Introduction Accounting Theory

Topics: Theory, Decision theory, Scientific method Pages: 16 (5702 words) Published: September 15, 2013
The students of accounting when enter in their career after passing graduation or post graduation in commerce, they believe that there is a solution to every accounting problem. No, it is for away from the truth because there are many issues remain unresolved after having the knowledge of mere accounting. To become of student of accounting in real sense of the business world one should also concentrate on understanding the problems of accounting practice and profession. For this matter and reason, the accounting theory is recommended. The accounting theory provides the knowledge of Generally Accepted Accounting Principles (GAAPs), Contemporary issues and other developments in the field. In this chapter, the students will be introduced with accounting theory and its main issues like “Theory, process of constructing the theory, need of accounting theory”. Meaning of Theory

Our common perception about theory is divided between two notions. One perception of theory is something which is far removed from reality. We then say, it is possible or it exists only in theory, not in practice. Another perception about theory is the cause effect relationship that exists behind any event or practice. For example, if a man jumps off the New Empire State Building he will descend on earth at a specified time irrespective of his weight. If he survives his first attempt, but repeats it from somewhere near the centre of the earth from the same height, he would be surprised to see that this time he has descended on earth more quickly than before (we hope he has survived this time also). Why? If he has an inquisitive mind, he may seek explanation which will lead him to the cause-effect relationship. By applying scientific method he may arrive at the theory of the law of gravitation (as Newton did). Then he knows not only the reason of his quick descending, but if he ever wishes to jump off from the same height at another place, he should be able to predict the time of his landing on earth. Our second perception about theory is the employment of scientific method to explain some phenomenon. A scientific method may be defined as a method of explanation that develops and tests hypothesis about how real world, observable phenomena are related. The goal of scientific method is explanation; scientific method strives to develop a systematic body of theory through development of hypothesis. Thus, theory may be described as “a cohesive set of hypothetical, conceptual and pragmatic principles forming a general frame of reference for a field of study.”

Definition of Theory
In the field of science, including social science, one may encounter a host of views about Theory’, which has a Greek root, ‘”Theoria”’ meaning to “”behold or view””. A popular definition given by Kerlinger defines theory as “a set of interrelated constructs (concepts), definitions and propositions that present a systematic view of phenomena by specifying relations among variables, with the purpose of explaining and predicting the phenomena”. Arnold Rose’s view is similar to the above statement. He defined theory as “an integrated body of definitions, assumptions and general propositions covering a given subject matter from which a comprehensive and consistent set of specific and testable (principles) can be deduced logically. There are other views which state theory as “a set of interrelated concepts at a fairly high level of generality.”

Characteristics of a Good Theory
A good theory should fulfill the following criteria:
(i) It should explain or predict phenomena, i.e., they should be empirical. (ii) Theories should be capable of being tested empirically. Theories which fail tests are not of universal applicability, therefore, must be replaced by better or non refutable theories. (iii) Theories should be consistent both internally and externally. Internal consistency is present when the analytical properties of theory ensure that the given theory predicts the...
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