DIFFERENT APPROACHES TO FORMULATE FOR ACCOUNTING THEORY

DIFFERENT APPROACHES TO FORMULATE FOR �Accounting THEORY

1. DIFFERENT APPROACHES TO FORMULATE FOR Accounting THEORY Under the guidance of Sundar B. N. Asst. Prof. & Course Co-ordinator GFGCW, PG Studies in Commerce Holenarasipura Pooja J V 1 st M.com

2. Content 1 . Introduction 2.Traditional approach The Pragmatic approach The Authorization approach The Deductive approach The Inductive approach The Ethical approach The Sociological approach The Economic approach The Electric approach 3.New approach The Events approach The Decision model approach The Behavioural approach The Predictive approach 4. Conclusion 5.Referenc e

3. Introduction In commerce they belive there is a solution to every accounting prolem No it is far away from the truth because there are many issues remain undersolved . After having the knowledge of mere accounting practices and profession for the matter and reason the accounting theory provides the knowledge of generally accepted accounting principles ( gaaps ), contemporary issues and other development in the faild so we should understand theory and it’s main issues like theory approaches of constructing the theory need Of accounting theory.

4. Meaning Although there is no single comprehensive theory of accounting various accounting theories of a middle ranges have resulted from the use of different approach .For the sake of clarity. We will limit our discussion In this work to be traditional approach and approaches to the formulation of an accounting theory. Traditional approaches: most of these approaches are thearitical Expect pragmatic & an authorization approaches are practical. Different between traditional &new approaches to accounting theory construction.

5. We shall discussion in brief the different approach to the formulate accounting theory under two heads: 1.The traditional approach: In these approaches, to accounting theory construction, accounting practices and verification are considered synonymous. 2.The new approach: In these approaches, to accounting theory construction, attempt are made to logically or empirically verify the theory. In should however, be understood clearly that these approaches are not independent of one another generally, more than one approach, is used in the development of accounting principles.

6. The Traditional approach The pragmatic approach The Authorization approach The Deductive approach The Inductive approach The Ethical approach The Sociological approach The Economic approach The Eclectic approach

7. 1.The pragmatic approach This approach consists of the formulation of a theory which is conformity with real(current) . Based upon the concept of utility or useful-(utility approach). In this approach, accounting principles are chosen because they are useful to the different categories of “users of accounting information and their relevance to find a practical solution. Most accounting theory was developed using this approach.

8. 2. The Authorization approach This approach is used by professional organization and the government. It consist of issuing pronouncements for the regulation of accounting practices. In developing economies, where financial accounting and reporting practices differ a lot. This approach has its own utility. It also attempts to provide practical solutions. In this (utility) approach, the emphasis is on accounting practices, and the logical conclusion is that accounting theory is to be derived from practices.

9. 3. The deductive approach In this approach we go from general to particular. In accounting, this approach begins with basis accounting proposition (Assumptions) and proceeds to derived by topical means the accounting principles. Steps used to derive the deductive approach in accounting : Specifying the objectives of financial statements. Selecting the ‘assumptions’ of- basic accounting proposition s – of accounting.

10. 3. Deriving the ‘ principles’of accounting. 4. Developing the “techniques of accounting”. Thus, the sequence objectives – assumptions- principles- techniques.

11. 4.The deductive approach In this approach we go from particular to general. On the basis of particular observation and measurement, generalized conclusion are draw. The Inductive approach in accounting “beings with observation of financial information of business enterprise and proceeds to draw generalization and principles of accounting”. Thus, accounting and financial information leads to the formulation of principles.

12. The inductive approach to a theory involves the following four stage Observation, and recording of all observations Analysing and classification these observation. Inductive deprivation of generalization and principles of accounting from observations . Testing the generalizations. It will be noted that to develop accounting theory, there has been an application of both the approaches. Principles are derived by deductive process, while the general proportion are formulated through an inductive process. A combination of the two approaches has been used by most authors.

13. 5.The ethical approach This approach should not taken as on independent approach. The basis core consists of the concepts of fairness, Justice (equity), and truth. These concept s as the main criteria in the formulation of accounting theory. “Fairness: refers to the basic concept that accounting data should be fair unbiased”. “Justice : equitable treatment to all interested parties”. “Truth: true and accurate financial accounting statements with out misrepresentations”.

14. In general the purpose of having these approach that accounting statements have not been subject to undue influence or bias. The word “true and faire ” have to be special mentioned in audit reports.

15. 6.The sociological approach Corporate activities have economic as well as social impact. The economic impact of corporation is measured by financial accounting methods and reported in financial statements, however no established methods and standards for measuring and reporting on corporate social performance. Emphasizes the social effects of accounting Techniques Implier that accounting data will be useful in making social welfare judgments. Accounting to this approach a given accounting principles or technique is evaluated on the basis of its reporting effects on all groups in society.

16. 7.The economic approach We have noted that ethical approach focuses on the concept of “fairness”, and the sociological approach focused on “ Social welfare”.The economic approach focuses on the concept of “General economic welfare”. The choice of different accounting techniques depends on their impact on the national economic. Accounting policies and techniques should reflect “economic reality”.and the choice of accounting techniques should depend on ‘economic consequences’.

17. The Choice accounting techniques depends on the particular economic situation. Examples: during the inflation, there is widespread shift from FIFO to LIFO for inventory valuation purposes.

18. 8. Eclectic approach In general the formulation of accounting theory and the development of accounting principles have followed on eclectic approach ( a combination of approach), rather than just one school of thought. Eclectic Approach means a combination of approach. To reflect the view point of professional institutes, industry, government and individuals, the establishment of concepts and principles of accounting results in the electric approach.

19. One great weakness in traditional approach is accounting practice and verification are considered synonymous. No attempt is made to logically the theory. In these new approaches to accounting theory construction, attempt are made to logically or empirically verify the theory.

20. New approach As mentioned, the new approach to accounting theory construction, attempts are made logically or empirically the theory. The new approaches have not yet been accept by various users of accounting information. Ther is always a time gap between theory and practices. The new approaches that have been discussed in brief are. The event approach The decision model approach The behavioral approach The predictive approach The information economic approach

21. 1.The Event approach “An event is an accurance phenomenon, or transaction that is assumed to be observable”. The characteristics of event monitory values and non monitory values are directly observed and significant to the users. The events suggests that the purpose of accounting is ‘to provide information about relevant economic events that might be useful in a variety of decision models. The events approach suggests a huge expansion of the accounting data presented in financial reports. It is not yet certain that the events approaches will lead to better prediction, or that “ measurement of events is more verifiable than measurement of objects”.

22. 2.The decision model approach In the decision model approach, accounting theory is developed by a normative. Assumption about how accounting information should be used (goals, decision and information needs of users). Derives the accounting principles and method best suited for meeting theres needs. In this model it’s acknowledged that different information may be needed for different users of the financial statements or for different kind of decisions.

23. 3. The behavioral approach The behavioral approach to accounting theory formulation is concerned with human behavior as it relates to accounting information and problems. In this approach the behavioral of users of financial information is an important consideration in the selecting of an important consideration in the selecting of an accounting technique. The behavioral approach to accounting theory formulation emphasizes the relevance to decision making of the information being communicated, and of the individual and group behavior caused by the information being communicated.

24. It’s control Ributio Exchange the accounting function from bookkeeping system to information system. Identify the users of information. Management accounting. Concentrate on relevance characteristic. Establishment of theoretical principles of financial reports which multi purposes.

25. 4.The predictive approach The predictive approach to the formulation of accounting theory users the criterion of predictive ability. Accounting measurement alternatives, which has the greatest predictive power will be regarded as the best by users.

26. 5.The information economic approach This approach suggests that all accounting reporting decision should be evaluated within the cost benefit framework. So the information approach implies that the efficiency of the utilization of information as a resources is measured by matching the costs of information against the benefits.

27. Conclusion The traditional theory consists of theory views more rather practical. It is able to give theoretical base to mythologies techniques followed in accounting. It sets out accounting relationship with other fields of human knowledge. These theories constructed with some Subjectively also. Under it sequence of events are made &after observing a phenomena lead to set up hypothesis and hypothesis tested accordingly test results a generalization can be stated and after it principle is introduced.

28. Reference Intruduction to different approach to formulate accounting theory, ( retrived from), https://www.slideshare.net/mobile/AbuHusanHNhiyan/approaches-to-the-formulation-of-accounting-theory Different approach to formulate accounting theory reports, ( Retrived from),https://slideplayer.com/slide/10513956/.