CHAPTER 5 Theories in accounting LEARNING OBJECTIVES After studying this chapter, you should be able to: 5.1 evaluate how theories can enhance our understanding of accounting practice 5.2 integrate knowledge about positive accounting theory and agency theory and apply them to agency contracts between owners, managers and lenders to explain accounting practice and disclosure 5.3 evaluate institutional theory in terms of its application to organisational structures and apply the theory to accounting practice and disclosure 5.4 evaluate legitimacy theory and the notion of the social contract and apply it to accounting practice and disclosure 5.5 evaluate stakeholder theory and apply it to accounting disclosure 5.6 evaluate contingency theory in terms of its application to accounting practice and disclosure 5.7 reflect on the different decisions made by accounting practitioners, evaluate and justify how theories can be used to explain a range of decisions. Copyright @ 2017. Wiley. All rights reserved. Rankin, Michaela. Contemporary Issues in Accounting, 2nd Edition, Wiley, 2017. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/swin/detail.action?docID=5049576. Created from swin on 2021-03-10 03:46:37.
Real world practice Assist us to explain and understand real world practice - Copyright @ 2017. Wiley. All rights reserved. Positive theories - describe, explain and predict accounting practice Positive accounting theory Contingency theory Theories Institutional theory - Accounting practice and decision making Normative theories - prescribe best practice Legitimacy theory Stakeholder theory Assist us to explain, understand and improve accounting decisions CHAPTER 5 Theories in accounting 141 Rankin, Michaela. Contemporary Issues in Accounting, 2nd Edition, Wiley, 2017. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/swin/detail.action?docID=5049576. Created from swin on 2021-03-10 03:46:37.
To understand the range of decisions that an accountant is required to make, how accounting systems are integrated into an organisation, and demands for accounting information, it is useful to investigate theories which can assist us in these endeavours. In this chapter we start by exploring what role theory can play in understanding or explaining accounting practice. We alsocategorise theories as beingnormative orpositive . We start by explaining these types of theories and introduce some theories that are currently used to either explain or understand accounting decision making and practice (positive theories) or propose recommended courses of actions for entities (normative theories). Throughout the investigation of these different types of theories, examples of how they have been used will be provided. Finally, how these theories can help to understand accounting decisions from the perspective of preparers of accounting information is examined. 5.1 What value does theory offer? LEARNING OBJECTIVE 5.1 Evaluate how theories can enhance our understanding of accounting practice. Theories are constantly used in the world around us. Builders, engineers and architects rely on structural engineering and mathematical theories in building design and development. Structural theories are based on physical laws and research which explain the structural performance of materials. We observe the outcomes of these theories in the construction of buildings, roads, tunnels and bridges. Governments use monetary and economic theories to formulate and cost policies or when setting taxes. These theories relate to the effect of expenditure or taxes on