Professional Developments In Accounting Theory Have Tended To Take Different Approaches
 Academic Research Focuses On Capital Markets, Agency Theory And Behavioural Aspects
 The Profession Has Sought A
More Normative ApproachWhat
Accounting Practices Should
Be Adopted

 Conceptual FrameworkResurrected In 1980s


 States The Nature And Purpose Of Financial Reporting
 Establishes Criteria For Deciding Between Alternative Accounting Practices
 Standard Advisory Committee (SAC)s 1 – 4
 Conceptual FrameworkRecent Developments
 Joint Project Between International Accounting Standards Board (IASB) And Financial Accounting Standards
Board (FASB)
 International Harmonisation Of Accounting Practices Through A Single Consistent Set Of International
Financial Reporting Standards (IFRS)
 The Conceptual Framework Underpinning The International Financial Reporting Standards (IFRS) Favours A
Move Toward
 Accounting Practices That Provide Information For Enhancing Decision Making By Investors And Others
 Recognizing All Gains And Losses In The Accounting Periods In Which They Occur
 Measurement Using Exit Values
CHAPTER OUTLINE
 Part 1: Accounting Theory (Chapters 1 – 3)
 Part 2: Theory Contributing To Practice (Chapters 4 – 10)
 Part 3: Accounting And Research (Chapters 11 – 14)
SUMMARY
 Accounting Theory
 Major Periods Of Accounting Theory Development
 Normative Accounting
 Positive Accounting
 Conceptual Framework
 International Financial Reporting Standards (IFRS)
KEY TERMS AND CONCEPTS
 Theory
 Accounting Theory
 Normative Theory
 Positive Theory Behavioural Theory
 Conceptual Framework
 International Financial Reporting Standards (IFRS)

Common questions

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Pragmatic accounting, predominant from 1800 to 1955, was based on empirical observations and focused on explaining existing accounting practices. Its primary objective was to provide an empirical and descriptive view, relying on the practices being observed and analyzing them through a scientific lens without prescriptive norms . In contrast, normative accounting from 1956 to 1970 sought to establish theoretical norms for optimal accounting practices, focusing on what should be rather than what is. This approach was criticized for being heavily based on value judgments rather than empirical evidence and for its prescriptive nature, which often led to conflicting viewpoints and failed to gain widespread consensus .

The emergence of joint ventures evolving into business corporations in England during the 1800s led to significant changes in accounting practices. This evolution necessitated expanded bookkeeping into a more formalized accounting structure to manage diverse and complex financial transactions. It resulted in the recognition and necessity of periodic reporting, allowing for more accurate assessments of net worth, including original contribution profits or losses. Legislation such as the Companies Acts required financial statements to be audited by independent parties, ensuring transparency and protecting shareholders' interests. These developments contributed to the establishment of accounting standards and laid the groundwork for modern corporate financial reporting .

Behavioral research in accounting, emerging in the 1950s, focused on the sociological implications of accounting numbers and the reactions of key players, such as shareholders and managers. This research highlighted how accounting information could influence decision-making, organizational behavior, and even market perceptions. By considering the human element in accounting, behavioral research illuminated the psychological and behavioral responses to financial data, thus contributing to a greater understanding of user interaction with accounting information. This approach contrasted with the mechanistic views of accounting, emphasizing the broader impacts of accounting beyond mere reporting, and helped entail more profound insights into the motivation and influence on management and market behaviors .

During the Renaissance period, particularly between 1300 and 1500, Italian merchants were actively engaged in trade and commerce, which necessitated the accurate keeping of records. This period saw the borrowing of the Arabic numeral system and the fundamentals of arithmetic by Italian merchants. These developments, combined with the emerging trade needs, led to the evolution towards the double-entry bookkeeping system. This system was formalized by Fra Luca Pacioli in 1494 in his work 'Summa de Arithmetica, Geometria, Proportioniet Proportionalita', where he described double-entry bookkeeping, emphasizing its systematic nature that built upon prior evolving practices .

The Securities Act of 1933 and the Securities Exchange Act of 1934 profoundly impacted the U.S. accounting industry by introducing comprehensive regulations that established the Securities and Exchange Commission (SEC). These acts mandated the auditing of financial statements and the disclosure of specific financial information to protect investors from fraudulent practices. This regulatory framework demanded greater accountability and transparency, enhancing the integrity of financial reporting. They led to the increased professionalization of accountants, necessitating stringent education and ethical standards. Additionally, the creation of the American Institute of Certified Public Accountants (AICPA) further established guidelines reinforcing these high standards, ultimately stabilizing and improving the industry’s credibility .

Normative accounting theories, which attempted to dictate optimal accounting practices, faced criticism for their lack of empirical hypothesis testing and reliance on value judgments. The critiques centered around the subjective nature of these theories and their inability to provide practical solutions that were empirically validated. This criticism and the failure to achieve broad consensus led to the emergence of positive accounting theories, which shifted focus toward explaining existing accounting practices through empirical observations and predictive models. Positive theories aim to understand the 'what is' rather than imposing the 'what should be', thus providing a more grounded, evidence-based approach to accounting that could explain and predict the behavior of stakeholders in response to accounting information .

Fra Luca Pacioli's contribution to accounting was pivotal, mainly due to his comprehensive work 'Summa de Arithmetica, Geometria, Proportioniet Proportionalita', published in 1494, where he described the double-entry bookkeeping system. This system formalized existing accounting practices and provided a structured methodology that could be widely adopted and taught. Pacioli's work established fundamental accounting principles that remain in use today, such as the ledger system and the matching principle, which have become foundational to modern financial accounting and reporting. His codification of these processes marked a significant advancement in accurately tracking financial information, providing a framework that has stood the test of time .

Recent developments in the conceptual framework have significantly influenced international accounting practices by promoting the harmonization and standardization of accounting procedures across different jurisdictions. The joint project between the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) aimed at developing a single set of International Financial Reporting Standards (IFRS) has underscored the importance of enhancing decision-making by users with more transparent and comparable accounting information. The framework emphasizes recognizing all gains and losses in the periods they occur and using exit values for measurement. This approach fosters consistency and reliability in financial reporting, facilitating international comparability and reducing financial uncertainty for global investors .

The Industrial Revolution, which reached the United States in the late 1800s, significantly transformed accounting practices. The expansion of the railroad industries created a demand for associated supporting industries and led to an increase in the market for corporate securities. This growth necessitated the presence of trained accountants to manage the complexities of corporate finance and securities. Initially trained through apprenticeships, accountants eventually received formal education from emerging private commercial colleges, which professionalized accounting and expanded it from mere bookkeeping to a more structured accounting system .

The transformation of the American Association of University Instructions in Accounting into the American Accounting Association in 1935 represented a pivotal moment in accounting education. This change signified a broader recognition of accounting as an academic discipline, supporting structured education and research in accounting. It facilitated the standardization of accounting curricula across universities and contributed to the establishment of rigorous academic frameworks that continue to influence accounting education standards today. The association played an essential role in shaping accounting education by promoting scholarly research and cooperation among educators .

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