Question

Accounting theory can be developed using several research methodologies such as:

Deductive approach

Inductive approach

Behavioral approach

Ethical approach

Discuss the strengths and weaknesses of each research approach in relation to accounting theory

Answer 1

Accounting is a mechanism of recording, classifying and summarizing events which could be quantified in terms of money in a logical manner for further analysis and making decisions.

The most relevant definition of “theory” is “the coherent set of hypothetical, conceptual, and pragmatic principles forming the general frame of reference for a field of inquiry”. Thus, the purpose of framing accounting theory is to provide a coherent set of logical principles that form the general frame of reference for the evaluation and development of sound accounting practices.

Various approaches have applied over time to the formulation of an accounting formulation theory. Some of these approaches are known as “traditional” approaches, because they are characterized by the absence of a vigorous process of verification in the attempt to develop an accounting theory. Traditional approaches constitute conventional research rather than new streams of research that rely on traditional reasoning to formulate a conceptual accounting framework. Among these approaches we may distinguish:

1. The Deductive approach
2. The Inductive approach
3. The Ethical approach

1. The Deductive Approach:

Deductive approach begins with propositions and assumptions and finally ends with logical conclusion about the subject under consideration. It helps in developing new accounting practices keeping pace with the dynamic world. It stresses on ‘what ought to be done’.

Method of Formulation:

Step 1:       The objective of preparing financial statement is determined.

Step 2:       Assumptions or postulates are made.

Step 3:       New principles are evolved on the basis of those postulates.

Step 4:       New accounting techniques are derived from such principles.

Advantages:

The deductive approach or theory made under this approach is compatible with changing circumstances. It is also useful when logic is necessary for building up new models.

Disadvantages:

The deductive approach or theory made under this approach is not simple, easy to understand and operate. This approach also has some loopholes as the wrong assumptions, postulates and proposition may give misleading conclusions. It is influenced by personal bias or is subject to manipulation by interested parties.

2. The Deductive Approach:

Inductive approach is useful in framing general rules, principles, laws of social & physical science and to study natural trend of human behavior. It begins with observations of accountant’s practice followed by formulation of hypothesis. If such hypothesis holds good in all observed cases, then it is considered as theory.

Method of Formulation:

Step 1:       Observations and recording of all observations.

Step 2:       Analyzing and classifying these observations.

Step 3:       Inductive derivation of generalizations and principals of accounting from observations.

Step 4:       Testing of the generalizations.

Advantages:

The inductive approach or theory made under this approach is simple, easy to understand and to operate. It is neither influenced by personal bias nor subject to manipulation by interested parties.

Disadvantages:

The inductive approach or theory made under this approach is not compatible with changing circumstances. It is also not useful when logic is necessary for building up new models.

3. The Ethical approach:

The basic core of the ethical approach consists of the concepts of fairness, justice, equity and truth.

This approach should not be taken as independent approach.

“Fairness” refers to the basic concept of that the accounting data should be fair, unbiased

“Justice” with equitable treatment of all interested parties

“Truth” with true and accurate accounting statements without misrepresentation

A discussion of assets, liabilities, revenue, and costs is premature and meaningless until the basic principles that will result in a fair presentation of the facts in the form of financial accounting and financial reporting are determined. This fairness of accounting and reporting must be for and to people, and these people represent the various segments of our society.

In general, the purposes of having these approach that accounting statements have not been subject to undue influence or bias.

The word “True and Fair” has to be specially mentioned in Audit Report.

New Approaches:

Behavioral approach:

It emphasizes the relevance to decision making of the information being communicated, and the individual and group behavior caused by the information being communicated.