Essay about Financial Accounting Theory

1793 Words Apr 5th, 2012 8 Pages
Chapter 1 – Financial Accounting Theory

1.1 What is Financial Accounting Theory?

Henderiksen (1970) – Theory is defined as: A coherent set of hypothetical, conceptual and pragmatic principles forming the general framework of reference for a field of inquiry.

FASB – a coherent system of interrelated objectives and fundamentals that can lead to consistent standards.

Introduction – theories of financial accounting

Accounting is a human activity and will consider such thing as people’s behavior and/or people’s needs as regards financial information, or the reason why people within organizations might select to supply particular information to particular stakeholder group.

Theories will include consideration of: •
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Theories that prescribe particular actions are called normative theory.

For example, Chambers Continuously contemporary accounting describes how financial accounting should be undertaken. It is prescriptive and central to this theory is a view that most useful information about an organization’s assets for the purpose of economic decision is information about their current cash equivalent.

Normative theories of accounting are not necessarily based on observation and therefore cannot (or should not) be evaluated on whether they reflect actual accounting practice.

The conceptual framework of accounting is an example of a normative theory of accounting. Relying on various assumptions about the types or attributes of information useful for decision making, The CFA provides guidance on how assets, liabilities, expenses, income and equity should be defined, when they should be recognized, and ultimately how they should be measured.

Chapter 1 – Financial Accounting Theory

1.5 Evaluating theories of accounting

The Positive Accounting theorist and the normative theorist would be considered to be working from different ‘paradigms” which provided greatly different perspectives about the role of accounting research.

Argument between PAT and Normative Theorist:
Proponents of PAT have

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