Why Is There No Universally Accepted Accounting Theory?

Why Is There No Univers everyy Accepted Accounting Theory?AbstractThis paper discusses the statement there is no universally accepted history supposition. In addition, it offers whatever basic and historical background regarding history and discusses the different approaches to develop an account opening, before describing three common score theories. Finally, the actuallyity of the above statement and the factors that confront a universal account statement theory argon debated.IntroductionAccounting is a very previous(a) knowledge as it is strictly related to the first off forms of trade in the old world. According to Belkaoui (1992 22), the Committee on Terminology of Ameri lavatory Institute of Certified customary Accountants (AICPA) defines accounting as followsAccounting is the art of commemorateing, classifying and summarising in a significant manner and in terms of money, transactions and events which are in part at least, of a financial character, and interpret ing the results thereof.Belkaoui (1992 22) believes that such a definition is limited and a broader alternative is offered that defines accounting asThe process of identifying, measuring and communicating economical information to permit informed judgments and decisions by users of the information.Historical BackgroundThe history of accounting is of importance to those wishing to understand existing and future accounting practices. Historically, the first form of accounting practices was bookkeeping. Bookkeeping resulted from a need of ancient traders in Chaldean, Babylonian, Akkadian, and Assyrian civilizations (Belkaoui, 1992). Those ancient traders developed advanced trading practices to track their costs and incomes. This of course, led to record keeping as the best. Belkaoui states that the earliest known form of record keeping dates back to 3000 B.C. which was found in Old Irak (Belkaoui, 1992).Egyptian and Chinese civilisations also had old accounting practices for handling twain treasury and other government accounts. In Greek civilisation, there was a famous accountant named Zenon. He managed the estates of Apollonius (a Greek minister of finance). Zenon was the first to introduce the first Responsibility Accounting System according to Belkaoui (1992).In the Roman civilisation, taxes and social classes were dependent on declared properties. As a result, taxpayers were supposed to submit clear financial statements. Of course, these factors enforced the existence of bookkeeping in the ancient world. During the sixteenth, seventeenth and eighteenth centuries, a huge transition in accounting took place. Luca Pacioli introduced the Italian double-entry method. Later on, new methods were introduced to handle fixed assets (Belkaoui, 1992).According to Schroeder and Clarke (1998), between the years 1900 and 1973, several bodies were introduced to establish and improve financial accounting standards, practices, and reporting.These bodies include the America n Institute of Accountants (AIA) which was established in 1916.Then, in 1934, the Securities and Exchange Commission (SEC) was established. In 1937, the American Institute of Certified Public Accountants (AICPA) was formed as a result of a merger between the AIA and the American Society of Certified Public Accountants(Schroeder and Clarke, 1998).Accounting TheoryA theory in its simplest form is an invoice of a certain phenomena, a set of observations. The theory can be understood as a generalisation used to organise data into pregnant information.Glautier and Underdown (1991) argue that theories are supposed to be concerned with the explanation of a set of observations. Also, they argue that relating an existing theory to a set of observations or attack up with a theory that relates to a set of observations is essentially having the same objective which is providing an explanation to these observations.Need for an Accounting TheoryWebster define a theory as a systematic statement of principles. Also, it gives a more detailed definitionA formulation of apparent relationships or underlying principles of certain notice phenomena which has been systematically accumulated, organised, and verified well enough to provide a frame of reference for future actions (Schroeder, Richard et al., 19981).The second definition gives some reason for the need of an accounting theory. These reasons include organising accounting practices and handling future changes. Of course, a theory can be applied into practical areas of interest. An accounting theory makes it easier to understand accounting in a professional way.Developing Accounting Theory Approaches and MethodsAn accounting theory should provide accountants with guidelines for how to represent a summary of financial data for activities during a year. Of course, this information should be useful to people who are going to use it in make decisions and judgments.Glautier and Underdown (1991) list three common approaches th at have been used to develop accounting theory previously. These approaches areDescriptive ApproachDecision Usefulness ApproachWelfare ApproachThey classified the Decision Usefulness Approach into two types semiempirical and normative (Glautier and Underdown, 1991).On the other hand, there have been several approaches to develop accounting theory. These approaches make use of other classical methods of reasoning such as the ethical, sociological and economic approaches.The descriptive approach developed theories that are concerned with what accountants should do. Descriptive theories use induction. Usually, inductive reasoning will begin by making enough observations by looking at similar instances and practices before drawing a generalised conclusion.Glautier and Underdown (1991) state that the descriptive approach has attempted to relate the accounting practices of accountants to a generalised accounting theory.Usually, descriptive approaches lead to descriptive or positive theo ries. These theories are concerned with existing accountants practices. Descriptive theories explain those practices and make it doable to predict future behaviours. Glautier and Underdown (1991) offer a useful example with regards to such predictions. By applying the descriptive theory, one can easily predict that the receipt of specie will be entered in the debit side of a cash book.The Decision Usefulness Approach resulted from the great interest in behavioural researches in accounting during the 1970s (Glautier and Underdown, 1991). This type of approach resulted into two main theories Empirical and normative theories.The Empirical theory resulted from the increase in empirical research in accounting. The objective of such research was to have reliable results that would positively influence decision making. This objective forced the use of advanced statistical techniques. The increase in university accounting courses resulted in a great number of students that were capable o f carrying out advanced and sophisticated quantitative research.On the other hand, the Normative Theory concentrates on which decision models should be selected by decision makers in order to make logical decisions.The third approach mentioned by Glautier and Underdown (1991) is the Welfare Approach. This approach can be considered as an extension to the decision-making approaches. The main objective of the welfare approach is to increase social welfare through rational decisions found upon reliable accounting information. common Accounting TheoriesPositive TheoryThe positive theory is mainly explaining existing accounting practices and observed accounting phenomena (Schroeder, Richard et al., 2001). Belkaoui (1992) believes that positive accounting theory is looking into why accounting practices have developed into the way they are today. Then, the positive theory explains or predicts accounting events. Many positive accounting theory supporters are afmenageative due to that posit ive approach is getting more supporters.Belkaoui (1992) noted criticism of positive theory including the point that the theory concept is based on an noncurrent philosophy of science and that theories of empirical science do not have positive statements on what is.Normative TheoryThe normative theory focuses on what should be instead of what is (Belkaoui, 1992). Therefore, it is on the contrary side to positive theory. This theory is based on a set of objectives. It was developed using the deductive approach that uses logic. Normative theory advocates agree on a set of objectives, believing that these objectives are the best for accountants. Then they deduce their hypotheses and principles. Their next step is to apply this theory to real life accounting practices and events. Actually, normative theory will depend on its advocates and the level of harmony they can reach on the agreed set of goals.Although the normative approach is very important in regulating the industry and develo ping new accounting practices, it may not handle possible future set up caused by new theories that may change accounting practice in the future.Agency TheoryAgency theory tries to describe financial statements and their basic accounting theories (Schroeder, Richard et al., 2001). This theory emerged from the relationship that exists between managers and shareholders. Agency theory assumes that individuals always try to increase their own expected utilities. Also, it assumes that they are creative in doing so. This theory is based on the fact that there is an agreed relationship between two parties. The first is the agent (usually the managers of a firm) and the second is the principal or the stakeholders. The principal agrees to let the agent act on his or her behalf. This usually happens because stakeholders are not capable or not trained sufficiently well to handle the firm in the manner that the managers can. An issue arises here which is the conflict of interest. This issue ca n be solved through several methods that ensure mutual benefit to both sides such as bonuses or a percentage for the agents. One negative point regarding agency theory is that it is based on the assumption that both parties are trying to maximise his own expected utilities. This assumption is not accepted politically or socially.Universally Accepted Accounting TheoryFrom the previous shade on accounting theories, it is clear that there are different approaches to develop them. In addition, there is a wide and diverse range of accounting practices all over the world. Generally Accepted Accounting Principles (GAAP) is the standard framework of guidelines for financial accounting used in the United States of America. The obstacle that prevents GAAP becoming the principles on which global accounting theory is developed is that every country has its own standard accounting practice version of GAAP, usually set by a national governing body.Currently, there is no Universally Accepted Acco unting Theory. It seems that having such a theory will not occur in the faithful future. This is due to many factors, including the fact that using different approaches to develop such a theory will result in different theories. Also, establishing international standards is a very tricky process due countries seeking to protect the privacy of their domestic legal and economic matters. In addition, it is difficult to have one theory that satisfies all needs.Of course, it is important to have guidelines to assist users with no accounting knowledge to understand company accounts. Also, there should be similar guidelines for accountants to handle multi-national firms and establishments.ConclusionAlthough some may argue that there is no need for such a universal theory as we are doing well without it, there is still a need for such a theory even if it is not as perfect as it should be.To sum up, establishing Universally Accepted Accounting Theory can be a very complicated process. This paper discussed the statement there is no universally accepted accounting theory. It gave a brief historical background and some basic information relating to accounting. It discussed the different approaches used to develop accounting theories, as well as the three common accounting theories. Finally, the essay enlarge on the fact that currently there is no universal global accounting theory.ReferencesBelkaoui, A. (1992) 3th edition, Accounting Theory. capital of the United Kingdom Dryden PressGlautier, M. W. E. and Underdown B. (1991) 4th edition, Accounting Theory and Practice. capital of the United Kingdom Pitman PublishingSchroeder, R. G. and Clarke, M. W. (1998) 6th edition, Accounting Theory Text and Readings. London John Wiley Sons Inc.Schroeder, R., Clark, M. and Cathey, J., (2001) 7th edition, Financial Accounting Theory and Analysis Text Readings and Cases. London John Wiley Sons Inc.