Approaches to the Development of Accounting Theory

Approaches to the development of accounting theory

Several approaches to the development of accounting theory have emerged in the last two decades. These approaches may be identified as follows:

1. Descriptive

2. Normative general

3. Decision-making


Normative specific

4. Welfare

The descriptive approach

Theories developed using the descriptive approach are essentially concerned with what accountants do. In developing such explanations, descriptive theories rely on a process of inductive reasoning, which consists of making observations and of drawing generalized conclusions from those observations. In effect, the objective of making observations is to look for similarity of instances, and to identify a sufficient number of such instances as will induce the required degree of assurance needed to develop a theory about all the instances which belong to the same class of phenomena.

As applied to the construction of accounting theory, the descriptive approach has emphasized the practice of accounting as a basis from which to develop theories. This approach has attempted to relate the practices of accountants to a generalized theory about accounting. In this view, accounting theory is to be discovered by observing the practices of accountants because 'accounting theory is primarily a concentrate distilled from experience . . . it is experience intelligently analysed that produces logical explanation . . . and . . . illuminates the practices from which it springs'. (Littleton and Zimmerman, 2018.)

The descriptive approach results in descriptive or positive theories of accounting, which explain what accountants do and enable predictions to be made about behaviour, for example, how a particular matter will be treated. Thus, it is possible to predict that the receipt of cash will be entered in the debit side of the cash book.

In effect, the descriptive approach is concerned with observing the mechanical tasks which accountants have traditionally performed. In 2018, the Institute of Chartered Accountants in England and Wales stated that 'the primary purpose of the annual accounts of a business is to present information to proprietors showing how their funds have been utilized, and the profits derived from such use'. (I.C.A.E.W., 2018.)

Underlying the descriptive approach is the belief that the objective of financial statements is associated with the stewardship concept of the management role, and the necessity of providing the owners of businesses with information relating to the manner in which their assets have been managed. In this view, company directors occupy a position of responsibility and trust in regard to shareholders, and the discharge of these obligations requires the publication of annual financial reports to shareholders. With the growth of very large corporate enterprises, the weakening of the links between ownership and management created a need for a more elementary notion of stewardship, in which the disclosure of financial information was aimed at protecting shareholders from fraudulent management practices. Sterling provides a perceptive comment on the significance of the descriptive approach in the following terms:

'Probably the most ancient and pervasive method of accounting theory construction is to observe accountants' actions and rationalize these actions by subsuming them under generalized principles. For example, if the accounting anthropologist has observed that accounting man normally records a conservative figure and generalizes this as the principle of conservatism, then we can test this principle by observing whether or not accounting man does in fact record a conservative figure.' (Sterling, 2000.)

As we shall see in Part 2 and Part 4 when discussing the work of the Accounting Standards Comwittee in relation to the development of accounting standards, it is evident that the descriptive approach to theory construction in accounting plays a very influential role in shaping perceptions of the problems of accounting and the manner in which they should be solved. In effect, the Accounting Standards Committee has been concerned with discussing the variety of practices used by accountants and with reaching a consensus on the most feasible basis on which to reduce the diversity of these practices through the process of standardization.

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Accounting theory

The word 'theory' is also used at different levels in the literature of accounting. Thus, references to 'accounting theory' may mean purely speculative interpretations or empirical explanations. These references usually do not indicate the level of theory which is implied.

According to Hendriksen,

'Accounting theory may be defined as logical reasoning in the form of a set of broad principles that (1) provide a general frame of reference by which accounting practice can be evaluated, and (2) guide the development of new practices and procedures. Accounting... see: Accounting Theory