CHAP 1 Introduction to Accounting Theory.pptx

introduction to accounting theory

1. ACCOUNTING THEORY OVERVIEW OF

2. Background Based on Arrow-Debreu economy theory, describe a competitive economy where all markets are clear (general equilibrium model) There is a major issue related to the questions of measurement

3. What is THEORY?? Theory itself can be described as a set of accepted belief or organized principle that explain and guide analysis Accounting Theory 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

4. First developed as a set of tools to record activities or transactions Theory underlying those prescriptions also developed in a largely unstructured manner that led into inconsistencies in practice ACCOUNTING STANDARDS Double entry accounting was focused on documenting the processes involved and not explaining the underlying basis for this method of recording Problems A principle or practice would be declared to be “right” because it was generally accepted; it would not be generally accepted because it was “right”

5. Accounting Theory Timeline 1400S General specific period (Pragmatic accounting) Providing an overall framework Major focus is the use of historical cost transactions 1800-1955 Normative period 1959 AICPA established the Accounting Principles Board Setting ”Best accounting practice” Debate about measurement Positive accounting era Provide a framework for explaining the practices Decision-usefulness objective 1970S Very little was written 1494, Fra Pacioli wrote “ Summa de Arithmetica Geometria Proportioni et Proportionalita ” 1956-1970 Two groups: “Critics of historical cost accounting” and “The conceptual framework proponents” https://www.youtube.com/watch?v=SRssuu2TUUY

6. Recent Development Different approaches are developed Profession pursued normative approach to unify accounting practice and make it more homogeneous Academic researchers sought to better understand the role and impact of different forms of accounting information Transition to IFRS - New conceptual framework project in 2005 to update and improve the conceptual framework for standard setters and preparers of financial statement to use

7. KEY ACCOUNTING THEORIES: ACCRUAL BASIS ACCOUNTING : TRANSACTION RECORDED WHEN THEY OCCUR, REGARDLESS OF WHEN CASH IS RECEIVED OR PAID MATCHING PRINCIPLES : EXPENSES ARE MATCHED WITH REVENUE, ENSURING THAT PROFIT ARE NOT OVERSTATED REVENUE RECOGNITION PRINCIPLES : REVENUE ARE RECORDED WHEN EARNED, REGARDLESS OF WHEN CASH IS RECEIVED FULL DISCLOSURE PRINCIPLES : ALL MATERIAL INFORMATION SHOULD BE DISCLOSED IN FINANCIAL STATEMENTS TO ENSURE TRANSPARENCY RELEVANCE AND RELIABLE PRINCIPLES : SHOULD BE RELEVANT TO DECISION-MAKING

8. NEXT WEEK PRESENTATION: CONCEPTUAL FRAMEWORK Explain the role, objective, of a conceptual framework Explain the principles-based and rule-based standard setting Explain the decision-theory approach Explain the qualitative characteristics of IASB Framework