Accounting theory has gone through rapid changes and innovations in recent years. These changes have been categorized as new accounting theory. These innovations and new theories go against and differ from the traditional theory of accounting. There are gaps in the way that varying companies account for their finances. Harmonization of the two approaches will bring greater stability to commerce.
According to Ahmed (2000) “Accounting history is the study of evolution in accounting thought, practices and institutions in response to changes in the environment and societal needs.” An older style of accounting is reactive to past experiences giving us reasons for what is now current. These are the 5 methods that have made up much of the traditional Theory.
According to Accounting Theory Formulation as a tool for enhancing international harmonization of accounting standards, “The non-theoretical approaches to accounting are the pragmatic (or practical) approach and an authoritarian approach.” These approaches are made to use known sciences to perform the given task. The heart of this theory is based upon the ideal that accounting theory must be on the terms of a final use in financial reports. This entails that any other theories without these characteristics are deemed bad.
Deductive approach is the attempt to find what “ought to be”. According to Porwal (2001) the four steps to using the deductive approach are
• Specifying the objectives of financial statements
• Selecting the “postulates” of accounting
• Deriving the “principles” of accounting
• Developing the “techniques” of accounting
The ethical approach is one that puts the equality of truth and transparency of the accounting framework above all else for all parties included. This means that accounting approaches may not be decided or implied to help a certain party but must be unbiased. This approach also is centered around fairness which maintains that business have acted ethical and in good faith.
The sociological approach focuses on sociological effects that accounting has. This concerns itself of the general wellbeing of the public; as well as the equality that accounting should bring to the world. In order for this to work it is imperative that “established social values” are used when implementing accounting theory.
The economic Approach to accounting theory differs from sociological and the ethical approaches because it is based upon the general economic wellbeing. This means that the choices will be made upon the overall goal that a nation has for its economy. This focuses much less on individual equality and mostly upon factors of macroeconomics.
New approaches to accounting are evolving and being remolded in recent years and are essential to present day accounting. All parties in the accounting world have not yet accepted the new Theory. These five Approaches are the makings of new theory.
A major aspect of accounting theory is counseling clients. Accountants must be able to coach their clients to make better decisions in their future when making changes to their company. For example, according to Accounting Theory 3E by LS Porwal, ” A client contemplating making and accounting change that will increase its reported income in purpose of supporting its stock prices should be informed that such tactics do not fool the market.” This shows the part that accountants play in advising the future actions companies will take to ensure their finances.
While generally excluded from traditional accounting process, the behavioral approach is based upon the opinions and reactions of the people. The meaning of this is try to quantify the reaction that people along with the users of the financial statements will have.
Human Information Processing Approach
Human Information Processing Approach is based on processing model inputs, process, and output. These three tools allow accounting methods to be utilized in other general real world problems.
According to the Concepts Statements NO.2 of FASB, the predictive value is an ingredient of relevance, a primary quality of financial reporting. This approach is an evaluation of the different options and the choice between the differing choices