StudentShare
Contact Us
Sign In / Sign Up for FREE
Search
Go to advanced search...
Free

Why Do We Need So Many Different Theories in Accounting - Case Study Example

Cite this document
Summary
The paper "Why Do We Need So Many Different Theories in Accounting?" explores the differences between accounting theories and theories of accounting and provides an example wherein two theories tackle the same case differently…
Download full paper File format: .doc, available for editing
GRAB THE BEST PAPER91% of users find it useful
Why Do We Need So Many Different Theories in Accounting
Read Text Preview

Extract of sample "Why Do We Need So Many Different Theories in Accounting"

Why do we need so many different theories in accounting? Accounting theories, wrote Brian Rutherford (2000), are the systems of reasoning which accountants refer to (or could refer to) in carrying out their practical work of generating accounting numbers. (p. 1) This is distinguished from the theories of accounting, which cover the human activity known to us as accountancy. And so, because this latter is concerned with human activity, then they are generally formulated within the domains of social sciences. The importance of the relationship between accounting theory and practice was set out by Littleton (1953). He said: Because accounting theory and practice are inseparably connected, neither can stand alone. To understand practice fully, we need to understand theory as well. And to understand the integrated structure of accounting theory, we need to know something of the totality that is accountancy, and something of its related fields. (p.1) The above statement explains why there is great deal of theorizing in accounting that has ensued over the years. This paper will explore the differences in these accounting theories and provide an example wherein two theories tackle the same case differently. Classification and Differences Much of the accounting theories have drawn on economics as their theoretical base. (Macintosh 2002, p. 1) However, there are several points of differences that characterized these numerous theories. A method to logically outline the differences is to classify them into groups. For instance, Higson (2003) suggested three levels of classifications that demonstrate the differences in accounting theories. These are: 1. The explanation of the present trends in accounting and prediction of the reaction of accountants in various circumstances. In this classifications, the theories emphasize the relationship of the structure of the data collection processes to financial reporting 2. Interpretational theories based on relationships between a phenomenon and its representation 3. Behavioral theories based on the behavioral or decision-oriented impacts of financial settlements. (p. 21-22) Then there are also the two general classifications of accounting theories: the positive and normative classifications. According to Porwal (2001), a theory which attempts to state how financial information should be collected, analyzed and communicated is called positive or prescribed theory while normative theory emphasizes what financial information should be collected, analyzed and communicated. (p. 10) Put in another way, the objective of the former is to outline the explanation and prediction of the processes in accounting, while the latter seeks to stipulate what will be included in the accounting reports. In the discussion of the normative theory, the dependence upon the human judgment of what is good and what is bad is emphasized. (Porwal) This characteristic supposedly link the theory to the positivist model since any normative statement is a result of the belief of what really is. Because the accounting phenomenon is still evolving and the field itself is complex and entails the same complexity of issues, one can confidently assume that there is no full-proof accounting theory available. This is because, as Belkaoui (2004) explained, the positive/descriptive models will attempt to justify some of the accounting practices deemed useful and the normative methodology will advocate accounting practices that ought to be adopted. (p. 109) The interdependency of these variables underscore the character that most theories assume – the middle range theory rather than one single comprehensive theory. The rationale behind these middle-range theories is that they reconcile the “user-” and “environment-” orientation in accounting. At this point, it is important to reiterate that differences in accounting theories are also fundamentally caused by evolving trends and operations in business and business organizations; the human factor as highlighted by the lot of behavioral accounting theories; and the accounting experiences, traditions, methodologies acquired through its history. In regard to the trend mentioned previously, the advent of globalization is a case in point. The manner in which business organizations set up subsidiaries across the globe added another dimension to modern accounting theory development. Previously, financial reporting must only concern itself with a parent company and its subsidiaries. Today, however, the dynamics in business have changed. Today, according to Taylor (1996), the structure of groups of companies could be much more complex, including partnerships as subsidiaries, shares in subsidiaries held by associates, and joint ventures, which most probably occur in international context. (p. vi) This financial environment required new and diverse accounting systems in order to be able to cope with the emergent financial structures and financial arrangements. Here, culture and the existing regulatory statutes per country add up as additional elements that characterize modern accounting theories. Specific examples wherein theories contradict in addressing an accounting are cited by Alexander and Britton (2004). To use some of their examples: Widespread Ownership vs. Equity: states who have codes requiring widespread ownership, prescribes high-quality published financial information. Here, financial disclosure is invaluable because investors rely on them in their investment decisions as business organizations, which depend, in turn, on the capital market, are not required to provide or disclose internal information to its shareholders. Meanwhile, countries with financial codes emphasizing on equity, the objective of accounting practice is to communicate the performance and efficiency of the business to existing and potential shareholders and that the accounting information needs are mainly focused on the underlying assets of the company and the determination of taxable income. (p. 167) Fairness versus Legality: The objective of accounting theory in common law countries is the fair representation of the financial situation of a business organization while in code law countries, emphasis is given on compliance with the legal requirements and tax laws. This difference is usually called as “substance over form.” (p. 167) To illustrate this difference, let us cite the accounting treatment of a lease contract in the UK and France. In Britain, where financial codes strongly emphasize fairness in financial transactions, the lease contracts are usually capitalized. This is reflected on the company’s balance sheet even though it is not considered as the legal owner of the assets. On the other hand, in France, the legal form characterize the financial codes. Hence, in a lease contract, the assets leased are not included in the balance sheet simply because the company does not own the property legally. This difference has significant bearing on the debt and equity ration of business organizations. Conservatism versus Accruals: Accounting theories also differ between countries wherein accounting practices are more creditor oriented from those with a shareholder orientation. This demonstrates the contradiction between conservatism and accruals. In dealing with depreciation, for instance, the declining balance method, wrote Alexander and Britton, will be used more often than the straight line method, if conservatism is an important characteristic in accounting financial statements. (p. 167) There are people who believe that the sheer number of accounting theories formulated by and available to accountants demonstrates a problem. Obviously, it highlights the lack of agreement and lack of widespread acceptance of a standard accounting theoretical model. This point of view is not entirely unfounded. A standard set of rules and procedures or a general accounting system applicable to each and every financial reporting may have its benefits, particularly in regard to accuracy, universal application, and so forth. However, as stated elsewhere in this paper, there is no full-proof accounting theory or model that would address the highly diverse and complex issues and factors that characterize the financial reporting today. These factors, especially in the backdrop of globalization, are often localized as shown in the cultural and state-specific dimensions to the cases mentioned in regard to financial reporting. An accounting theory or model may be valid in a location or a cultural group but may not be effective on others. Demski (1974), for instance, argued that no accounting theory can be constructed using and set standards such as relevance, usefulness, objectivity, fairness and verifiability and that adopting this position would inevitably bound to inadequately rank the accounting alternatives and, hence, would lead to incorrect or undefined accounting specification. (p. 718) The agency theory explains this phenomenon. It emphasizes the fact that a universal framework cannot be developed because of the diverse interests involved in financial reporting. (Schroeder & Clarke 1995, p. 67) The so-called mid-range theories owe their existence to this very aspect in contemporary accounting. Its emphasis on reconciling the user-oriented and environment-oriented theories allow it to be flexible and, hence, more effective. Littleton argued that, obviously, the two processes of generalizing from experience and inferring from premises work hand in hand. (p. 17) And so, it appears that the differences in accounting theories and systems are necessary because they are required by an equal amount of diversity in financial reporting needs. Differences in the theories also do not mean that they could not work in tandem because as this paper has determined they could complement one another, with a theory filling the gap that others could not. The bottom line in this discourse is that it does not matter which theory is employed, The important thing is that in the evaluation or assessment, a usefulness of a theory is established. The uses of an accounting theory, therefore lies on its implications in specific financial reporting and not so much in its popularity, consistency or adherence to standards, which to this day has not yet been globally established. A theory can be developed, regardless of the availability of others if it can describe and used to derive demanded information better. References Alexander, D. and Britton, A., 2004, Financial reporting. 7th ed. Cengage Learning, EMEA. Belkaoui, A., 2004. Accounting Theory. Singapore: Thomson Learning. Demski, J. 1974. "The Choice Among Financial Reporting Alternatives." The Accounting Review. April 1974. pp. 718-783. Higson, A., 2003. Corporate financial reporting: theory and practice. London: SAGE. Littleton, A. 1953. “Structure of Accounting Theory.” American Accounting Association Monograph No. 5. Sarasota: American Accounting Association. Macintosh, N., 2002. Accounting, accountants and accountability: poststructuralist positions. New York: Routledge. Porwal, L.S. 2001. Accounting Theory. Tata McGraw-Hill. Rutherford, B., 2000. An introduction to modern financial reporting theory. London: Paul Chapman Publishing. Schroeder, R. and Clark, M., 1995. Accounting Theory: Text and Readings. 5th ed. New York: Wiley. Taylor, P., 1996. Consolidated financial reporting. SAGE. Whittington, Geoffrey. (2007). Profitability, accounting theory and methodology: the selected essays of Geoffrey Whittington. New York: Routledge. Read More
Cite this document
  • APA
  • MLA
  • CHICAGO
(Why Do We Need So Many Different Theories in Accounting Case Study, n.d.)
Why Do We Need So Many Different Theories in Accounting Case Study. https://studentshare.org/social-science/1730529-why-do-we-need-so-many-different-theories-in-accounting
(Why Do We Need So Many Different Theories in Accounting Case Study)
Why Do We Need So Many Different Theories in Accounting Case Study. https://studentshare.org/social-science/1730529-why-do-we-need-so-many-different-theories-in-accounting.
“Why Do We Need So Many Different Theories in Accounting Case Study”. https://studentshare.org/social-science/1730529-why-do-we-need-so-many-different-theories-in-accounting.
  • Cited: 0 times

CHECK THESE SAMPLES OF Why Do We Need So Many Different Theories in Accounting

Theories of Accounting for Stock Options

Theories of accounting for Stock Options.... The theories used in the accounting of stock option are measured using different models which include; the intrinsic value, historical cost method where companies repurchase their own stock and utilize such treasury to satisfy the exercise of the stock options.... Discussion Pertaining the use of the intrinsic value method of accounting for stock options, a company is to value stock options based on their intrinsic value at that juncture they were granted....
10 Pages (2500 words) Research Paper

Developing a Conceptual Framework as an Impossible Possibility

Conceptual framework is a theory in accounting against which accounting problems can be tested against objectively.... in accounting, rules are followed to the letter, but in some cases, there are no rules.... A conceptual framework builds the public trust in accounting.... hellip; The conceptual framework provides guidance on the boundaries of financial accounting and other events related to it.... The accounting conceptual framework was developed as early as 1970s....
6 Pages (1500 words) Essay

The Twitter IPO

hellip; accounting Theory The Twitter IPO As the news of Twitter (a social media website) being going public is revolving for some time, recently they announced that the twitter will obtain listing on New York Stock Exchange (NYSE) rather than Nasdaq.... But then comes a range of stakeholders with different set of goals and expectations.... As many witnessed the glitches which made the Facebook suffer.... There were many delays and technical problems....
5 Pages (1250 words) Essay

Leadership Challenge: Using Sources of Power Ethically

In the context of providing effective leadership, CEO's have found themselves in a position where they have to exercise the power at their… This paper discusses some of the traits of leadership and the kinds of situations that call for application of ethical theories. Research into the trait based model of leadership has emphasized the importance of individual traits in leadership as well as differences in personality that contribute to making a person a leader in specific situations but not in other situations....
4 Pages (1000 words) Essay

Consistency of Accounting Standards

The author in this article discusses the importance of the consistency of the accounting standards as the need of the hour because of the fact that the reliance placed on the principles has been, thus far, unable to ensure its application consistently and the management tends to… Today, after the world gained globalization, this issue has been eradicated and guidance materials such as the International Financial Reporting Standards and the Generally Accepted accounting Principles Consistency can only be maintained in the companies throughout, if the accounting standards are itself consistent....
4 Pages (1000 words) Essay

Why Do People Do School

When I wrote this essay answering the question “why do we do school?... ??, the most important reason I could think of was that we need to have a degree in hand to be eligible for jobs, which is why we do school.... by teaching them foreign languages, business administration and management, and advanced accounting techniques and softwares etcetera.... However, doing business in the 21st century requires much more knowledge, and different kinds of talents and competencies that make it much more complex than what one needed to do business in the gone ages....
6 Pages (1500 words) Essay

The Effectiveness of Budgetary Control in Unpredictable and Dynamic Environment

The traditional budgetary process has resulted so different problems in various organizations including but not limited to top down command orientation issues as well as poor planning and performance evaluation processes.... This means that for any management process to be deemed as… The need to remain within budget while undertaking all the tasks in an organization has remained a fallacy for many and those who are able to work within it find the task successful in one On the other hand, there are those who view budgeting as one of the major impediments of the process of goal achievement....
7 Pages (1750 words) Essay

Socially Constructing Discipline

This paper "Socially Constructing Discipline" describes accounting as a language used in communicating information to individuals.... The author takes into account a complicated history of the t accounting system, various arguments of Tony Tinker and David Solomon who contributed to the implementation and growth of accounting theory.... nbsp;… Additionally, it is claimed that accounting is a language used in communicating information to individuals....
9 Pages (2250 words) Term Paper
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.
Contact Us