The role of accounting theory
Underlying the discussion of accounting as an information system is the important question of the field of knowledge to which accounting information refers. This question raises issues about the nature and significance of accounting theory, the different approaches to developing accounting theory and the relationship between accounting theory and accounting practice.
The purpose of this section of the website is to consider these various problems with a view to establishing the role of accounting theory.
The nature of theories
Essentially, theories are generalizations which serve to organize otherwise meaningless masses of data, and which thereby establish significant relationships in respect of such data. The construction of theories requires a process of reasoning about the problems implied in the data under observation, as a means of sorting out the most basic relationships. Thus, theory construction is also a process of simplification, which requires assumptions which permit the representation of reality by a generalization which is easily understood. The close association of theory and data, or facts, is fundamental to the notion of good theory, for the reliability of a theory is dependent not only upon the facts to which it refers, but also upon an interpretation of those facts requiring validation and continuous re-assessment.
Theories are concerned with explanation. Explanation consists of relating a set of observations to a theoretical construction of reality which fit those observations. If no theoretical scheme is available that seems to do this reasonably well, the desire for explanation leads to the creation of a scheme of ideas which provides a definition of the problem observed as well as an understanding of it in the form of explanation. In both cases, relating observations to existing theory, and constructing theory to fit observations have the objective of providing explanation of those observations.
A misunderstanding of the relationship which exists between facts and theories gives rise to a great deal of misconception about the role of theories. Thus, the complaint that 'it's all right in theory but not in practice' implies that the person making the complaint must hold the belief that an alternative theory provides a different explanation of the facts in question.
The word 'theory' itself gives rise to misunderstanding, and may mean different things to different people. This arises because explanations are made at different levels. At one extreme, explanations are purely speculative, resulting in speculative theories, for example that 'outer space probes are affecting the weather'. To the natural scientist, speculative theories are not really theories at all. In his view, explanations have to be conclusive before they are given the status of theories. To this end, their assumptions require verification by the test of experience. Therefore, at another extreme are to be found explanations which are accepted only when they have been verified. Empirical theories are constructed by the process of verifying assumptions, or hypotheses, through the test of experience. This process is known as the 'scientific method'.
Empirical theories assist in making 'predictions', for while they consist of generalizations which explain the present, future occurrences also replicate the same conditions. It is in providing both explanations and predictions that empirical theories have acquired such an importance for making decisions about the future which are based on assumptions derived from experience.
We began with an examination of accounting as an information system consisting of three activities-input, processing and output. The systems characteristic of accounting suggests that the systems approach is the ideal way of studying the subject. It is not sufficient, however, to view accounting purely as an operating system, for its relevance and usefulness may only be judged by the degree with which its output meets the needs of the users of accounting information. By identifying the basic goal of an accounting information system as being the provision of information for decision making, we provide... see: Information System Summary