Topic 1

Question 1

What is a theory?

Answer 1

What is a theory?

• A theory is not a “hunch”
• A theory is a set, scheme or system of hypothetical, conceptual and pragmatic principles
• A theory is based on systematic and coherent (or logical) reasoning
• A theory provides explanation or an account of a phenomena

Theories help us make sense of the world we live in and provide a structure to understand our (social) experiences

Question 2

How are theories in accounting different from other theories?

Answer 2

How are theories in accounting different from other theories?

• “A scheme or system of ideas or statements held as an explanation or prescription of a group of accounting facts or accounting phenomena”
• As accounting is a human activity accounting theories explain or prescribe human behaviour as far as accounting is concerned.
• As human behaviour is complex there is no one accounting theory. In fact, there are many theories of financial accounting even for the same accounting phenomena.
• Different perspectives about the central objective, role and scope of financial accounting results in different theories.

Question 3

What are the two main ways of developing theories (in accounting)?