overview of accounting theory

 Development history of accounting theory  Conceptions about the nature of accounting  Theoretical framework and accounting theory  Applications... DEVELOPMENT HISTORY OF ACCOUNTING

Course Targets

 To provide the fundamental knowledge for students about accounting theory of which they can gain the understand and be able to apply the approaches,

measurements, compare the theoretical framework to analyze and come to evaluate an accounting system;

 To supply students with an overview of the

international accounting system in each historical

stage of establishment, development and international integration trend in accounting.

Recommended texts

 Vu Huu Duc – The Fundamental Problems in

Accounting Theory – Labor Publisher (2010);

 Ministry of Finance – Vietnamese Accounting

Standards (VAS);

 IASB, Framework for the Preparation and Presentation

of Financial Statement, was approved by the IASC

Board in April 1989 for publication in July 1989, and adopted by the IASB in April 2001.

 Other documents given by the lecturer during the

course.

Assessment Standards

 The midterm test 2 x 0,2 = 0,4

(essays in groups/constructed response test)

 The final test 0,6

(constructed response test)

 Total: 1,0

Course Timetable

-sion

– Explain the development of modern accounting and the trends controlling this development.

 Development history of accounting theory

 Conceptions about the nature of accounting

 Theoretical framework and accounting

theory

 Applications

DEVELOPMENT HISTORY OF

ACCOUNTING THEORY

 The Pre-theoretical period

 The Basically Scientific period

 The Normative period

 The Positive period

 The Modern period

THE PRE-THEORETICAL PERIOD

 This stage began to exist from the time when the primary kinds

of accounting were established to the end of the 18th century

 Accounting had existed under the recording ways to supportbusiness and financial operations before the double entryaccounting system was founded in the 15th century

 In 1494, the double entry accounting system that was introduced

by Luca Pacioli in ―Summa de Arithmetia, Geometria,Proportioni et Proportionalita‖ played an important role indeveloping the modern accounting

 In 300 years later, researchers would rather concentrated on advancing the accounting systems than giving an adequate theory Goldberg affirmed:

“ There was completely no accounting theory proposed from Pacioli’s time until the early 19 th century Even though there were the theoretical proposals from somewhere, they do not combine enough necessary extents to put accounting on a systematic foundation.

THE PRE-THEORETICAL PERIOD

The main contributions in this period to accounting

practices include:

 Appearance of different journals specialized in recording various transactions.

 Creation of periodical accounting reports.

 Expanding double entry accounting system appliances for different economic organizations such as monasteries, the government…

 Using different accounts for various inventories.

 Conception formation about continuous operations, periods and accrual.

 Some methods of accounting for fixed assets…

THE PRE-THEORETICAL PERIOD

THE BASICALLY SCIENTIFIC

PERIOD

 This stage took place from the 19th century until 1950s.

 The 19th century was the thrive of accounting

techniques and practices which derive from the industrialization, the separation of properties and managing functions in big companies in order to increase demands for managing and financial

information.

THE BASIC SCIENTIFIC PERIOD

 In this stage, accounting techniques and practices

began to be applied in teaching at universities and lots of accounting books were composed.

 Great contributions to accounting in this period were the development of depreciation, the accrual

techniques, the cost accounting system,…

 The economic development in this period also

founded the basis for the connection between this

field and accounting.

 By the late of 19th and the early of 20th century, some

vocational organizations founded in the UK and US together with the formation of professional accountancy These

organizations make contributions to the improvement of the initial accounting theory like:

– In 1936, American Accounting Association (AAA) published ―The announcement orienting the accounting principles for financial

statements‖.

– In1938, American Institute of Certified Practising Accountants –

AICPA issued ―A statement about the accounting principles‖

THE BASIC SCIENTIFIC PERIOD

 In 1938, AICPA established the Committee on Accounting Procedures – CAP This committee published Accounting Research Bulletin – ARB from 1939 to 1959 with the

accounting terms and principles introduced such as:

– Company income tax accounting (ARB 23 in 1944),

– Intangible fixed asset accounting (ARB 24 in 1944),

– Business consolidation (ARB 40 in 1950 was later replaced by ARB

48 in 1957),

– Consolidated financial statements (ARB 51 in 1959)

THE BASIC SCIENTIFIC PERIOD

 In accounting theory, this phase was considered as

―The basic scientific period‖ because the theoretical research in this phase mainly focused on providing the explanations about practice, relied on experimentally analyzing the ways companies are applying

accounting

THE BASIC SCIENTIFIC PERIOD

 ― A statement about the accounting principles‖, a work

attributed to 3 accounting researchers, T.H Sanders, H.R

Hatfield and U Moore, based on interviewing both all financial statement builders and users, researching the previous

accounting books, regulations and adjudications of related

laws, and financial statements… in the purpose of ― creating a series of helpful accounting principles to clarify and improve accounting tasks at companies and financial statements issued

in public

THE BASIC SCIENTIFIC PERIOD

THE NORMATIVE PERIOD

 By the late of the 1960s, according to the application

of economics to accounting, the regulatory accounting researches widely developed This theory strongly

concentrated on dealing with the problem ―How

should accounting be carried out?‖ instead of ― How

is accounting be conducted?‖.

 The distinguished researchers in this field are W A Paton, M Moonitz, R.V Mattessich, R.J Chambers,

Y Ijiri

Two basic contents of regulatory accounting:

(1) Criticizing the original cost and finding new

evaluation theories in accounting, especially when the economy was in the inflationary conditions The

evaluation patterns except the original cost such as the current cost were introduced in this set.

THE NORMATIVE PERIOD

 (2) Recommending a theoretic accounting structure

as a theoretical framework about accounting.

Starting from the definitions of the nature, the meaning of accounting, and researches to find out the aims of accounting to create the accounting principles.

These researches are considered as the basis for developing the theoretical accounting patterns of FASB and IASC in later.

THE NORMATIVE PERIOD

 Some studies in the trend of regulation were formed since 1940s such as ― The introduction of corporate accounting principles‖, A.C Littleton and W.A Paton.

It was the first set of developed accounting principles that based on the interpretation instead of using the induction of reality.

Two researchers who clearly distinguished accounting principles with accounting methods are the first ones

to recognize their relation.

THE NORMATIVE PERIOD

 However, until the 1960s, the regulatory studies were strongly developed:

– The studies of regulatory accounting principles such as

―The basic assumptions about the nature of accounting‖ by Mootnitz in 1961, ― The orientation for the accounting

principles applied in companies‖ by Mootnitz and T

Spouse in 1962

– The studies of corporate profit and assumptions such as

―Accounting, evaluation and economic behaviors‖ by

Chambers in 1966; ― Measurement basis in accounting‖ by Ljiri in 1967…

THE NORMATIVE PERIOD

 In the 1970s, the regulatory accounting was criticized for the reasons that:

– The assumptions weren’t verified by practices

– The interpretation was mainly dependent on the individual guessing

THE NORMATIVE PERIOD

THE POSTIVE PERIOD

 Researches of recognizing accounting were developed by R.L Watts, J.L Zimmerman and the others in 1970s

 These studies originated from the criticism about the regulatory theory together with the ability to approach the various practical information

 They based on the recognizing basis to explain and predict the accounting realities The recognizing researchers gave the real theory, collected data, and tested the theories to finally make the conclusion

 The recognizing studies in this stage include:

– (1) Relations between accounting information and capital market

in which the factors of accounting information have impacts on the stock market were considered The important one in this area was ― Practically evaluating about the number of profit in

accounting‖ by Ball and Brown (1968).

– (2) Management’s selection of the accounting policy to consider the ways managements choose the accounting principles for

presenting financial statements; for example, ―The effects of

awarding plans on the selection of accounting policies‖ by Healy

in 1985.

THE POSITIVE PERIOD

 The recognizing studies in this stage include:

– (3) Political impacts on selection the accounting policy such as the studies of Watts and Zimmerman, ―Direction for a recognizing theory for establishing the accounting principles‖ in 1978 and

―The recognizing accounting theory‖ in 1986.

THE POSITIVE PERIOD

 The studies in recognizing was criticized because their

approaches were so easily led to the dependence on external relations that the other sides would be missed; for example,

there were more focuses on the ways of choosing the

accounting policies rather than the accounting methods

themselves

 In 1980s, another approach developed in researching was

studying on behavioral accounting theory The behavioral

researches considered the affects of accounting numbers on a larger social scale and the reactions of each sides to accounting information, including investors, managements, creditors, and governments…

THE POSITIVE PERIOD

THE MODERN PERIOD

 Despite criticisms, the positive and behavior studies still have played essential roles in present accounting researches in the academic field

 After the collapses of big companies (WorldCom, Enron,…) and the financial crisis in the early 21st century, the issues of basic accounting have been discussed again and the normative theories are strongly supported The majority of these studies were conducted by both the accounting organizations and the professional people working in the accounting – auditing field

THE MODERN PERIOD

 Even though there are different approaches between the normative and positive researches, there are no conflicts between them; by contrast, the

understanding of the accounting impacts in the

academic studies is an important element for

developing the accounting principles in practice.

THE MODERN PERIOD

 Overall, by the developing process, accounting theory has increasingly brought to accounting a deeper inner rather than the merely transactions or legislations.

 Vangermeersch R Và Power J.W ― The debates

beyond the positive accounting premises and findings

to show that the accounting ideas have reached for the level of maturity in science.

WHAT IS ACCOUNTING?

 Accounting is the art of recording,

classifying and summarizing in a

significant manner and in terms of money, transactions and events which are, in part at least, of a financial character and

interpreting the results thereof‖

(Committee on Terminology of AICPA - 1953)

 Accounting is a service activity Its function

is to provide quantitative information, primarily financial in nature, about economic entities that is intended to be useful in

reasoned choices among alternative courses

of action.‖

(Accounting Principles Board- 1970)

WHAT IS ACCOUNTING?

 Accounting is the activities of collection, processing, testing, analyzing, and providing economic and financial information in the form of value, matters, and labor time.

(Vietnamese Accounting Laws, 2003)

WHAT IS ACCOUNTING?

 The debates:

– What are the scope of accounting?

– What are the objectives of accounting?

– Is accounting an art or a science?

WHAT IS ACCOUNTING?

Management Accounting Financial Accounting

Tax

Accounting

Auditing

Accounting Information System

Social Accounting

International Accounting

Collecting/Processing

The Information

Statistical Agencies

Macroeconomic Policies

Tax Agencies

Tax Decisions

Quyết định

Kinh doanh

THE NATURE OF ACCOUNTING

 The nature of accounting information

 The economic nature of accounting

 The politic nature of accounting

 The social nature of accounting

THE NATURE OF ACCOUNTING

INFORMATION

Accounting records the past

 Recording of past transactions of the business in an honest

manner based on the principles of objectivity, consistency and prudence

 Providing information about the managements’ abilities in

using the resources of owners, including the most effective preservation and mobilization

 The accounting principles used for good financial statements relate the level and ability to provide information for a more comprehensive assessment of management capacity

Accounting reflects economic reality

 Accounting is a tool reflecting economic reality at the present time than using historical cost price to record and reflect

 The balance sheets must show the economic values of the assets and liabilities;

 The income statements must reflect the "net profits" of the

businesses, the economic benefits’ value independently increase

from the methods of distribution or classification

 This view leads to negation of the historical cost and finding of other replacing costs as the current cost or the possible value (Giá trị có thể thực hiện?)

 This view is considered as the basis for normative theories which relate to valuation in accounting.

THE NATURE OF ACCOUNTING

INFORMATION

Accounting is the information system

 Accounting includes information sources (accountants),

information channels and users Under this perspective,

accounting is understood as work of encoding observations in the system language, creating the system signals and reports, and then decoding them into the results

 This approach has important implications in the development of accounting theory Accordingly, accounting is no longer bound

by the goal of creating an absolutely true profit figures (true

income) or a picture of absolute honesty Instead, accounting is set up to provide relevant information to the users (user-

orientation)

THE NATURE OF ACCOUNTING

INFORMATION

Accounting is the business language

The similarities between accounting and languages​​:

 About purposes, both aim to provide information for a given object

 About structures,

– Language consists of two components of words and grammar

– Accounting also includes data and identifying principles for financial

statement preparing.

 Language perspective, accounting translates economic transactions into the figures under certain rules to help the readers understand the companies’ financial and operating situations

 This view is the basis for researching accounting theory’s structures.

THE NATURE OF ACCOUNTING

INFORMATION