Question

Why is it useful for students of accounting to consider accounting theories?

Answer 1

Definition of Accounting Theory:

(1) Provide a general frame of reference by which accounting practice can be evaluated, and

(2) Guide the development of new practices and procedures.

Importance:-

ccounting theory may also be used to explain existing practices to obtain a better understanding of them. But the most important goal of accounting theory should be to provide a coherent set of logical principles that form the general frame of reference for the evaluation and development of sound accounting practices.Accounting theory is that branch of accounting which consists of the systematic statement of principles and methodology. However, theory cannot be divorced from practice. The theory underlies practices, explains and attempts to predict them. There is not and cannot be any basic contradiction between theory and facts.

A theory is an explanation. However, every explanation is not a theory in the scientific meaning of the word. The objective of accounting theory is to explain and predict accounting practice. Explanation provides reasons for observed practice. For example, an accounting theory should explain why certain firms use LIFO method of inventory rather than the FIFO method.Prediction of accounting practices means that the theory can also predict unobserved accounting phenomena. Unobserved phenomena are not necessarily future phenomena; they include phenomena that have occurred but on which systematic evidence has not been collected.

It is significant to observe that accounting theory may be based on empirical evidence and practices as well as accounting theory may be formulated using hypothetical and speculative interpretations.