Why Do We Need So Many Different Theories In Accounting

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Over the history of the accounting practice, different theories have been developed to explain the ever-changing accounting practices. However, there has never been one generally accepted accounting theory, mainly due to the difference in assumptions, methodology, and users of the accounting information. Generally, accounting involves measurement and recording, and communication of financial information to be used for decision making by the users of such information. To achieve this end, various theories that involve concepts, principles, guidelines, and hypotheses have been established to give explanations and predictions on accounting application and practice.

According to Riahi-Belkaoui (2004, p. 80), a theory may be described as a body that includes concepts, hypotheses, and propositions linked in a systematic structure to allow for explanation and prediction of the subject matter (in this case accounting).

Irrespective of which theory is used in the explanation of specific accounting phenomena, the bottom line is that each theory should be empirically verifiable and testable or should be readily validated. Moreover, accounting theories have been different due to the approach taken to establish them including traditional approaches (inductive, deductive, ethical, sociological, and economic approaches) and the new approaches (e.g. events, decision model, behavioral, predictive, and information-economic approaches) (Porwal, 2001, p.27).

Various kinds of information are required for different situations and therefore different theories will tend to give different explanations and predictions depending on the information required and the situation in which it is going to be applied. In other words, different types of people from diverse cultures and different decision paradigms will use the accounting information, and given that accounting information is subject to change depending on conditions, there is virtually no single and steadfast rule/law that is applied in accounting practice. Despite this, the primary objective of every party involved is to have a clarification of the accounting theory and accounting practice (Solomons and Zeff, 1996, p. 18). However, efforts have been made to ensure standardization of accounting standards in the preparation of financial accounting statements relevant to the market economy (Glautier and Underdown, 1994, p381).

Accounting theories may also be classified as either normative (or prescriptive) or positive (or descriptive) depending on the era of establishment and basis of application. Moreover, there is a possibility of accounting theories providing different explanations and predictions to the same accounting phenomenon. This paper will discuss the reason behind the presence of many accounting theories, how these theories differ from each other, and the situations where two theories may provide different explanations for the same accounting phenomenon.

Nature of Accounting

The nature of accounting provides a situation where no single accounting theory can be exhaustively applied. This is due to the fact that accounting consists of various concepts and principles that are used in the identification, measurement, and communication of economic information to the users of such information for informed decision-making. These users may include the shareholders, creditors, government, investors, and organizations’ management (Mattesich, 2007, p.3).

In the recent past, the conflict in accounting standards by different accounting bodies such as Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) has fast-tracked the importance of establishing a body of accounting theory to form the basis for setting standards and providing guidance to authoritative accepted principles (Delaney and Whittington, 2008, p. 41).

The changing nature of the accounting practice provides a framework for the development of different theories to suit specific accounting practices. According to Watts and Zimmerman (1990, p.140), the choice of theory to be applied in a certain accounting phenomenon depends on the level of explanation that the theory provides. That is, theories are always being developed due to the increase of knowledge demand such that, the theory that has better explanation and prediction is preferred over other theories. The rationality of choice will be applied due to the differences in the assumption of different theories, for instance, legitimacy theory and stakeholders’ theory may be seen as two competing theories yet both may have different assumptions on the phenomenon (Deegan, 2007, p. 276).

How accounting theories differ

Accounting theory tends to explain the accounting phenomena on account of concepts and principles, accounting bases/methods, accounting policies, and accounting standards. Accounting concepts form the base of the accounting theory and may include the matching concept, business entity, going concern, historical cost recognition, accrual basis accounting, revenue recognition, and materiality, substance over form, prudence, monetary concept, and consistency. Accounting bases are the methods applied to an accounting phenomenon to describe a given concept, for example, different methods of depreciation may be used to express the application of the matching concept.

Policies involve the selection of a specific method or accounting base in the application, for example using the reducing balance method in calculating depreciation. Lastly, accounting standards are the specific guidelines that regulate the accounting practice and treatment of certain accounting items. Due to the difference in the application of these items in accounting, different theories have been established to give explanations that are relevant to the application of accounting practice (Norris, 1980, p. 70).

The non-presence of a single theory of accounting has been facilitated by the application of different theoretical and non-theoretical approaches in the construction of accounting theories. For instance, the non-theoretical approaches (which include pragmatic and authoritarian) provide practical solutions to real-life accounting practice on the basis of the usefulness of the accounting information to the users of such information (Riahi-Belkaoui, 2004, p. 110). For instance, the theory of accounts which is developed through a pragmatic approach tends to rationalize the application of the double-entry accounting/bookkeeping on the basis of the choice of the accounting method that justifies the balancing effects in the financial statements.

The deductive approach tends to provide theories that specifically derive the truthfulness of the propositions and accounting techniques with certainty, for example making observations and deducing the best technique to employ in a given phenomenon. The inductive approach on the other hand will provide a theoretical framework that is based on a generalization of accounting techniques used in certain accounting practices (Devine, Hendrickson and Williams, 2004, p. 27). For example, the theory may attempt to justify the application of the historical cost principle by generalizing the goals implicit in the application of techniques in given accounting practice (Ijiri, 1975, p. 70).

A different explanation for one phenomenon

The history of accounting theory has led to the development of normative and positive accounting theories which differ on the basis of the level of observation and the application. Normative theories tend to explain what should be done in a certain phenomenon without having to incorporate observations or future trends, i.e. they are based on the truth of measurement and specific application of a specific technique in a prescriptive manner (Kabir, 2005, p. 2). For instance, decisions are made based on the specifications of the users and do not go beyond to make predictions – they are mostly related to the deductive and inductive approaches of theoretical construction. On the other hand, positive theories are science-based and tend to be predictive in nature, mostly applied in the capital market and behavioral accounting applications, where they tend to discount the normative theories on the basis of the information limitation and use of accounting numbers (Kabir, 2007, p. 4).

In addition, positive theories provide that additional economic information is important to the users of the information, including the analysis reports by management, political and social factors affecting accounting choice, and the accounting changes and contracting costs theory. From a deductive point of view, accounting is an applied social science, and the theory constructed should be subject to validation through a philosophical standpoint (Nobes, 1996, p. 127).

The presence of competing theories in the accounting practice tends to give different accounting treatments of similar accounting phenomena. For instance, the going value theory will recognize assets on the basis of their historical costs while equity/fair value theory will base the cost of the same asset on current market value. The explanation to this difference is that the going value theory takes the value of the asset during purchase as constant and since the physical condition of the asset will not change, then its cost will remain constant, while fair value theory indicates that market changes always occur and prices are never constant, therefore it will be fair to incorporate the changes in the economic value of the asset.

Take another example where an auditor presents a report to potential investors without making a physical stock count establish the validity of the values. In the event of litigation, different theories may explain the situation differently. For instance, the normative theory will apply the true and fair view approach as expressed in international accounting standards to explain that the auditor ought to have conducted the stock count since he was aware that the information was to be used by the investors (Carpenter, 1994). On the other hand, the positive theory will categorically explain that it is not the responsibility of the auditors to conduct physical stock counts and the true and fair view will not be tied to the provision of the legislations or accounting standards.


In conclusion, it is obvious that there is no single or general theory that can explain all the requirements of accounting practice but there must be different theories that address the needs of different stakeholders at different decision-making decisions. Regardless of which accounting theory is used, the information provided to the users should be reliable, relevant, and acceptable as well as applicable in decision making and should be capable of appeasing not only the accounting users but also the non-accounting users. The theory should also be testable and capable of being validated empirically.

Reference List

Carpenter, D., 1994. Some Approaches to a ‘True and Fair View”. The Irish Accounting Review, Vol.1, Number 1.

Deegan, C., 2007. Financial; Accounting Theory. NSW, McGraw-Hill Irwin.

Delaney, P. R., and Whittington, O. R., 2008. Wiley CPA Exam Review 2009: Financial Accounting and Reporting. John Wiley and Sons. Web.

Devine, C. T., Hendrickson, H. S. and Williams, P. F., 2004. Accounting theory: essays by Carl Thomas Devine. Oxford, Routledge.

Ijiri, Y., 1975. Theory of accounting measurement. University of Virginia.

Glautier, M. and Underdown, B., 1994. Accounting Theory & Practice. London: Pitman.

Kabir, M. H., 2005. Normative Accounting Theories. Auckland University of Technology – Faculty of Business. Web.

Kabir, M. H., 2007. Positive Accounting Theory and Science. Auckland University of Technology – Faculty of Business. Web.

Mattessich, R., 2007. Two Hundred Years of Accounting Research. Oxford, Routledge.

Nobes, C., 1996. International harmonization of accounting. Edward Elgar Publishing. Web.

Norris, H., 1980. Accounting theory, an outline of its structure. Ayer Publishing.

Porwal, L.S., 2001. Accounting Theory, 3E. Mumbai, Tata McGraw-Hill.

Riahi-Belkaoui, A., 2004. Accounting Theory. Andover, Cengage Learning EMEA. Web.

Solomons, D. and Zeff, S. A., 1996. Accounting Research, 1948-1958: Selected Articles on Accounting Theory. Oxford, Taylor & Francis. Web.

Watts, R. L., and Zimmerman, J. L., 1990. Positive Accounting Theory: A ten Year Perspective. The Accounting Review, Vol. 65, pp. 131-156.

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