Accounting theory

Accounting theory refers to the study of the underlying principles and concepts that guide the preparation and presentation of financial information. It involves the examination of the assumptions, concepts, and conventions that form the basis of accounting practice, as well as the evaluation of the principles and methods used to measure, classify, and report financial information. Accounting theory is used to develop and improve accounting standards, methods, and procedures, and to provide a framework for understanding and interpreting financial statements.

Accounting theories classification

Accounting theories can be classified into several categories, including:

• Positive Accounting Theory: This theory focuses on explaining and predicting actual accounting practices and choices. It is based on the assumption that individuals and organizations act rationally in their financial reporting decisions.
• Normative Accounting Theory: This theory focuses on prescribing how financial information should be reported and presented. It is based on the assumption that there is an ideal or "correct" way for financial information to be reported.
• Institutional Accounting Theory: This theory focuses on how social and political factors influence the development of accounting practices and standards. It examines how institutions such as governments, professional organizations, and the legal system shape accounting practices.
• Behavioral Accounting Theory: This theory focuses on how individuals and organizations make decisions and how those decisions affect financial reporting. It examines the psychological and social factors that influence accounting practices.
• Critical Accounting Theory: This theory emphasizes the role of power and politics in shaping accounting practices and standards. It critiques the assumptions and ideologies that underlie mainstream accounting theory and practice.
• Real-Business-Reporting Theory: This theory emphasizes the need to provide useful financial information about an organization's performance to the stakeholders. It suggests that financial statements should be supplemented with non-financial information to provide a more complete picture of an organization's performance.

Positive Accounting Theory

Positive Accounting Theory (PAT) is a theoretical framework that seeks to explain and predict actual accounting practices and choices. It is based on the assumption that individuals and organizations act rationally in their financial reporting decisions. The main goal of PAT is to understand why firms make certain accounting choices and how these choices affect the financial statements.

PAT is often associated with the work of economists, who use economic models and theories to explain accounting decisions. For example, PAT researchers may use agency theory to explain why firms choose to disclose certain information and not others. Agency theory suggests that firms will only disclose information that is in the best interest of the managers, who are the agents of the shareholders (the principals).

PAT also draws on other disciplines such as finance, law and psychology to understand the accounting choices and its impact on the financial statements. One of the important contributions of PAT is the development of the Earnings Management Literature, which examines the strategies that firms use to manage their earnings in order to meet or beat analysts' earnings expectations.

The empirical research in PAT has been largely based on the examination of the association between accounting choices and various factors such as firms' characteristics, regulatory environment, and market conditions. PAT has been successful in explaining a wide range of accounting phenomena, such as the choice of accounting methods, the level of earnings management, and the choice of accounting standards.

Overall, Positive Accounting Theory provides a framework for understanding the motivations and incentives that drive accounting choices and its impact on the financial statements. It also serves as a guide for regulators, standard-setters, and researchers in accounting and related fields to understand the underlying factors that affect financial reporting.

Normative Accounting Theory

Normative Accounting Theory is a theoretical framework that focuses on prescribing how financial information should be reported and presented. It is based on the assumption that there is an ideal or "correct" way for financial information to be reported. The main goal of Normative Accounting Theory is to provide a set of guidelines for how financial information should be reported in order to be most useful and informative to users.

Normative Accounting Theory is often associated with the work of philosophers and ethicists, who use moral and ethical principles to guide accounting practices. For example, Normative Accounting Theory may suggest that financial information should be reported in a way that is fair and transparent, so that users can make informed decisions.

Normative Accounting Theory also draws on other disciplines such as economics, sociology, and psychology to understand the most effective ways to present financial information. One of the important contributions of Normative Accounting Theory is the development of the Conceptual Framework, which provides a set of guidelines for accounting standards and practices.

The empirical research in Normative Accounting Theory has been largely based on the examination of the most effective ways to present financial information. Normative Accounting Theory has been successful in providing a set of guidelines for accounting standards and practices that are intended to be useful and informative to users.

Overall, Normative Accounting Theory provides a framework for understanding the principles and values that should guide accounting practices and standards. It serves as a guide for regulators, standard-setters, and researchers in accounting and related fields to understand the underlying factors that affect financial reporting and the presentation of financial information.

Institutional Accounting Theory

Institutional Accounting Theory is a theoretical framework that focuses on how social and political factors influence the development of accounting practices and standards. It examines how institutions such as governments, professional organizations, and the legal system shape accounting practices. The main goal of institutional accounting theory is to understand how the formal and informal rules and norms of a society influence accounting practices and standards.

One of the key insights of institutional accounting theory is that accounting practices are not solely based on economic or technical considerations, but also on social and political factors. For example, the institutional theory may explain how political and economic pressures influence the development of accounting standards or how professional organizations shape the way accountants are trained and regulated.

Institutional accounting theory also focuses on how accounting practices spread across countries and cultures, and how the institutional environment affects the adoption of accounting practices. It examines how accounting practices and standards are shaped by the historical, cultural and political context of a society.

Overall, institutional accounting theory provides a framework for understanding how social, political and cultural factors shape accounting practices and standards. It serves as a guide for regulators, standard-setters, and researchers in accounting and related fields to understand the underlying factors that affect financial reporting and the presentation of financial information.

Behavioral Accounting Theory

Behavioral Accounting Theory is a theoretical framework that focuses on how individuals and organizations make decisions and how those decisions affect financial reporting. It examines the psychological and social factors that influence accounting practices. The main goal of behavioral accounting theory is to understand how cognitive biases, emotions and social influences affect the financial reporting decisions of individuals and organizations.

Behavioral accounting theory draws on the insights of behavioral economics, psychology and sociology to understand how these factors affect the financial reporting decisions of individuals and organizations. For example, it examines how cognitive biases such as optimism or overconfidence can lead to financial reporting errors or how social influences such as groupthink can lead to accounting misconduct.

Behavioral accounting theory also focuses on how organizations design their accounting systems to reduce decision errors and to align the behavior of employees with the organization's goals. It examines how the design of accounting systems can be used to mitigate cognitive biases and to promote ethical behavior.

Overall, Behavioral Accounting Theory provides a framework for understanding how psychological and social factors affect financial reporting decisions and the design of accounting systems. It serves as a guide for regulators, standard-setters, and researchers in accounting and related fields to understand the underlying factors that affect financial reporting and the presentation of financial information.

Critical Accounting Theory

Critical Accounting Theory (CAT) is a theoretical framework that emphasizes the role of power and politics in shaping accounting practices and standards. It critiques the assumptions and ideologies that underlie mainstream accounting theory and practice. The main goal of CAT is to understand how accounting practices and standards are shaped by power relations and ideologies, and how they reproduce social inequality and injustice.

CAT draws on the insights of critical sociology, critical management studies and feminist theory to understand how accounting practices and standards are shaped by power relations and ideologies. For example, it examines how accounting practices and standards can be used to reinforce the power of dominant groups or how accounting practices can be used to legitimize social inequality.

CAT also focuses on how accounting practices and standards can be used to challenge power relations and promote social change. It examines how accounting practices and standards can be used to promote social accountability, transparency and to challenge dominant power relations.

Overall, Critical Accounting Theory provides a framework for understanding how power relations and ideologies shape accounting practices and standards. It serves as a guide for regulators, standard-setters, and researchers in accounting and related fields to understand the underlying factors that affect financial reporting and the presentation of financial information.

Real-Business-Reporting Theory

Real-Business-Reporting Theory is a theoretical framework that emphasizes the need to provide useful financial information about an organization's performance to the stakeholders. It suggests that financial statements should be supplemented with non-financial information to provide a more complete picture of an organization's performance. The main goal of Real-Business-Reporting Theory is to provide a set of guidelines for how organizations should report their performance in a way that is useful and informative for stakeholders.

Real-Business-Reporting Theory draws on the insights of management, sustainability and corporate social responsibility to understand how organizations should report their performance. For example, it suggests that organizations should report on their environmental, social and governance performance in addition to their financial performance.

Real-Business-Reporting Theory also focuses on how organizations can use non-financial information to manage their performance and to create value for stakeholders. It examines how organizations can use non-financial information to identify risks, opportunities and to improve their performance.

Overall, Real-Business-Reporting Theory provides a framework for understanding how organizations should report their performance in a way that is useful and informative for stakeholders. It serves as a guide for organizations, regulators, and researchers in accounting and related fields to understand the underlying factors that affect financial reporting and the presentation of financial information.

Accounting theory — recommended articles

Ethical factors affecting business — Upper echelons theory — Burke-Litwin model — Shareholder theory — Mary Parker Follett — Social exchange theory — Management by values — Social cognitive theory — Ethical objectives — Easy credit

References

• Wolk, H. I., Dodd, J. L., & Rozycki, J. J. (2016). Accounting theory: conceptual issues in a political and economic environment. Sage Publications.
• Schroeder, R. G., Clark, M. W., & Cathey, J. M. (2022). Financial accounting theory and analysis: text and cases. John Wiley & Sons.