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““Introduction to Introduction to Accounting Theory”Accounting Theory”

TopicsTopics ““Accounting Theory Approach”Accounting Theory Approach”

Prepared For:Prepared For: Moksud Md. Zobaer Moksud Md. Zobaer Lecturer, Department of Business Lecturer, Department of Business

AdministrationAdministrationStamford University BangladeshStamford University Bangladesh

Prepared By:Prepared By:► MD. Mydul IslamMD. Mydul Islam 0270763202707632

► Sadia AfrinSadia Afrin 02707687 02707687► Imtiaz Uddin AhmedImtiaz Uddin Ahmed 0270776602707766► Mahnaz Faridy JabinMahnaz Faridy Jabin 0270783502707835

► AsaduzzamanAsaduzzaman 0270802702708027

AimAimThe aim of this presentation is to enrich The aim of this presentation is to enrich

you about the Approachesyou about the ApproachesOf Accounting Theory.Of Accounting Theory.

““Approaches”Approaches” # # Traditional Approaches:Traditional Approaches:

1.1. Pragmatic ApproachPragmatic Approach2.2. Authoritarian ApproachAuthoritarian Approach3.3. Deductive ApproachDeductive Approach4.4. Inductive ApproachInductive Approach5.5. Ethical ApproachEthical Approach6.6. Sociological ApproachSociological Approach7.7. Economic ApproachEconomic Approach8.8. The Eclectic ApproachThe Eclectic Approach

# # New Approaches:New Approaches:

1.1. The Events ApproachThe Events Approach2.2. The Behavioral The Behavioral

ApproachApproach3.3. Human Information Human Information

Processing ApproachProcessing Approach4.4. The Predictive The Predictive

ApproachApproach

# # Other Approaches:Other Approaches:

1.1. The Classical ApproachThe Classical Approach2.2. The Evolutionary The Evolutionary

ApproachApproach3.3. The Processual The Processual

ApproachApproach

# # Traditional Approaches:Traditional Approaches:1.1. Pragmatic Approach:Pragmatic Approach: The pragmatic The pragmatic

approach consists of the construction of a theory approach consists of the construction of a theory characterized by its conformity to real world characterized by its conformity to real world practices that is useful in terms of suggesting practices that is useful in terms of suggesting practical solutions. practical solutions.

2.2. Authoritarian Approach:Authoritarian Approach: The authoritarian approach to The authoritarian approach to the formulation of an accounting theory, which is employed the formulation of an accounting theory, which is employed primarily by professional organizations, consists of issuing primarily by professional organizations, consists of issuing pronouncements for the regulation of accounting practices.pronouncements for the regulation of accounting practices.

3.3. Deductive Approach:Deductive Approach: The deductive approach The deductive approach begins with the basic accounting propositions or begins with the basic accounting propositions or premises and proceeds to derive by logical means premises and proceeds to derive by logical means accounting principals that serve as guides and bases for accounting principals that serve as guides and bases for the development of accounting techniques.the development of accounting techniques.

44.. Inductive Approach:Inductive Approach: The inductive approach The inductive approach begins with observation about the financial information of begins with observation about the financial information of business enterprises and proceeds to construct business enterprises and proceeds to construct generalizations and principles of accounting from these generalizations and principles of accounting from these observations on the basis of recurring relationship.observations on the basis of recurring relationship.

5.5. Ethical Approach:Ethical Approach: The basic core of the The basic core of the ethical approach consists of the concepts of fairness, ethical approach consists of the concepts of fairness, justice, equity and truth. Scott equates “Justice” with justice, equity and truth. Scott equates “Justice” with equitable treatment of all interested parties, “truth” with equitable treatment of all interested parties, “truth” with true and accurate accounting statements without true and accurate accounting statements without misrepresentation and “fairness” with fair, unbiased and misrepresentation and “fairness” with fair, unbiased and impartial presentation.impartial presentation.

6.6. Sociological Approach:Sociological Approach: The sociological approach to The sociological approach to the formulation of an accounting theory emphasizes the the formulation of an accounting theory emphasizes the social effects of accounting techniques. Accounting to the social effects of accounting techniques. Accounting to the sociology approach a given accounting principle or sociology approach a given accounting principle or technique is evaluated for acceptance on the basis of its technique is evaluated for acceptance on the basis of its reporting effects on all groups in society.reporting effects on all groups in society.

7.7. Economic Approach:Economic Approach: While the ethical approach While the ethical approach focuses on a concept of “fairness” and sociological focuses on a concept of “fairness” and sociological approach on a co concept of “social welfare”, the approach on a co concept of “social welfare”, the economic approach focuses on a concept of “general economic approach focuses on a concept of “general economic welfare”. Accounting to the approach, the economic welfare”. Accounting to the approach, the choice of different accounting techniques depends on choice of different accounting techniques depends on their impact on the national economic good.their impact on the national economic good.

8.8. The Eclectic Approach:The Eclectic Approach: In general the formulation of In general the formulation of an accounting theory and the development of accounting an accounting theory and the development of accounting principles have followed an eclectic approach, or a principles have followed an eclectic approach, or a combination of approach rather than only one of the combination of approach rather than only one of the approaches presented here.approaches presented here.

# # New Approaches:New Approaches:1. 1. The Events ApproachThe Events Approach:: The event approach was first explicitly The event approach was first explicitly

stated after a divergence of opinion among the members of stated after a divergence of opinion among the members of the committee of the American Accounting Association. The the committee of the American Accounting Association. The majority of the committee members favored the value majority of the committee members favored the value approach to accounting. Only one member favored the events approach to accounting. Only one member favored the events approach. In the value approach, the balance sheet is approach. In the value approach, the balance sheet is perceived as an indicator of the financial position of the firm perceived as an indicator of the financial position of the firm at a given point of time. In the events approach, the balance at a given point of time. In the events approach, the balance sheet is perceived as an indirect communication of all sheet is perceived as an indirect communication of all accounting events relevant to the firm since is inception.accounting events relevant to the firm since is inception.

2. 2. The Behavioral ApproachThe Behavioral Approach:: The behavioral approach to the The behavioral approach to the formulation of an accounting theory is concerned with human formulation of an accounting theory is concerned with human behavior as it relates to accounting information and problem. behavior as it relates to accounting information and problem. In this approach, the behavior of the users of accounting In this approach, the behavior of the users of accounting information is an important consideration in the selecting of information is an important consideration in the selecting of an accounting technique. The behavioral approach to the an accounting technique. The behavioral approach to the formulation of accounting theory emphasizes the relevance to formulation of accounting theory emphasizes the relevance to decisions making of the information communicated-a decisions making of the information communicated-a communication-decision orientation and on the individual and communication-decision orientation and on the individual and group behavior caused by the communication of the group behavior caused by the communication of the information –a decision-maker orientation. information –a decision-maker orientation.

3. 3. Human Information Processing ApproachHuman Information Processing Approach:: Interest in the human information processing Interest in the human information processing approach arose from a desire to improve both the approach arose from a desire to improve both the information set presented to users of financial information set presented to users of financial data and the ability of users to use the data and the ability of users to use the information.information.

4. 4. The Predictive ApproachThe Predictive Approach:: Predictive value is an Predictive value is an ingredient of relevance, a primary quality financial ingredient of relevance, a primary quality financial reporting. If accounting data are to be relevant for reporting. If accounting data are to be relevant for making decision by investors, they must provide making decision by investors, they must provide into the decisions model of the investors. And since into the decisions model of the investors. And since only expectations of future objects and events are only expectations of future objects and events are relevant for these decision models, it follows that if relevant for these decision models, it follows that if accounting data are to be relevant, they must accounting data are to be relevant, they must provide or permit predictions of future objects or provide or permit predictions of future objects or events. events.

# # Other Approaches:Other Approaches:1. 1. The Classical ApproachThe Classical Approach:: CClassicists see profitability as the lassicists see profitability as the

key goal of any business and rational planning as the means to key goal of any business and rational planning as the means to achieve it. It is a theory which states that management best achieve it. It is a theory which states that management best serves the interest of all investors by undertaking all serves the interest of all investors by undertaking all productive investment opportunities that yield a return productive investment opportunities that yield a return greater than that available on the capital markets. greater than that available on the capital markets. Shareholders, in turn, borrow and lend on the capital market Shareholders, in turn, borrow and lend on the capital market to produce the cash flows that meet their own personal to produce the cash flows that meet their own personal individual needs.individual needs.

2. 2. The Evolutionary Approach:The Evolutionary Approach: Proponents of the evolutionary Proponents of the evolutionary approach see the attainment of a strategic framework as a approach see the attainment of a strategic framework as a dangerous delusion. There is much less confidence ten senior dangerous delusion. There is much less confidence ten senior management’s ability to plan and act in a rational manner. management’s ability to plan and act in a rational manner. They expect markets to secure profit maximization and They expect markets to secure profit maximization and managers to be rational optimizers in a law of the jungle view managers to be rational optimizers in a law of the jungle view of the business world where only the best performers survive.of the business world where only the best performers survive.

3. 3. The Processual Approach:The Processual Approach: Most processualists see the Most processualists see the classicists as naive idealists, and though they share some classicists as naive idealists, and though they share some common thinking with the evolutionists they ate far less common thinking with the evolutionists they ate far less confident about the environments ability to foster strategy confident about the environments ability to foster strategy selection.selection.

Any QuestionAny Question

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