1

ABSTRACT

Accounting can be regarded as the mathematical science entrusted with the task of observing the
financial information; collecting of the financial information; classifying and recording of the
financial information under the various hands; summarizing and compiling the financial
information in the financial statements in such a way that it can communicate effectively and
efficiently the information so collected to the various interested parties; who can later on, can use
and draw inferences out of the information provided. Like every subject or language it has its
own coherent set of concepts and principles that constitute its theoretical framework based on
logic and traditions which helps in, evaluating and explaining existing practices, and also serves
as a guide for the development of new practices and procedures. The main objective of this paper
is to understand and analyze the available literature about accounting theory and to understand
how it has been studied and evaluated by different professionals who have worked on it. This
paper also concentrates on understanding the concept and importance of accounting theory and
its practices.

Keywords: Accounting Theory, Accounting Concept, Theoretical Framework, Financial

Information.
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CHAPTER-1

1.1 Introduction:

Accounting the language of the business is now also considered as the number 1
decision support system of the business. Accounting is regarded as decision
support system as no decision in the business can be taken without going through
the information provided by the accounting documents. It has come a long way
from just a bookkeeper or record maintain to a decision support system with the
introduction of new technologies and software's, users of accounting are left with
the task of sifting through the data and analyzing the information provided or
compiled by the accounting. Accounting has helped the users of accounting to
make well-planned, well-organized, well informed and well-coordinated
decisions. Accounting is the process aimed at providing financial information to
the users of accounting observing, recording, classifying and summarizing the
financial transaction or events. It is the process begins with the detection
transactions of monitoring nature and ends with information dissemination. It
prepares, produces and communicates information to its users which would
facilitate quick and sound decision-making. It helps in effective and efficient
control of activities of business.
1.2 OBJECTIVES OF THE STUDY
The objective of the present paper is to review the following:
 To know the importance of Accounting Theory.
 To know the importance of Accounting Theory for accounting
Professionals and Practitioner.
 To analyze the Concept, Need, Advantages and limitations of Accounting
and Accounting Theory.
 To analyze the future aspect of Accounting Theory
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1.3 RESEARCH METHODOLOGY

The paper is mainly based on secondary data and information available from books,
published works, reports and concern websites.

1.4 ACCOUNTING THEORY

Financial matters are very crucial to any business or a human being thus far business or
the human being to make any financial transaction irrationally is just an indication to the
end. Accounting theories tries to explain and evaluate the rationales behind the financial
decisions or transactions made by the business entity. According to Prof. Hendriksen,
“Accounting Theory may be defined as logical reasoning in the form of a set of broad
principles that provide a general frame of reference by which accounting practice can be
evaluated and guide the development of new practices and procedures. Perara and
Matthew, 1996 opine that Accounting Theory is the logical reasoning in the form of
broad principles that provide a general frame of reference to every accountant to evaluate
and guide the development of new practices and procedures. It is the rationalization of
the rules of accounting which further explains the manner in which accountants gather,
record, classify, report and interpret financial data especially when monetary amount is
determined in the financial statements. American Accounting Association 1966
described accounting theory as a. cohesive set of conceptual, hypothetical and pragmatic
proposition explaining and guiding the accountant's actions in identifying, measuring and
communicating economic information to users of financial statement.

To sum up it can be said that, accounting theory is a system or set of ideas or concepts or
phenomenon which are widely accepted as a justification or explanation to the practices
of accounting. Accounting theory mainly aims at explaining the reason behind
accounting practice followed that doesn't imply that it is a scientific word but certainly
have a logic behind it, for instance wineries generally follow LIFO method of inventory
valuation whereas, a fruit vendor would use or prefer FIFO method of inventory
valuation, accounting theory should provide explanation regarding such practice of
inventory valuation followed whether on the basis of logic or on scientific principles.
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1.5 ACCOUNTING THEORY KEY TAKEAWAYS

 Accounting theory provides a guide for effective accounting and financial

reporting.
 Accounting theory involves the assumptions and methodologies used in financial
reporting, requiring a review of accounting practices and the regulatory
framework.
 The Financial Accounting Standards Board (FASB) issues generally accepted
accounting principles (GAAP) which aim to improve comparability and
consistency in accounting information.
 Accounting theory is a continuously evolving subject, and it must adapt to new
ways of doing business, new technological standards, and gaps that are
discovered in reporting mechanisms.
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CHAPTER-3

3.1 CHARACTERISTICS OF ACCOUNTING THEORY:

Originates and Explains Practices
Accounting Theory plays a dual role of both of originating and explaining accounting
practices. Present practices and problems serve as the basis for the development of new
theories similarly; accounting theory also tries out to explain the rationale behind the
existing practices.

Rationalizes the Accounting Practices

One of the key aspect of the good accounting theory is to rationalise or provide a logical
framework to the accounting practices which would not only serve as general principles
of references for evaluating and guiding the existing accounting practices but also
developing the new practices arising as a solution to the dynamic environmental
problems.
Dynamism
Any theory would not be accepted worldwide or won't flourish unless and until it has
dynamism in it. Accounting theories have inbuilt dynamism in their DNA which enables
them to cope and develop accounting practices with the changing business environment.
Verified and Tested by Practice
Accounting theories are very verified and tested on evaluated by the accounting practice
to check is there a any existence of deviation in the theory and practice are not, if there is
the case of deviation then accounting theory is modified, restated or pale the way for a
emergence of new phenomena are principles.
Systematic Set of Coherent Postulates or Principles
Accounting theories provides a systematic set of coherent postulates are principles,
which are accepted as true in order to provide a basis for logical reasoning to the existing
practices.
Statement of Systematic Methodologies and principles
Accounting theories are simply the statement of principles and methodologies to be
followed by the accountants.
Predictions
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One of the major features or test of a good accounting theory is its inability to predict or
govern the accounting events and behavior.
3.2 WHY ONE SHOULD ACQUAINT HIMSELF WITH KNOWLEDGE OF
ACCOUNTING THEORY:

"Why I should read accounting theory?”Why am I supposed to do valor of reading such a

boredom thing?" These are the questions which would generally come into every readers
mind. Well answer to such questions is that, knowledge of accounting theory provides
bundle of benefits which would make life of practitioners and readers of accountingeasy.
The knowledge of accounting theory due to scores of benefits it gives, serve as a deadly
weapon in the arsenal of the accountant. The acquaintance to accounting theory gives
following benefits:

 It helps in bringing logic in decision-making of accountants

 It helps in developing better accounting approach among accountants
 It helps in increasing efficiency of accountants.
 It helps in reducing ambiguity in accounting practices.
 It helps in justifying accounting practices with logic.
 It helps in preparation and adherence income tax and at the economic laws.
 Facilitates auditing of accounts easily.
 It helps in framing of accounting policies and procedures.
 It helps in fulfilling various information needs of interested parties in a better
way.
 It helps in bringing out accountant from the dilemma of selection of various
alternatives
 It helps in better interpretation and understanding of accounting information
provided by accounting documents.

3.3 STRUCTURE OF ACCOUNTING THEORIES:

There are n numbers of accounting theories floating around. These theories are deferring
due to the nature of accounting environment, nature of business environment, nature of
economic and political environment and from user to user. Besides, the nature of
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accounting information and data, sources of information and so on are influencing the
accounting theories1all these aspects serve or provide frame of reference termed as
structure of accounting theory. These frame of references or accounting theory structure
helps in judging to what extent and accounting theory adequate. The structure of
accounting theory has five elements:
 Objectives of Financial Statements
 Accounting Postulates/Assumptions viz Entity Postulate, Going Concern
Postulate, Accounting Period Postulate and Unit of Measurement Postulate.
 Theoretical Concepts namely: Proprietary Theory, Entity Theory, Residual
Equity Theory, Enterprise Theory and Fund Theory
 Accounting Principles viz Cost Principle, Revenue Principle, Matching Principle,
Objectivity Principle, Consistency Principle, Full Disclosure Principle,
Conservatism Principle, and Materiality Principle.
 A body of accounting techniques.

3.4 CLASSIFICATION OF ACCOUNTING THEORIES

Accounting theories can be classified into three types which are:
‘Accounting Structure’ Theory.
‘Accounting Structure’ Theory or Classical Theory or Descriptive Theory or Traditional
Theory: Classical Theories tries to answer why an existing practice is followed by the
accountant and what he would do in a particular situation. The contributors of the theory
would pursue accounting as the mechanical process which begins with the collection of
data by observing the financial occurrences and using the data derived from that
observation as the input to transform them into valuable output (that is financial
statements and financial reports). Classical theorists were mainly focused towards
rationalizing and unifying actions of accountants by bringing them under the umbrella of
generally accepted principles however, which tends to curtail dynamism of the
accounting practices. The essence of the classical theories lied in bringing logic and
explaining accounting practices. The classical theorists were highly obsessed with
explaining and predicting the behaviour of accountants which resulted in neglection of
real business situation. The classical theorists were more bothered about evaluating and
explaining the means of producing output (financial statements and financial reporting)
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instead of bothering about usefulness of the output. In spite of thriving for uniformity in
accounting practices classical theories have brought various alternative practices which
have led to inconsistency in accounting practices. In the thrust of unifying the accounting
practices classical theories restricts the application of judgments and also fails to give
meaningful interpretation of accounting practices

‘Interpretational’ Theory
‘Interpretational’ theories are part of the classical accounting theory (model) aimed at
giving meaning accounting practices followed. Interpretational theories tires to iron out
deviations in interpretations and meaning attached to the information communicated by
producers to the users of accounting information as they say, “It is not what you say it is
what people understand”. The contributors to the ‘accounting structure theories’ such as
Hatfield, Littleton, Paton and Littleton, Sterling and Ijiri were mainly, concerned with
bringing out rationale behind traditional accounting practicewhereas, the contributors to
interpretational theories,were, focused towards finding the consequences of the
accounting practices followed by evaluating them. Interpretational theorists tried to make
such theories which would help practitioners’ of accounting in resolving accounting
issues.

‘Decision-Usefulness’ Theory
The Financial Accounting Standards Board (FASB) has stated that major object of
financial reporting is to “provide information that is useful to present and potential
investors and creditors and other users in making rational investment, credit and similar
decisions. The information should he comprehensible to those who have a reasonable
understanding of business and economic activities and are willing to study the
information with reasonable diligence.” This opinion is also seconded by, the American
Institute of Certified Public Accountants (AICPA) Study Group on the Objectives of
Financial Statements, also known as Troubled Report, which categorically states that
“the basic objective of financial statements is to provide information useful for making
economic decisions.” There is nothing in the business world except accounting which
can influence actions and human behaviour in such a drastic manner that it can convert a
king into a Knave. Accounting is capable enough to destroy a business empire to a like
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pack of cards overnight however, the impact of accounting is dependent on the
usefulness of the information it provides.

Classical theories as stated earlier were obsessed with giving logic and explaining, and
accounting practices on the other hand interpretational theories were analytical in
approach and focused towards giving meaning or showcasing the influence of the
accounting practices. But, both the theories were not recognizing the crucial fact that is
relevance or usefulness of the information provided by accounting documents this very
important fact is focus of the ‘decision usefulness’ theories. Staubus emphasized that
“accountants should explicitly and continuously recognize an objective or objectives of
accounting, and “that a major objective of accounting is to provide quantitative economic
information that will be useful in making investment decisions.” ‘Decision-Usefulness’
theories focuses on measuring and evaluating the impact of accounting procedures and
modes of financial reporting on the individual and group behaviour of users of
accounting information. The relevance of information being communicated is a
subjective concept depends on two things viz, "who are the users of it?", and what are the
decision models adopted by the users of information.
3.5 LIMITATIONS OF ACCOUNTING THEORY
In spite of number of benefits which knowledge of accounting theory gives to its users,
there are varied reasons which limit the acceptability of accounting theory universally.
As a student of accounting theory one should keep in mind that the accounting theory
though influences the accounting practices but also gets influenced by customs and
practices followed in the society, these practices or customs may defer region wise thus it
limits accounting theory to get wider acceptability. Government policies and legal
requirements also impact the development and acceptance of accounting theory. One of
the devastating fact of the accounting theory is that, various conflicting theories and
alternative treatment of same items are available, which creates problem of selection for
the accountants, these conflicting theories gives rise to inconsistency and ambiguity in
accounting practices, which creates a dilemma for both the users and practitioners of
accounting.
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CHAPTER-4

4.1 Needs and Purpose for Accounting Theory:

The primary objective of accounting theory is to provide a basis for the prediction and
explanation of accounting behavior and events. We assume, as an article of faith, that an
accounting theory is possible. A theory is define as a set of interrelated constructs (
concepts ) , definitions , and propositions that present a systematic view of phenomena by
specifying relations among variables with the purpose of explaining and predicting the
phenomena (Porwal 2012).

To be absolutely able to solve any real world accounting problem, an accountant should
have sufficient practical experience helped by adequate theoretical knowledge. Generally
accepted accounting principles (GAAP), widely used customs, conventions, doctrines,
procedures and postulates constitute accounting theories.

Alan (2015) opines that, accounting theories and rules based are useful because their
creation and implementation ensure that these factors are promoted in accounting methods
and practices which enhance to provide accurate and consistent information for financial
decisions. Al-Jabali (2013) views that, accounting comes from theoretical application in
addition to being logically consistent and proportionate importance appears in the
following: A. Accounting as a science in desperate need of a framework for a general
theory after long practice in the absence of such a theory. B. The existence of these
Theoretical assumptions contained therein, including scientific principles and leads to the
availability of significant accounting entity, and put it in the ranks of the advanced social
sciences. C. The theory Provides assumptions and principles of the foundation upon the
selection between alternative systems that can be used in practice. D. Theory contributes
to an increase in understanding of the content of users of accounting information and then
provides confidence in it. E. Theory contributes to make comparisons when judging the
significance of the financial statements. It is the language in which they will be addressed
in such a way gives one meaning when used since all concepts used in the field of
accounting in general and accounting theory in particular, the concepts agreed upon
scientific and must be uniform and free of confusion and ambiguity From the above, we
can agree that a theory can be applied into practical areas of interest. An accounting
theory makes it easier to understand accounting in a professional way

4.2 Early Attempts at Accounting Theory

Historically, there have been three basic approaches to the development of accounting
theory. Attention was first directed to the account itself, and attempts were made to
construct rules for the operation of accounts. This led to the celebrated personification
theories in which the account was ascribed the qualities of a person who received and
gave. But an account is not a person, and recognition of this fact directed attention to the
transactions and events which are in great part the subject-matter of accounts. This led to
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attempts to formulate rules and standards designed to ensure that objective economic facts
were recorded and reported. It then became clear that accounts contained values other
than those represented by transactions and events, and that the very concept of value was
subjective. Attention is now directed to the user of accounting, and contemporary
accounting research is heavily influenced by such questions as: is it useful? to whom ? is
it used ?

The transfer of accounting knowledge from one age to another, and from one part of the
world to another was accomplished by writing, teaching, and example. Until the twentieth
century however, very little of this involved theoretical explanation separate and distinct
from practical instruction. In the absence of an accounting theory, early writers had great
difficulty in expressing their objectives, models, and systems. They resorted in most cases
to precept and admonition, frequently bolstered by appeals to the deity.
A few writers attempted generalizations which would avoid the necessity to memorize
many rules and procedures. One of the earliest devices was the personification theory of
accounts. This device imputed personalities to accounts for things, so that they were
treated as living persons. Personification permitted the formulation of general rules, such
as .debit him that receives; credit him that gives, which appear to have explanatory
qualities. Personification took three forms; the attribution of human qualities to inanimate
objects, the fiction that each account was a branch of the owner’s personality (e.g. James
Smith his goods.) and the construction that the account represented a clerk, who received
and gave up value for the proprietor of the business. Of these, the most useful was the
second, for it permitted the accounts of a business to be classified into personal accounts,
or accounts of persons outside the business (e.g. debtors, creditors) and impersonal or real
accounts, or accounts for objects owned by the owner. The former, of course, would be
equal and opposite to the personal accounts kept by others, and must therefore conform to
general rules. The latter, being peculiar to the particular business, could be handled in
different ways.

The rise of the income statement, or profit and loss account, was accompanied by the
development of a third class of nominal accounts for revenues and expenses. At this point
personification came under severe strain. How does one personify, for example, discounts
received or discounts allowed? This, coupled with a growing realization of the artificial
nature of the device, led to its abandonment. By the latter part of the nineteenth century
explanations were being phrased in terms of transactions. The second generation of
theorists was concerned with images of form and structure, and they attempted to explain
accounting by demonstrating the effect of accounting entries on these images.
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4.3 Approaches to the for Formulation of Accounting Theory:

Attempts to formulate a generally accepted accounting theory have not succeeded so far
because of different assumptions, methodologies and users.

This paper discusses in brief the different approaches to the formulation of an accounting
theory under two headings: (1) traditional approaches, and (2) new approaches. It should,
however, be understood clearly that these approaches are not independent of one another.
Generally, more than one approach, is used in the development of accounting principles

4.4 The Traditional Approaches:

The traditional approaches includes among others (Oseni, Ireghah & Ali-Momoh, 2011):
a. Non – theoretical, practical, or pragmatic (informal) b. Theoretical : i. The Deductive
Approach. ii. The Inductive Approach. iii. The Ethical Approach. iv. The Sociological
Approach. v. The Economic Approach. vi. The Electronic approach.

4.5 Non – Theoretical, Practical, or Pragmatic (Informal):

The non – theoretical approaches are a pragmatic (or practical) approach and an
authoritarian approach. The pragmatic approach consists of construction of a theory
characterized by its conformity to real-world practices that is useful in terms of suggesting
practical solution. According to this approach, accounting techniques and principles
should be chosen on the base of their usefulness to users of accounting information and
their relevance to decision making process. Usefulness, or utility, means “that property
which fits something to serve or to facilitate its intended purpose”.

The authoritarian approach to the formulation of an accounting theory, which is employed

primarily by professional organization, consists of issuing pronouncements for the
regulation of accounting practices. Because the authoritarian approach also attempts to
provide practical solution, it is easily identified with the pragmatic approach. Both
approaches assume that accounting theory and the resulting accounting techniques must
be predicted on the basis of the ultimate uses of financial reports, if accounting is to have
a useful function. In other words, a theory without practical consequences is a bad theory.

Theoretical Approaches:

In accounting, this approach begins with basis accounting propositions (Assumptions) and
proceeds to derive by logical means the accounting principles. In this approach we go
from general to particular. It emphasizes on “what ought to be”. If we assume at this point
that the basic propositions about the accounting environment consist of both objectives
and postulates, the steps used to derive the deductive approach according to Porwal
(2001) will include: i. Specifying the objectives of financial statements ii. Selecting the
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“postulates” of accounting iii. Deriving the “principles” of accounting iv. Developing the
“techniques” of accounting.

In a deductively derived accounting theory, therefore, the techniques are related to the
principles, postulate, and objectives in such a way that if they are true, the techniques
must also be true. 4.1.22. Inductive Approach

In this approach we go from particular to general. On the basis of particular observation

and measurement, generalized conclusions are drawn. Applied to accounting, the
inductive approach beings with observation about the financial information of business
enterprises and proceeds to construct generalization and principles of accounting from
these observations on the basis of recurring relationships. It is based on “what is”.
Inductive arguments are said to lead from the particular (accounting information depicting
recurring relationships) to the general (postulates and principles of accounting). The
inductive approach to a theory according to Porwal (2001) involves four stages: i.
Reducing all observation. ii. Analysis and classification of these observations to detect
recurring relationship (“like” and “similarities”). iii. Inductive derivation of generalization
and principles of accounting from observations that depict recurring relationships. iv.
Testing the generalizations.

Ethical Approach

The basic core of the ethical approach consists of the concepts of fairness, justice, equity
and truth. Accountants equate “justice” with equitable treatment of all interested parties,
“truth” with true and accurate accounting statements without misrepresentation, and
“fairness” with fair, unbiased, and impartial presentation. The “fairness” concept implies
that accounting statements have not been subject to undue influence or bias. “Fairness”
generally implies that the preparers of accounting information have acted in good faith
and employed ethical business practices and sound accounting judgment. “Fairness” is a
value statement that is variously applied in accounting. “Fairness” is ranked as a basic
standard to be used in the evaluation of other standards, because it is the only standard
that implies “ethical considerations”. Fairness is a desirable objective in the construction
of an accounting theory if whatever is asserted on its basis is logically or empirically
verified and it is made operational by an adequate definition and identification of its
properties.

Sociological Approach

The sociological approach to the formulation of an accounting theory emphasizes the

social effects of accounting techniques. It is ethical approach that centers on a broader
concept of fairness-social welfare. Accounting to sociological approach, a given
accounting principles or techniques is evaluated for acceptance on the basis of its
reporting effects on all groups in society. Also implicit in this approach is the expectation
that accounting data will be useful in making social-welfare judgments. To accomplish its
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objectives, the sociological approach assumes the existence of “established social values”
that may be used as criteria for the determination of accounting theory.

Economic Approach

The economic approach to the formulation of an accounting theory emphasizes

controlling the behaviour of macroeconomic indicators that result from the adoption of
various accounting techniques. While the ethical approach focuses on a concept of
fairness” and the sociological approach on a concept “social welfare”, the economic
approach focuses on a concept “general economic welfare”. According to this approach
the choice of different accounting techniques depends on their impact on the national
economic goals. More explicitly, the choice of accounting techniques will depend on the
particular economic situation. The general criteria employed in the macroeconomic
approach are firstly, that accounting policies and techniques should reflect “economic
reality” and secondly that the choice of accounting techniques should depend on
“economic consequences”. “Economic reality” and “economic consequences” are the
precise terms being used to argue in favors of the macroeconomic approach.

New Approaches

New approaches have been developed or revised recently, the aims of which are not yet
generally accepted by the various interest groups or by the accounting profession in
particular. They represent new streams of accounting research that use both conceptual
and empirical reasoning to formulate and verify a conceptual accounting framework.
(Belkaoui, 1992).

The new approaches include the following; a. Events approach b. Behavioural approach c.
Human information processing approach d. Predictive approach e. Positive approach
The Events Approach

The events approach was first explicitly stated after a divergence of opinion among the
members of the committee of the American Accounting Association, which issued A
Statement of Basic Theory in 1966. The majority to the Committee members favoured the
value approach to accounting. Only one member, George Sorter, favoured the events
approach.
The value school, also called the user-need school, considers that needs of users to be
known sufficiently to allow the deduction of an accounting theory that provides optimal
input to the specified decision models. The events approach, on the contrary, suggests that
the purpose of accounting is “to provide information about relevant economic events that
might be useful in a variety of decision models”. It is up to the accountant to provide
information about the events and leave to the user the task of fitting the events to their
decision models. It is up to the user to aggregate and assign weights and values to data
generated by the event in conformity with his or her own utility function.
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The Bahavioural Approach

Most traditional approaches to the construction of an accounting theory have failed to take
into consideration user behaviour in particular and behavioral assumptions in general. The
behavioral approach to the formulation of an accounting theory is concerned with human
behavioural, as it relates to accounting information and problems. In this context, the
choice of an accounting technique must be evaluated with references of the objectives and
behavior of the users of financial information.

The Predictive Approach

The predictive approach arose from the need to solve difficult problem of evaluating
alternative methods of accounting measurement and from the search for a criterion on
which to base the choice between measurement alternatives. Specifically, “the measure
with the greatest predictive power with respect to a given event is considered to be the
“best method for that particular purpose”.

The Positive Approach

The positive approach to accounting is generally drawn from a well-known essay in

which Friedman argues “for distinguishing positive economics sharply from normative
economics”. In fact, Friedman credits his distinction between “positive” and “normative”
science to Keynes. Positive science may be defined as a body of systematized knowledge
concerning what is; a normative or regulative sciences as a body of systematized
knowledge relating to criteria of what ought to be, and concerned, therefore with the ideal
as distinguished from the actual.

The development of a positive theory accounting will help to explain why accounting is
what it is, why accountants do what they do, and what effects these phenomena have on
people and resource utilization”. The major thrust of the positive approach to accounting
is to explain and predict management’s choice of standards by analyzing the costs and
benefits of particular financial disclosures in relations to various individuals and to the
allocation of resources within the economy.

4.6 Critiques of the Accounting Theory Approaches:

Looking at Eric (1963) and Hendriksen (1982) definition of accounting theory, two parts
of this definition must be qualified with respect to accounting theory. First, theory does
not explain all accounting practice. Theory is base on logic, and not all practice is
logically conceived. But if the emphasis is placed on the explanation of concepts and
results rather than on technique, the definition is generally correct. Secondly, the body of
fact being explained by accounting theory can be assumed to be either (1) financial facts
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as represented in accounting statements, (2) concepts implied in the presentation of
accounting data, or (3) economic relationships of firms with other firms, individuals and
the economy as a whole as measured and summarized in accounting statement. Of these
three, the first- the explanation of financial facts presented by accounts – is not the
function of theory.

The events approach offers certain advantages and certain limitations. The advantages
predominantly take the form of effects to provide information about relevant economic
events that might be useful to a variety of decision models.
The usefulness of events approach may depend, however, on one or more of the following
arguments: a. The usefulness of the events approach may depend on the psychological
type of the decision maker. It has been shown, for example that structured/aggregate
reports are preferable for high-analytic decision makers, but that data-base inquiry
systems (the events approach) are preferable for low-analytic decision makers. b. An
adequate criterion of the choice of the crucial events has not be developed. c. Measuring
all the characteristics of an events approach may prove difficult, given the state of the art
in accounting.

The positive approach looks into “why” accounting practices and or theories have
developed in the way they have in order to explain and/ or predict accounting events. As
such the positive approach seeks to determine the various factors that may inference
rational factors in the accounting filed. It basically attempts to determine a theory that
explains observed phenomena. The positive approach is generally differentiated from the
normative approach, which seeks to determine a theory that explains “what should be”
rather than “what is”.

One striking criticism of the positive approach was based on following points. a. The
concept of “positive theory” is drawn from an obsolete philosophy of science and is, in
any case a misnomer, because the theories of empirical science make no positive
statement of “what is”. b. Contrary to the empirical method of subjecting theories to sever
attempts to falsify them, the Rochester school introduces ad-hoc arguments to excuse the
failure of their theories
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Another criticism is based on the argument that positive or “empirical” theories are also
normative because they usually mark a conservative ideology in their accounting policy
implications. The most striking critics of positive accounting theory come from sterling,
with his comments that: (i) The two pillars of value-free study and accounting practices
are insubstantial, (ii) The economic and scientific support of the theory is mistaken and
(iii) The accomplishments have been nil.

Most of the behavioral accounting research discussed in the preceding sections has
attempted to establish generalization about human behaviour in relation to accounting
information. The implicit objective of all these studies is to develop and verify the
behavioural hypothesis relevant to accounting theory hypotheses on the corporate
reporting practices, materiality judgments, the decision effects of alternative accounting
procedures, and the components of an information processing model (input, process, and
output). This implicit objective has not yet been reached.
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