Introduction The students of accounting when enter in their career after passing graduation or post graduation in commerce, they believe that there is a solution to every accounting problem. No, it is for away from the truth because there are many issues remain unresolved after having the knowledge of mere accounting. To become of student of accounting in real sense of the business world one should also concentrate on understanding the problems of accounting practice and profession. For this matter and reason, the accounting theory is recommended.

The accounting hurry provides the knowledge of Generally Accepted Accounting Principles (Gaps), Contemporary issues and other developments in the field. In this chapter, the students will be introduced with accounting theory and its main issues like “Theory, process of constructing the theory, need of accounting theory’. Meaning of Theory Our common perception about theory is divided between two notions. One perception of theory is something which is far removed from reality. We then say, it is possible or it exists only in theory, not in practice.

Another perception about theory is the cause effect relationship that exists behind any event or practice. For example, if a man Jumps off the New Empire State Building he will descend on earth at a specified time irrespective of his weight. If he survives his first attempt, but repeats it from somewhere near the centre of the earth from the same height, he would be surprised to see that this time he has descended on earth more quickly than before (we hope he has survived this time also). Why? If he has an inquisitive mind, he may seek explanation which will lead him to the cause-effect relationship.

By applying scientific method he may arrive at the theory of the law of gravitation (as Newton did). Then he knows not only the reason of his quick descending, but if he ever wishes to Jump off from the same height at another place, he should be able to predict the time of his landing on earth. Our second perception about theory is the employment of scientific method to explain some phenomenon. A scientific method may be defined as a method of explanation that develops and tests hypothesis about how real world, observable phenomena are related.

We Will Write a Custom Essay Specifically
For You For Only $13.90/page!


order now

The goal of scientific method is explanation; scientific method strives to develop a systematic body of theory through development of hypothesis. Thus, theory may be described as “a cohesive set of hypothetical, conceptual and pragmatic principles forming a general frame of reference for a field of study. ” Definition of Theory In the field of science, including social science, one may encounter a host of views about Theory, which has a Greek root, “Theories meaning to or view”.

A popular definition given by Kerning defines theory 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 ND predicting the phenomena”. Arnold Rose’s view is similar to the above statement. He defined theory as “an integrated body of definitions, assumptions and general propositions covering a given student matter Trot wanly a comprehensive Ana consistent set of specific and testable (principles) can be deduced logically.

There are other views which state theory as “a set of interrelated concepts at a fairly high level of generality. ” Characteristics of a Good Theory A good theory should fulfill the following criteria: (I) It should explain or predict phenomena, I. E. , they should be empirical. Theories should be capable of being tested empirically. Theories which fail tests are not of universal applicability, therefore, must be replaced by better or non refutable theories. (iii) Theories should be consistent both internally and externally.

Internal consistency is present when the analytical properties of theory ensure that the given theory predicts the same outcome in every identical case. External consistency implies that the theory should be consistent with theories in other disciplines. (iv). A theory should be exhaustive so as to cover the full range of variations relating to the tauter of the phenomena is question. (v) Theory should be helpful in providing guidelines for research into empirical problems.

Accounting theory and its nature: Accounting Theory is the organized body of knowledge which deals with order, reasons, relationships, objectives and methods involved in the practice of accounting. Hendrickson, however, used the definition of the Weeper’s Third International Dictionary as the basis to define Accounting Theory. Thus, according to Hendrickson, “Accounting Theory may be defined as logical reasoning in the form of a set of broad reminisces that : (I) provide a general frame of reference by which accounting practices can be evaluated, and (ii) guide the development of new practices and procedure.

He further states that accounting theory may be used to explain existing practices to obtain a better understanding of them. Both the definitions of accounting theory given above underpin the use of theory as a guide to accounting practices. But the fact that there has been a concurrent development in accounting. While accounting was developing as a practical art, it was also evolving a body of theoretical premises. The theoretical evolution of accounting is of recent original, though its practical development can be traced back five hundred years ago.

Both the theoretical and practical approaches have contributed to the existing organized body of knowledge, presently known as accounting theory. Their approaches are different, but the purpose is the same: to develop systematic accounting practices. Under the practical approach, accountants have frequently relied on trial and error as a meaner to improving accounting practices whereas, the theoretical approach relied on logical, inception structure to develop meaningful pattern of accounting practices.

But both the theoretical approach and practical approach are interested in developing some general principles and procedures for dealing with the same real world phenomena of business transactions and events. The development of accounting practices which employs a problem solving approach is shown in the right hand side of the diagram. As particular problems occurred in dealing with individual business events practicing accountants would look for separate procedures to solve these specific problems. L nee nelsons AT accounting practice consults AT a problem procedure evolution . He development of new, or modification of old, procedures as different problems occurred”. In other words, the approach adopted in the development of accounting practice can be epitomized as, “Accounting is what accountants do”. The development of accounting theory, which has taken place concurrently with that of accounting practice, is shown in the left hand side of the diagram. The first step in the development of accounting theory is abstraction from the real world of business orientations to make some assumption about them.

From these assumptions conclusions can be developed about accounting activities through deductive logic. This procedure would suggest “Accounting is what accountants should be doing. ” Descriptive and normative theories: From the foregoing it appears that accounting theory can be extracted from the practice of accounting (I. E. , the practical approach) or it can result from a logically derived process through the deductive approach. The difference in not one of purpose, rather the difference is due to adoption of different methodologies.

The divergence of opinions, approaches and values between accounting practice and accounting research have led to the use of two methodologies, one descriptive and the other normative”. ” (I) Descriptive theories: A descriptive theory describes a particular phenomenon as it is, without any value judgment. For example, if you Jump from The New Empire State Building, a descriptive theory will tell you when you will descend on earth; it will not tell you whether you are right or wrong in doing so. The practical or conventional approach to accounting theory is essentially descriptive in character.

Such descriptive theories are concerned with the behavior of the practicing accountants and what they do. This approach emphasizes accounting practice as the basis from which to develop theory. Under the destructive view, accounting theory, therefore, is “primarily a concentrate distilled from experience”. The prominent examples of descriptive accounting theories are the works of Paul Grady, An Inventory of Generally Accepted Accounting Principles for Business Enterprise, Sanders, Hatfield and Moore, A Statement of Accounting Principles, Stephen Gillian, Accounting Concepts of Profit, A.

C. Littleton, Structure of Accounting Theory, and Yuk ‘Sir, The Foundation of Accounting Measurement. (it) Normative theories: The essential feature of Normative Theory is the existence of value Judgment. Normative Theories tend to Justify what ought to be, rather than what it is. It imposes on the accountants’ responsibility of determining what should be reported rather than merely reporting what some on else has requested. The outstanding examples of normative accounting theories are the works of J. B.

Canning, The Economics of Accountancy, W. A. Paton, Accounting Theory, Henry Sweeney, Stabilize Accounting, Kenneth McNealy, Truth in Accounting, Edwards and Bell, The Theory and Measurement of Business Income, and Spouse and Monotint, A Tentative Set of Broad Accounting Principles for Business Enterprise Relationship between accounting theory and accounting practice: Accounting theory and accounting practice are not mutually exclusive things; they pertain to the same real world phenomenon of economic transactions.

Therefore, conclusions developed from accounting theory should be same as the generalization developed from the study of accounting practice. Theory is important to the development of accounting because to be meaningful, practice must be based on logic. On the other hand, accounting is an u Tartan evolve Tort solving everyday economic problems AT Dustless. I Norte, a theory would be Judged good in the long run if it improves usefulness of accounting.

Ideally, a sound practice should always conform to a theory, and at the same time, theory should be based on common sense and relate to the existing business world. In that sense, theory and practice should serve as a check and balance to each other. But unfortunately, present accounting practices are not based n such ideal conditions. We have already seen that accounting theory and accounting practices are based on different methodologies.

Whereas accounting theory is based on logic oriented deductive approach, accounting practices are based upon a process of inductive reasoning which consists of making observations and drawing generalized conclusions from a limited number of observations. This approach emphasizes the behavior of practicing accountants rather than the behavior of real world phenomena. Since accounting practice is characterized by practical approach, it cannot be free from personal bias of the practicing accountants. A good theory, on the other hand, would strive to eliminate such bias.

Besides, consistency is another factor that distinguishes accounting practice from theory. As a good number of inconsistencies are noticed in accounting practice, and they are permitted by the “generally accepted accounting practice”, they are responsible for significantly divergent reported income. This inconsistency did not escape the attention of Canning who stated that, “Accountants have no complete philosophical system of thought about income, nor is there evidence that they have ever greatly felt the need for one. The generalizations are too inchoate….. O permit one to suppose that they have ever seriously put their minds to the philosophical task”. Advantages and limitations of accounting theory: The advantages and limitation of accounting theory has been best summed up by Monitor who says that accounting theory “cannot solve all the problems the profession faces anymore than the “laws” of physics can build a bridge, but they can give the frame of reference it must have”. Similarly, it may be observed that a large part of accounting practice depends upon Judgment related to particular circumstances.

Therefore, a theory with ROR determination of objectives or goals may suffer from limitations due to changes in business environment. There seems to be logic both in favor and against theory. Yet, at the risk of over simplification, one way may that theory provides the foundation for practice; theories are constructed to explain and give meaning to practice; without the foundation of theory is like a building standing upon sand. “If we develop accounting with no more foundation than arbitrary assumptions, who will dare rely on it? “.

Below is given some of the clearly identified advantages of theory: (1) Identification of robber area: Accounting Theory narrows the range of problem area by clearly identifying the facts to be studies. It helps select the relevant aspect of a phenomenon. (2) Conceptual frame: Accounting theory provides a conceptual framework or, as put by Hendrickson, it gives a general frame of reference for the study of accounting problems. This frame of reference actually provides the standard with respect to which accounting practice may be evaluated. 3) Summarization: Accounting theory as an organized body of knowledge summarizes concisely what is already Known auto ten student . As can De seen Trot ten Dullness AT ten A any of the current accounting theories are actually summarization of current accounting practices. (4) Uniformity of practice: One of the goals of accounting theory is to provide uniformity in practice. The contemporary ‘Generally accepted accounting principles’ are primarily a cluster of current accounting theories on existing practices in the grab of theories.

It aims at providing uniformity in accounting practice, the lack of which will greatly reduce credibility of accounting. (5) Predictive ability: An obvious advantage of accounting theory is its predictive ability. Theoretical generalizations an be used to predict further facts. Due to this predictive ability of accounting theory, a growing body of empirical research has evolved that can be used for decision making by the users. Examples of such predictive model in accounting, among others, include prediction of earnings, corporate failure risk associated with equity or bond, and capital market reactions. 6) Development of new practice: Accounting operates in a dynamic socioeconomic environment. Therefore, with the change in social attitude, economic reality and improvement in information science, it may be necessary to replace the existing practice by new one. For example, requirement of huge capital for fixed assets during the rail road developments in the UK and USA created the need for depreciation accounting based on historical cost. But the economic reality in a persistently inflationary condition has forced the accountants to propose for replacement cost depreciation.

Limitations of Accounting Theory (1) Accounting theory does not explain all its practices. Due to the utilitarian nature of accounting, many of the conventions and principles of accounting have been constructed on the basis of expediency rather than as rules of logic. (2) Littleton and Zimmerman argued that accounting is not as strongly oriented toward logical argument as towards utilitarian service. It is less concerned with deductive generalization than with practical accomplishments. 3) The concepts and postulates of accounting theory are not rigorously defined. Some of the fundamental assumptions of accounting theory are not realistic, e. G. , the assumption about stable value of money. (4) Unlike the theories of pure science, accounting theory suffers from internal consistency. For example, according to the entity concept, which is a basic postulate of accounting, accounting statements should be prepared to present the activities of the entity rather than the groups connected with it.

But in many cases the tenet of the concept is violated e. G. , the net income is defined as net income of the shareholders instead of those to the entity. (5) The practical nature of accounting does not lend itself to have a general theory of accounting such that a high level of generality makes it possible to the applied to all countries, to all industries and all firms. For example, generally accepted accounting principles in the USA and India are not the same due to different socio economic conditions.

HISTORICAL DEVELOPMENT OF ACCOUNTING Italian Renaissance: Birth of Double Entry Bookkeeping The innovative Italians of the Renaissance (14th -16th century) are widely acknowledged to be the fathers of modern accounting. They elevated trade and commerce to new levels, and actively sought better methods of determining their pronto Although Aridly numerals were Introduced long Deter, It was aurally tons period that the Italians became the first to use them regularly in tracking business accounts – an improvement over Roman numerals the importance of which cannot be overstated.

They kept extensive business records, as the use of capital and credit on a large scale developed: The evolutionary trend toward double entry bookkeeping was underway. Lucas Bacilli and The Summary Lucas Bacilli was a true Renaissance man, with knowledge of literature, art, mathematics, business and the sciences, at a time when few could even read. Born about 1445 at Borg San Sepulcher in Tuscany, Prater Lucas Bartholomew Bacilli acquired an amazing knowledge of diverse technical subjects – religion, business, military science, mathematics, medicine, art, music, law and language.

He accepted the popular belief in the inter-relatedness of these widely varying disciplines and in the special importance of those, such as mathematics and accounting, which exhibit harmony and balance. His friend Leonardo dad Vinci helped prepare the drawings for Piccolo’s 1497 work, Divine Proportions; In turn, Bacilli is reputed to have calculated for dad Vinci the quantity of bronze needed for the artist’s huge statue of Duke Lidos Sports of Milan. Around 1482, after completing his third treatise on mathematics, Bacilli, who like many of his time sought preferment as a teacher, became a Franciscan friar.

He traveled throughout Italy lecturing on mathematics, and, in 1486, completed his university education with the equivalent of a doctorate degree. Bacilli never claimed to have invented double entry bookkeeping. Thirty-six years before his monumental treatise on the subject, Benefited Cottrell wrote Delia Mercury et del Merchant Perfecto (Of Trading and the Perfect Trader), which included a brief chapter describing many of the features of double entry.

Although this work had not been published for more than a century, Bacilli was familiar with the manuscript and credited Cottrell with originating the double entry method. Bacilli was about 50 years old in 1494 – Just two years after Columbus discovered America – when he returned to Venice for the publication of his fifth book, Summary De Arithmetic, Geometric, Proportion et Proportionality (Everything About Arithmetic, Geometry and Proportion). It was written as a digest and guide to existing mathematical knowledge, and bookkeeping was only one of five topics covered.

The Summer’s 36 short chapters on bookkeeping, entitled “De Computes et Scriptures” (“Of Reckonings and Writings”), were added, “in order that the subjects of the most raucous Duke of Robin may have complete instructions in the conduct of business,” and to, “give the trader without delay information as to his assets and liabilities. ” (All quotes from the translation by J. B. Kissable, “Ancient Double Entry Bookkeeping: Lucas Piccolo’s Treatise,” 1914).

Perhaps the best proof that Piccolo’s work was considered potentially significant, even at the time of publication, was the very fact that it was printed on November 10, 1494. Gutenberg had, Just a quarter century earlier, invented metal type, and it was still an extremely expensive proposition to print a book. Piccolo’s System: Memorandum, Journal and Ledger “De Computes” begins with some basic instruction for commerce. The successful merchant, declares Bacilli, needs three things: sufficient cash or credit, good bookkeepers and an accounting system which allows him to view his finances at a glance.

Before commencing business, one should prepare an inventory listing all Dustless Ana personal assets Ana teats I Nils Inventory must De completed Walton one day, and property should be appraised at current market values and arranged according to mobility and value, with cash and other valuables listed first since they re most easily lost. The memorandum, or memorial, was Piccolo’s equivalent of a daybook, for the recording, in chronological order, of business transactions as they occurred.

The transaction could be entered in any of the various monetary units then in use in the Italian city-states of the time, with conversion to a common currency for double entry left for later. The Journal was the merchant’s private account book. Entries consisted of a narrative debit, credit and explanation in one continuous paragraph. The Journal had only one column, which was not totaled. There were no compound entries. Piccolo’s ledger was, of his three books, the most like its modern equivalent.

The money and date columns were almost identical to those in modern ledgers, with entries consisting of brief paragraphs, debits on the left side of a double page (dive dare) and credits on the right (dive aver). The bookkeeper posts “cash in hand” as a debit on page one of the ledger, Just as it was entered first in the journal. As ledger postings are made, two diagonal lines are drawn through each journal entry, one from left to right when the debit is posted and the other from right to left when the credit is posted.

The first 16 chapters of “De Computes” describe this basic system of books and accounts, while the remaining 20 are devoted to specialized accounting issues of merchants. These include bank deposits and withdrawals, brokered purchases, drafts, barter transactions, Joint venture trading, expense disbursements and closing and balancing books. The trial balance (summary samarium) is the end of Piccolo’s accounting cycle. Debit amounts from the old ledger are listed on the left side of the balance sheet and credits on the right. If the two totals are equal, the old ledger is considered balanced.

If not, says Bacilli, “that would indicate a mistake in your Ledger, which mistake you will have to look for diligently with the industry and intelligence God gave you. ” Significance of the Summary In the first century after its publication, the Summary was translated into five languages, and numerous books on double entry bookkeeping appeared in Dutch, German, English and Italian whose descriptions were obviously lifted from “De Computes. ” Many consider these works inferior explanations of the system so clearly articulated by Bacilli.

One historian has described the works issued during this erred as, “at the best, revisions of Bacilli, at the worst servile transcriptions without even the courtesy of referring to the original author. ” Nevertheless, they helped quickly spread the knowledge of the “Italian method” throughout Europe. Perhaps most surprising is how little bookkeeping methods have changed since Bacilli. Both the sequence of events in the accounting cycle and the special procedures he described in “De Computes” are familiar to modern accountants.

In fact, the primary differences between current bookkeeping practices and the “Method of Venice” are editions and refinements brought about by the needs of a larger scale of business operation. The small proprietorships of 1 5th century Italy had no need for specialized journals, subsidiary ledgers, controlling accounts, formal audit systems, cost accounting or budgeting. Some omissions, such as the failure to touch on accruals Ana terrestrials, proudly occurred Decease Piccolo Tell tenet were too Vance Tort a beginner’s treatise.

But numerous tiny details of bookkeeping techniques set forth by Bacilli were followed in texts and the profession for at least the next four centuries, s accounting historian Henry Rand Hatfield put it, “persisting like buttons on our coat sleeves, long after their significance had disappeared. ” Accounting In Islamic Perspective (APP) Developing APP as a Formal Discipline Scholars have emphasized on development of management in Islamic perspective as a formal academic discipline (Small, 2007). However, this aspiration needs in-depth analysis and pragmatic considerations.

There are many questions that the researchers in this area will have to address while taking up this task. The following section elaborates on the challenges that are likely to emerge while developing APP as formal discipline. Defining APP ‘Islamic accounting’ as an emerging discipline, which deals with the financial reporting of organizations from the perspective of the knowledge acquired from the revealed and other Islamic sources of knowledge, and results in applications are compatible with the Islamic beliefs and practices.

Of course, the aims, objectives, operational activities and results of ‘Islamic accounting’ are determined according to Islamic Qaeda’ and Shari’s. According to Hashish ‘Islamic Accounting (1989), “is an integrated discipline with social, political and economic domain ruled by Allah or meta rule”. Islamic accounting should regulate and establish a harmonious integration among the parties of this diverse domain”.

Hashish continues that the Islamic accounting which has implicit economic, political and religious meaning (an integrated world view system, author), has the possibility to show the key to a post Newtonian Accounting (Western Secular based accounting, author)”. Bases of Islamic Accounting: AY Quern Islamic accounting can be defined as the “accounting process” which provides appropriate information (not necessarily limited to financial data) to stakeholders of n entity which will enable them to ensure that the entity is continuously operating within the bounds of the Islamic Shari’s and delivering on its socioeconomic objectives.

Islamic accounting is also a tool, which enables Muslims to evaluate their own accountabilities to Allah (in respect of interurban/ environmental transactions). A. Ownership To Him belongs what is in the heavens and on earth, and all between them, and all beneath the soil (Sarah Ta-Ha: 6). B. Debt Contract and Accounting “O ye who believe! When ye deal with each other, in transactions involving future obligations in a fixed period of time, reduce them to writing let a scribe write down faithfully as between the parties; let not the scribe refuse to write: as Allah has taught him, so let him write.

Let him who incurs the liability dictate, but let him fear his Lord Allah, and not diminish aught of what he owes. If the party liable is mentally deficient, or weak or unable himself to dictate, let his guardian dictate faithfully. And get two witnesses, out of your own men, and if there are not two men, then a man Ana two women, sun as ye condos, Tort wellness’s, so Tanat IT one AT teem errs, ten there can remind her. The witnesses should not refuse when they are called on (for evidence).

Disdain not to reduce to writing (your contract) for a future period, whether it be small or big: it is Jester in the sight of Allah, more suitable as evidence, and more convenient to prevent doubts among yourselves but if it be a transaction which ye carry out on the spot among yourselves there is no blame on you if ye reduce it not to writing. But neither take witnesses whenever ye make a commercial contract; and let neither scribe nor witness suffer harm.

If ye do (such harm), it would be wickedness in you. So fear Allah; for it is Allah that teaches you. And Allah is well acquainted with all things. ” (Sarah AY-Basilar: 282) C. Trusteeship of Mankind Behold, thy Lord said to the angels: “l will create a vicegerent on earth. ” They said: “Wilt Thou place therein one who will make mischief therein and shed blood? Whilst we do celebrate Thy praise and glorify Thy holy (name)? ” He said: “I know what ye know not. ” (Sarah AY-Basilar: 30). D.

Inequality – Natural And it is He Who hath made you (His) agents, inheritors of the earth: He hath raised you in ranks, some above others: that He may try you in the gifts He hath given you: or thy Lord is quick in punishment: yet He is indeed Oft-Forgiving, Most Merciful (Sarah Al-Ma’am:165). E. Record Book – Audit Then he who is given his Record in his right hand, soon will his account be taken by an easy reckoning, And he will turn to his people, rejoicing! , But he who is given his Record behind his back, Soon will he cry for Perdition, And he will enter a Blazing Fire. Sarah Al- Insignia: 7-12) Distinguishing APP from Conventional Accounting After researchers have defined and sharpened the definition of Alp, they will need to take a clear and elaborate stance as to how APP differs from conventional accounting r emerging forms of accounting, which drive their inspiration from spirituality and servant leadership. If they are not able to distinguish APP from existing and other emerging forms of accounting, this would imply that it is either equivalent to the conventional accounting with add-on of spirituality or a simply redundant concept.

Researchers will also need to identify and focus on the points of divergence and accentuate these in their conceptualization and measurement of Alp. Though some scholars have already given some attention to the issue arguing that conventional counting and APP are distinct, there are many who note both similarities. For example, Legman and Bulb (2007) note that the 14 principles of conventional management given by Henry Payola are alike the principles of Islamic Management. Some assertions, however, show that Islamic perspective offers distinct way of accounting.

Legman and Bulb (2007) call these points of distinctions as additional principles of management. These include: kalmia (vicegerent), honesty, truthfulness, promise keeping, moderation, sincerity, timeliness, efficiency, patriotism, exemption, accountability in this world as well as in the life hereafter and more over Tackle (depending upon Allah STW). These principles are not present in the conventional accounting approaches and therefore make APP a unique perspective. Door (2007) joins this stance and argues that Islam provides “extra dimensions” that are likely to enhance the positive nature of Islamic leadership.

The most important “extra dimensions” in this regard include: surrendering to Allah STW, trusteeship of Allah SW l, accountability to Allan SW l, denounce AT Allan SWISS Ana ten Proponent, Toweling he Shari, virtuosity, mercy, forgiveness, compassion, social Justice and consideration, service of mankind, righteousness, humility, positive firmness, inner struggle against the self, honesty, truthfuln

x

Hi!
I'm Niki!

Would you like to get a custom essay? How about receiving a customized one?

Check it out