Chapter 1:
Introduction to Accounting Theory
What is Accounting Theory
Accounting Theory & Policy Making
Measurement
Accounting Theory is defined as
the basic
assumptions
definitions
principles and
concepts that underlie
the rule making by a
legislative body
the reporting of
accounting and
financial information
applicable to financial
accounting, not to
governmental or
managerial
Accounting Theory includes
Conceptual Frameworks
Accounting Legislation
Concepts
Valuation Models
Hypotheses and Theories
Accounting Theory & Policy Making
3 inputs to policy making function
Accounting Theory
Political Factors
Economic Conditions
Once policy is made
Accounting Practice implements the policy
Users observe effects of implementation
Financial Accounting Environment
Accounting
Theory
Political
Factors
Accounting
Policy Making
Accounting
Practice
Users
of Accounting
Data and Reports
Economic
Conditions
Accounting
Theory
Political
Factors
Economic
Conditions
Accounting
Policy Making
Accounting
Practice
Users
of Accounting
Data and Reports
Audit
Function
Measurement is defined as
the assignment of
numbers to the
attributes or
properties being
measured
Measurement Categories
Direct or Indirect
Direct is preferable; managers like
Indirect is a roundabout way of making the
measurement
Assessment and Prediction
Assessment measures are concerned with particular
attributes of objects
Prediction measures are concerned with factors that
may be indicative of conditions in the future
Measurement Process
Is not simple
There is not just one
absolutely correct
measure
The process will
depend on several
factors:
1. The object itself
2. The attribute being
measured
3. The measurer
4. Counting operations
5. Instrument used
6. Constraints affecting
the measurer
Measurement Types (NOIR)
Nominal
Most simple
Groups like objects (e.g., chart of accounts)
Ordinal
Indicates an order of preference
Degree of preference among the ranks is not necessarily
the same
Interval: change in the attribute being measured is equal
Ratio: same as interval, but zero point has a unique
quality
Quality of Measurements
Objectivity or Verifiability
The degree of agreement among measurers
Statistically, this means the less variance there
is, the higher the objectivity
Bias
Timeliness
Cost Constraint
SUMMARY:
Introduction to Accounting Theory
What is Accounting Theory?
Accounting Theory & Policy Making
Measurement