Financial Accounting Ideas: Questions and Answers

In the type of theory, a good theory of accounting or Positive Accounting Theory is a descriptive theory, which identifies particular aspects of financial accounting practice. It seeks to predict, notice, and describe which accounting methods accountants will or will not use specifically circumstances and why managers and/or accountants choose to adopt particular accounting methods instead of others. While a normative theory of accounting is a prescriptive theory, which prescribes how accounting should be carried out. It generates direction in what accountants should do. It seeks to share with accountants which accounting method used is the most effective or equitable process and therefore, which accounting method accountants should use.

In the idea of theory, a positive theory of accounting is developed through inductive reasoning that is, through observations. The idea developed is dependant on watching 'what accountants do'. While a normative theory of accounting is developed through deductive reasoning that is, logical reasoning. The theory developed is situated more on the use of logic that is, 'what accountants should do' rather than observation.

If a normative theory of financial accounting has been developed to suggest how we should do financial accounting, is it feasible that people can decide to reject the theory because we do not with trust a central assumption of the theory (such as an assumption about the aim of financial reporting), but at exactly the same time decide that the theory is nevertheless reasonable? Demonstrate your answer.

Yes, we can reject a theory even that the idea is logical. For instance, the capital market segments that we use as an assumption are reliable. Besides that, folks are motivated by self-interest bind alongside the wealth maximization. It could lead us to make particular prescriptions in what information organizations should produce. Self-interest means a core belief about what motivates specific action. However, we may consider that the prescriptions provided by the idea are unsound and potentially even negative impact to particular communities within modern culture if we reject these assumptions. In short, we would even to believe that the idea is logically developed.

Is the study of financial accounting theory a misuse of time for accounting students? Explain your answer.

In my estimation, the analysis of financial accounting theory is not a misuse of time for accounting students. Actually, it is important for accounting students to review and understand financial accounting theories. It is because; accounting theories try to provide a coherent and systematic framework for investigating, understanding and/or producing various accounting procedures. The evaluation of individual accounting practices may very well be a lot more effective if the person evaluating these techniques has a thorough knowledge of accounting theory. Without a thorough theoretically informed knowledge of accounting, it is difficult to judge the suitability of current accounting techniques, to develop improved accounting techniques where current tactics are unsuitable for quickly changing business situations, and to defend the reputation of accounting where accounting tactics are wrongly blamed for leading to companies to fail. Hence, the insights from a different range of accounting theories are crucial to the process of continual improvement in financial accounting tactics.

In addition, students of financial accounting may also be required to learn how to construct and read financial assertions ready in conformity with various accounting specifications and other professional and statutory requirements. Within their working life, whether they choose to specialize in accounting, they could be involved in such activities as studying financial statements for the purpose of making particular decisions, compiling financial assertions for others to read, or making accounting guidance or rules for others to follow. Therefore, the better they understand the accounting routines root these various activities, the far better they are likely to be in undertaking these activities - and for that reason, the better equipped they will tend to be to achieve their chosen job.

Explain this is of the next paragraph and evaluate the logic of the point of view described:

In generating ideas of accounting that are established upon what accountants do, it is assumed (often implicitly) that what's done by nearly all accountants is the most appropriate practice. In implementing such a point of view there is, in a way, a point of view of accounting Darwinism - a view that accounting practice has improved, and the fittest, or simply "best", techniques have survived. Prescriptions or advice are given to others on the basis of what most accountants do, the logic being that the majority of accountants must be doing the most appropriate thing.

From around the 1920s to the 1960s, theories of accounting were normally developed based on observation of what accountants actually does in practice. They were developed by the task known as sense. This is contrasted with an activity wherein ideas are produced by deductive reasoning which is based more upon the utilization of logic somewhat than observation. Besides, time for the utilization of observation to develop generalisable theories is dependant on the common tactics that have been codified in the form of conventions of accounting after observing what accountants did in practice.

These techniques of the ideas were used by Notable ideas, which careful observation of accounting practice revealed patterns of steady behaviour. For instance, maybe it's seen that accountants tended to be very advisable in measuring both earnings and expenses. Where judgement was necessary it was discovered that accountants usually underestimated income and overstated expenditures. The result was a conventional measure of revenue.

Similarly, maybe it's seen that accountants behaved as if the worthiness of money, that was the unit of account, continued to be constant. These observations of accounting practice resulted in the formulation of a number of hypotheses such as 'that where judgement is needed, a conservative treatment is followed' and 'that it is assumed that the worthiness of money remains constant'. These hypotheses were confirmed by many observations of the behaviour of accountants.

While there was a general switch towards prescriptive research in the 1960s, some research associated with an inductive mother nature still occurs. Research predicated on the inductive methodology has been subject to many criticisms. For example, Gray, Owen and Maunders (1987, p. 66) declare that learning extant practice is a study of 'what is' and, by classification does not analyze 'what is not' or 'what should be'. It therefore specializes in the position quo, is reactionary in attitude, and cannot provide a basis upon which current practice may be evaluated or from which future advancements may be deduced.

What role do values judgments have in deciding what particular accounting theory a researcher might choose to adopt to make clear or predict particular accounting phenomena?

Value judgements have a significant capacity to make using what theory a researcher might elect to utilize to make clear or anticipate particular phenomena. These indicate that, we must consider the particular accounting theory researchers might use to describe the companies choose to produce information about their cultural and environmental performance. In the event, I presumed that company managers are determined by self-interest. In those days, I would adopt a Positive Accounting Theory. A CONFIDENT Accounting Theory has self-interest as one of the fundamental assumptions about what drives human behavior. These people could have a tendency towards believing that all human activity. The actions include the disclosure of interpersonal and environmental information. Which means that, it is undertaken to the limits that the activity can be related back again to favorably impacting the managers' wealth.

Besides, it typically requires folks of current generations to offer current use to extent it is in the interests of future decades if I was a researcher who holds a perspective of ecological development. In this manner, I'd reject Positive Accounting Theory as self-interest and ecological development are to mutually exclusive. For instance, researcher would accept another theoretical perspective such as legitimacy theory. However, there are no analysts in the region of communal and environmental accounting enfolds Positive Accounting Theory though it is interesting to note that.

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