Abstract

In Chapter 2, different notions of ‘theory’ were introduced and applied to financial reporting. The various theories can be divided into two broad but overlapping groups, reflecting the main purpose for which the theories have been developed. Some theories are intended to provide a structure for understanding existing accounting practice, usually with a view to its improvement. Such theories may be labelled ‘prescriptive’ or ‘normative’, and have sometimes been classified as ‘theories of accounting’ (for example, Kinney, 1989: 121). Other theories also aim for an understanding of existing accounting practice, but here the objective is to explain the behaviour of those who prepare and use financial reports of businesses and not-for-profit entities, and to predict the accounting choices that preparers and users may make. Such theories may be labelled ‘descriptive’ or ‘positive’, and come within the classification ‘theories about accounting’ (Kinney, 1989: 121). However, as is argued in Chapter 2, these classifications are not always helpful, as they often mask presuppositions as to what a theory should be. Writers of textbooks with titles such as Accounting Theory (for example, Hendriksen and van Breda, 1992; Riahi-Belkaoui, 2000) sometimes evade the provision of a single definition and claim that there are multiple approaches to accounting theory, perhaps appealing to the American Accounting Association’s Statement on Accounting Theory and Theory Acceptance (AAA, 1977), which argued that a collection of theories was required to address the different contexts of accounting.