Relationship between accounting theory and policy making

relationship between accounting theory and policy making

Proposition – statements concerned with the relationship among concepts. Concepts 11 Accounting Theory and Policy Making The two groups that determine. Accounting as communication-decision information • Accounting is action .. Relationship between Efficient Market Theory and EC Efficient market theory. Accounting Policy MaNing: A Political Avenue for Sustainability occurrence of unsustainable business practices, even among business entities that declare The profound meaning of sustainability can be observed not only in its relation to the existence and survival of . of theory in Nnowledge development process.

Accounting as a mediator, is required to achieve the capital transformation, promote and preserve the changing economic order. The capital movement was forced to emerge with the economic sphere in the capitalism economic laws. Arbitrary accounting operations, such as the balance sheets presentation, take place in many companies.

The Relationship Between Accounting Theories, Financialization Process And Neoliberalism

Capitalism must protect its economic arranging laws and rules. However, accounting, manipulated or distorted, can destroy the economic process that can, in turn, induce critical reactions.

The capitalist economy needs an institutional framework such as laws, rules and regulations to prevent economic chaos. From this advances, we can overcome some weakness in the critical school of accounting approach SS. This approach has a pessimistic assumption is always the result of the accounting institutionalization and financial reporting and twisted dummy preventing the public from acquiring real accounting information made its ideological character and legitimating function.

The accounting institution, however, seems to have two different characteristics. That is to say, legitimate accounting, impartial operations as less impartial, properly using ideological and political pressures. The other character is to promote and retain from time to time, operations accounting to maintain economic order that supports the capital movement.

Accounting standards is an institutional set to reflect the complex relationships and social-political conflicts. The accounting institution rule aggressively practices of arbitrary calculation and financial reporting that are idle for social reproduction. Measurement and institutions The accounting research has historically shown a great interest in analyzing its institutional structure, has tended to focus on institutionalized interpretations due to the strong influence of the legal framework which consists of two main laws with different characteristics and goals, i.

The government and the public sector dominated the accounting scene and commercial code which has been strongly influenced by the accounting practice. In such environment, studies in accounting discipline have naturally developed a legal orientation. The accounting measure was generally understood as double-entry process, involving a recording technique and calculation part. The Commercial Code, as well as other laws and regulations, are built on the accounting traditional logic.

Accounting, itself is concerned with the recording operation, measurement, and reconciling the stakeholders various interests. Which process the legal conditions is expected to provide adequate regulation. The accounting mainstream has developed an affinity legal discipline. The relationship between accounting and economics became a theoretical issue in recent years involving both methodological problems as when the accounting identity as a school subject [ 23 ].

It turns out that the accounting academic mainstream focuses on a common concern and how to develop the accounting discipline perspective as a social science.

In this context, two main approaches are important. This that focuses on accounting as a measure, particularly in accounting calculation is known for what is called "individual capital movement" approach ICM.

The other relates to the accounting analysis as an institution, is known for what is called "socio-political superstructure approach" SS. The ICM approach considers the accounting calculation as the reflection of the individual capital movement is analyzed as a movement component of the entire share capital symbolized by MC-M in the Marx capital.

The SS approach, meanwhile, studied accounting as an institution with legal, political and ideological structures created by the capitalism economic base. The ICM approach has contributed significantly to the development of a scientific measure. A design which provided for the development of the capitalist economy was conducted and supported by reasonable and symbolized accounting techniques.

This approach offers theoretical perspectives to understand and identifying the relationship between accounting and real economic process. Accordingly, a measurement scientific concept based on economics while traditional accounting is to present, only, practices law and rule interpretations [ 26 ]. This idea has been criticized by supporters of the SS approach as ineffective, analyzing critically the accounting actual state and involves manipulated accounting practices.

This approach argues that leadership inevitably involves in monopoly capitalism, arbitrary and distorted to rationalize unequal economic relations. As part of this superstructure, SS approach attempts to establish an institutionalized accounting as part of the superstructure, which supports the ruling class interests and allows the company legitimate status in the form of law, politics, religion, culture and ideology. This approach was successful analyzing the accounting actual behavior and different accounting practices, providing empirical evidence supporting the dummy reporting a legitimization of capital accumulation, such as reported income deformation, balance sheet adjustment or results Operating.

According to these critics groping in the theory of measurement is not continued in spite of its importance in accounting theory and the ideological legitimization of discipline or accounting function, oversimplified as a socio-political superstructure function, without thereby identifying widespread possibility of reforming institutions. Differently, this approach is invaded as accommodation as a pessimistic view of such possibilities.

To develop accounting as a social science, it is easy to reflect on the historical lessons and critical studies. In doing so, we must overcome the weaknesses of both approaches and integrate them to approve a fundamental issues resolution such as accounting purpose and methodology by Barth and Landsman [ 6 ]. From the neoclassical approach perspective or traditional schools, accounting is outside the economy process Figure 2. Neoclassical economies do not identify the accounts presence as a theoretical framework.

Accounting process outside the economy 3. Specifically, in the traditional schools opinion, we assume that accounting is a neutral system that reflects, impartially, the economic process and the accounting should make, draw, or copy the object just like a synthetic photo. Accounting is considered one of the management tools, and the relationship between accounting and economics is treated as analogous to the relationship between the tool and the object.

This thinking way can be termed as an instrumentalist view of the relationship between accounting and economic processes. Alternatively, from the Marxist economic perspectives, accounting is located within the economic process as a capital flows component. In Figure 3, accounting exists within the economic process and negotiates the capital metamorphosis. In this way, the claim is that accounting is not a neutral system or an independent tool for describing the economic process.

Accounting is considered as a capital movement identifying and controlling activity itself. In addition, accounting is defined as an economic process mediator.

It should be understood that the identification and control functions are included and subject to the function mediation [ 26 ]. Therefore, identification and control not promise impartial and correct thinking.

Instead of punching, the accounts must be regarded as an operation to establish a subjective picture of the capitalist portion interests. Needless to say, this is counted as one of the economic costs. Accounting process in the economy 4. Thus, unlike an instrumentalist interpretation, accounting is not separated from the economy and is not just a tool for measuring the economic purpose. Accounting and economics, conversely, are interactive to proliferate, analyze and estimate the movement of capital.

It is very interesting that the capital itself can be the subject or object of accounting. Figure 3 can be transformed to Figure 1 in which accounting is institutionalized by the socio-political superstructure. We can explain the genesis of the accounting institutionalization and its ideological function by using Figures 1 and 3. Accounting functions as individual capital movement metamorphosis mediator. In addition, mediation does not promise the correct calculation or honest reporting.

Among the volumes of capital from individuals working in the economy, at least one party is likely to be driven by arbitrary accounting and the other could be made by illegal operations such as training function.

Arbitrary proliferation or unlawful accounting operations constitutes a threat to the socio-economic process integrity. Then again, the accounting institution allows some operations-center to bring benefits to capitalists. Capital accumulation is inevitable for the capitalism development and required by the capitalist economy laws.

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Within the institutional accounting framework, the operations types that promote the capital accumulation and induce investment are approved and institutionalized. Typical accounting operations are developed institutionalized by laws and rules. This institutionalization is determined and justified by the socio-political superstructure including the state, ideology and culture. The accounting institutionalization, in turn, self-centers operations using the power of the superstructure.

It is important that the institutional framework is produced by the mediation function to increase its role in the social capital movement monarchy. Once institutionalized, each activity is conducted according to the accounting framework and the status question. Although the accounting institution began within the economic process, the institution appears to be allowed to drive the resolution of accounting outside the economic process.

Since all accounting activities are institutionalized in contemporary accounting changes occur mainly in the field of institutional framework for accounting. Today, the institution accounting plays the mediator role in the social capital movement to maintain the economic order as well as to encourage the capital accumulation. Theorizing Accounting The positive theory Watts and Zimmerman [ 27 ], took relief Beaver [ 28 ], Brown and Ball [ 29 ], which, in turn, brought accounting research to overcome its normative framework for a scientific discipline, referring to the founder Friedman atto develop research in accounting.

Both authors have a scientific approach was manifested allowed the accounting studies emerged from a normative investigation to an axis of scientific research called positive theory.

Designed as approach pioneers have claimed a perspective that tends to predict and explain the accounting practices demolished earlier theories. The positive theory emerged in the sense of explaining the influence and attitude of political factors, taxes, regulations, compensation costs The politico-contractual approach is based on the policies and contractual costs which are subject institutions. Until the sixties, the accounting information decision-usefulness hypothesis validity put forward the implicit form.

Guesswork in financial accounting have evolved in a normative direction is concerned, in a speculative dimension, selection of the most relevant rules. A decade later, an empirical attempt was made in order to evaluate the normative accounting research. The first experiments have attempted to provide decision-usefulness and a scientific validation hypothesis for accounting information.

Highlighting the anticipation of informative volume of accounting data prior to disclosure was the first subject empirical tests. The first empirical studies that have introduced the accounting information to study the market efficiency were emerged by Beaver [ 28 ], Brown and Ball [ 29 ], and Ijiri [ 30 ] frameworks.

Thus, under both an "information perspective" and a "contracting perspective, accounting disclosures Have the potential to alter securities prices" Holthausen [ 31 ].

These attempts are divided into two columns, those who recognize the accounting relevance using the historical cost figures as an analytical tool, Ijiri [ 30 ]. Proponents of this methodology attribute their qualities that justify their rule and longevity in explaining the firm value. In contrast, other analysts give as a conservative design and low volatility on income measures and wealth [ 21 ], which emphasizes the quasi-systematic bias introduced by the accounting use numbers based on historical cost.

This fundamental change in the financial design reporting was accompanied by the legitimacy of the institutional accounting science framework as an information production source. In regulated based on a current explanation of observed practices is intended to predict accounting choices. This program 5 was founded by Watts and Zimmerman [ 1819 ]. The positive theory has emerged as a cornerstone in the recent process groping in accounting.

These schools have a merit in accounting standards emergence and have acquired their scientific aspect and their epistemological status. Exalted for his controversial, the positive theory has had its share of criticism and even refutation.

Beyond its impact, positive approach has emerged to be a combination researcher and the imposition of an empirical meaning of theoretical assumptions. A new horizon dated by a scientific reorientation and a framework for positive analysis of normative prepositions. Both authors had published a radical distinction between what-is and what-should be.

relationship between accounting theory and policy making

This scientific orientation gave methodological foundation for the accounting study as a values system, and a redefinition of the researcher-subject relationship. Subject to the rebuttal principle, the constraint of focusing research in accounting practices with regard to the accounting products development that has emerged like an empirical validation process supposed to be presumed realities. To this end, the majority experiments have evolved a derived from a micro-economic analysis of the financial sphere resting on a methodological 7 study of the theoretical basis events.

The pillars of this current analysis were Beaver [ 28 ], Ball and Brown [ 29 ]. Their objectives were to study the market reaction following the release of new accounting information.

Thus, researchers argues the limit informational continuous when the market trend explanation. This convergence has questioned the alleged positive theory of prejudice that the primary role of the disclosure of accounting results of market 8 expectations.

In the same decade, Kaplan and Roll [ 32 ], based on a similar methodology, have concluded the accounting policies limit to explain market assessment risk. This accounting positive investigation was hired on the financial markets efficiency concept validity. Denying the scientific capacity of traditional research characterized by their normatively, Watts and Zimmerman [ 18 ] based their theory emphasized the contractual use of accounting information.

The positive theory purpose was to establish a set of behavior rules deducting the legitimacy of their empirical validity and which are constrictive a general theory facer financial statements for companies.

Although the factors importance associated with particular methods choice, highlighting the accounting choices motivations made by management, as well as the accounting leadership analogy selection according to the characteristics of their business seems prerogatives. Ultimately, deploy the developing accounting standards process, exceeding the accounting items study to their explanatory and predictive attitudes, marked the Rochester school genesis. The intention is focused to predict and explain the accounting information producers and users behavior in a neo-classical logical.

Nevertheless, economic regulation and agency theories are unanimous. The company is seen as a set of contracts between parties in balance, rational, whose interest is to maximize their utilities, Jensen and Meckling [ 15 ]. This interest divergence and opportunistic behavior, those are at the origin of some decision-making power delegation in a combination-agent. These monitoring costs opportunity are responsible for the introduction of accounting at the agency heart relationship [ 1415 ]. And the economic agent rationality is the crux of any accounting problems formulation.

In this alternative, the politicians have exploited the economic theory of regulation [ 33 ] to a transfer of wealth. Taking the political visibility advantages and social weight of major subsidiaries as pressure tools, politicians took advantage from companies accounting results as a technical argument to attract voters.

Accounting information is diverted to a political conception. Rochester School made a assumptions number about the firms vulnerability to new regulatory policies and the agency relationship. The "debt" hypothesis is based on the accounting ratios introduction to conclude loan agreements between actuators and creditors by reducing the leaders action when corporate earnings.

The interest conflict between managers 9 and actuators is reduced by pressing the accounting indicators profit sharing plan for managers. These choices can be remedied for political or competitive reasons. The hypothesis that favors size businesses reduces their political visibility. A choice gives the company to destroy the regulatory policies emergence and tax or administrative help fight against the entry of potential competitors on the market.

Accounting practices diversity analysis allowed the context and outcome duplication. To reduce the treatment settings multiplicity, Mouck suggested two axial assumptions. The assumption is derived from the capital advanced school in Chicago based on micro-economic rationality. In this context, the agents have different preferences and knowledge of their situations; seek to maximize their personal interests under contracts whose firm represents the node.

In this regard, a type of advanced capitalist order is processed, the market efficiency, rational expectations models, agency theory, regulation, CAPM This allowed the sequential methodology introduction in accounting research.

An appropriate instrumentation is advanced for a specific treatment in the accounting practices observation, modeling, formulating testable hypotheses that lead to a reversal or results confirmation. Positive accounting theory remains very fruitful despite criticism [ 27 ]. Some criticize that span the design capital of the accounting process by reducing its social dimension.

Decisions tend to meet contractual terms and managing the corporate 10 ratio leverage. Although, opportunistic behaviors that their purpose is to achieve oriented speculative mind with the company pension shareholder ideology rises.

Legal or illegal, large companies tend to manipulate their final results or reduce depending on the final assessments 11like executive chefs compensation the debt ratio and the company size. The production sector and the market, in addition to other factors, are at the accounting origin choices.

The derived information is influenced by the choices and decisions Marxist intensified by a dividend policy characterized by capital concentration and high risks. Conceptually, setting a record that may reflect realistically the company value on the market, is a disproportionate combination.

Positive accounting theory has challenged its epistemological orientations Christenson, The North American school has been the some criticism subject, Ball and FosterWhittington, Hinessometimes called the empirical results convergence and sectarianism at research [ 34 ]. Limited to a specific environment in which the previous transposition research has concerns and precarious consequences model. A theory based on a political vision contractual organizations and having an analytical framework deemed too simplistic [ 3 ].

When the neoclassical synthesis is constructed, capital assets, financing arrangements that center around banks and money creation, constraints imposed by liabilities, and the problems associated with knowledge about uncertain futures are all assumed away. For economists and policy-makers to do better we have to abandon the neoclassical synthesis [ 35 ]. Zuker theory had emerged under the pressure of developing a common knowledge CK. Increasing the society weight and the growing human empowerment being through the collective mediation is splitting with contemporary economic theory.

Controversies that develop, externality and the collective welfare supremacy to individual preferences, the office opacity in personal peculiarities respect is to eradicate. The collective reasoning appearances emergence, the ignorance obstacles and the divergence points erected, are the collective act is rectified in the mutual agreement development. The fictional Walrasian auctioneer personification is an adjustment of externality pricing for consistency model.

Equal to inaccessible phenomena and suspicion annihilation and mistrust mechanisms are forged to block specular game mutual conflicting identifications "agents are determined relative to a known future they suppose to, while the ones who have determine the [ 36 ]".

However, the transparency and opacity can mitigate the deficit overshoot reflection shape a CK. According to Dupuy a proposition P is a CK in a community of subjects familiar to it: Historically the CK concept is anonymous basis.

In his treatise "treatise of human kind" Hume [ 37 ] argues that all agents must know how to predict the other behavior so that they can engage in activity coordination. The gents adopt cooperative behavior to destroy the opacity and externality, "all agent must know what behavior to expect from one Reviews another in order to engage in Coordinated activity" Humen [ 37 ].

Littelwood [ 38 ] proposed one of the famous arguments CK reasoning in mathematical game Martin Gardener. The coordination game notion advanced by Schelling [ 39 ] "if the gents are more likely to believe that others will also choose the same device, they can be prominent, while such devices become a center focus for their actions are" is the basic tool used by Lewis.

Schelling [ 39 ] discussed the behavior CK type. Lewis [ 40 ] gave the CK formal definition as knowledge niche levels. The author suggested three conditions to complete the CK agreement.

The salient features are more likely to be a CK others. Priority or compliance seems the second constraint. Even in the agreement or balance absence, the priority is designed a basic complement of CK. If everyone has confirmed a behavior pattern in the past, it is more likely that everyone knows that this is the case, and they are also likely to continue to comply in future respect for the straight line in the road.

These three conditions make possible CK but not fully realized. According to Barbier [ 41 ], the CK is a "heroic assumption with complete transparency of the group for each individual who composes it always presupposes the maintenance of a pure rationality in a lack of communication between people".

All parties are aware of the Convention and its alternatives, or at least anticipate the others reactions, since the decision is a personal individualism optimization. CK is the gents meeting on "some" knowledge of a given subject. Information is simply a CK between two agents A and B if both A and B have the same information and both also known that others know that others have the information The two agents A and B have the first mutual understanding.

The spread of information between the various parties is a knowledge transfer from a reduced to a greater degree to its spread in the crowd level. CK is a combination of all knowledge levels dices its beginning to end. CK is entered as a Manichean coordination series, where an infinite specularity is applied by actors with immeasurable capacity calculations, the visualization is easier than its realization "cognitively, it is difficult to think consciously about knowledge orders beyond the first few.

Yet, CK is a valuable theoretical benchmark. A great deal of accounting and financial literature Assumes CK" Sunder [ 4243 ]. CK is the language basis, communication, social life [ 26 ], In contrast, Galbraith considers that the CK is neutral. The Convention uses as well the wisdom dripping in irony. The irony and the implicit criticism of CK is largely absent in the accounting context. American social movements come and shout their ideas Ban child labor!

And CW Responds in its reassuringly predictable pattern. CW appears in accounting and control in several forms, though not always explicitly" Recent research has denounced the absolute reflectivity and the utopianism of total transparency, "A weakening of the burden of rationality contained in the notion of CK Lewis treats the CK concept like a relative 12 concept and infinite specularity it is correlated.

People are satisfied with a finite number of cross expectations as acknowledges. Channeling our attention to the implications of the CK role in the accounting research and little clarification from the management as accounting rules formation process, accounting phenomena mathematical modeling, changes in stock prices, the financial analysis The accounting policies set the game rules in a cooperative economy.

As soon as the pivot rules, legitimacy and effectiveness standards mark. The standards harmonization process is referred to the statement as a CK. Such processes which include a stakeholders variety 13 and supposed to be a challenge when the facer accounting standards as CK. This term has been development potential as a concept in philosophy, economics, and cognitive science. Although the information is at the research heart in financial accounting and financial markets, these developments impact is still limited.

However, the CK little push, significantly our understanding of the financial reporting forward for efficient analysis, security assessment, management control, and auditing and information system. Advancement will contribute to a better realization of the business world and accounting information. In his capital markets description, Keynes [ 44 ] suggests the professional investors example as participants in a competition in a newspaper to select the six prettiest picture from a hundred faces.

Each participant selects, not the faces it finds itself the prettiest, but those which he thinks most likely chosen by the other participants.

However, winning is not a resident to choose the photos to the best of his judgment are the best, or even what the average opinion genuinely thinks. Thus, intelligence is devoted to predict what the average opinion expects the average opinion to be and vice versa. During the postwar period, the tax law in the United States has allowed companies to use the LIFO inventory method for the taxes assessment and the financial statements preparation. By analyzing the adaptation of this method to inventory reasons, financial officers concluded that the LIFO adaptation will increase the cash flow and a decrease in income which can lower stock prices.

However, such results are not empirically validated. In these examples, we assume the existence of a similar auctioneer theory like Walrass phenomenon. The others and their beliefs play a crucial role. People disguise their own point of view and do not dare to speak. They keep coming and unite in the same mind state, convinced by a belief that they would require specific information.

Without being stupid or incompetent, even as they saw the shade of chooses, they say and do not express what they saw. It is the belief that dominates the visible reality, the influence of the crowd directed collective thought. Indifference to speak symbolizes incompetence, gents keep their own wisdom not to destroy or contradict the collective beliefs.

Everyone knows and believes that others know too, but they are silent to maintain the collective knowledge. The silence reinforces the others doubts and the belief in "false assumption" continuously.

Individual autonomy is to cloud the collective order. Once a route otherwise breaks the silence so innocent if childthe running of the event ends and the assumption annihilates. This validity argument is rooted in the Keynes hierarchy rule decision. These rules work and the judgment margin becomes closer to the reality of the market operation. It's like a casino game, the gents involved in games because they saw others who win and they believe it too.

In this time of trouble winning spirit dominates the crowd and becomes a common belief, a truth about which way is subject against.

How to express the gents and belief in each other's behavior becomes real data. In business, agency problems are solved by contracts binding resolution compensation manager shareholder value. This value is subject to manipulation by the executive and the carrying value exceeds the market value.

relationship between accounting theory and policy making

The latter adopts accounting increases the current results against lower future earnings in order to increase the share carrying value. Market efficiency is the optimum solution for this agency problem, the information asymmetry between managers and actuators is canceled. The theory is then a CK efficiency to solve the opportunistic behavior.

The company, all as each organization is a contractors group whether they are individuals or organizations, mutual, explicit or implicit agreements, whether long term or short term. It is an obligation to contribute to the company resources, which, in the court time, every party involved to receive income. The company contract form part of each party and how to align resources are a CK.

In this regard, accounting and control is a cornerstone in the operation and continuing contracts. However, the resources contribution, income distribution between contractors, the information dissemination between the parties Conflicts that waste resources and hinder the proper functioning of the company affect its image and market value.

CK can weaken disagreements and help achieve a healthy socio-economic fabric and a change climate and cooperation whose personal wealth is allocated to human welfare. Sharing information helps resolve family conflicts, work with competitors are settled or avoided. The social and economic rivalries prevention and resolution are prevented by the information systematic dissemination.

Contracts are then execution CK among stakeholders. Controversy and disappointment rise as soon as the visibility of an event is allocated to one party over another. When everyone has an informational advantage, individual opportunism prevails over the collective welfare. The CK introduction is needed to reduce uncertainty and mitigate any individual power to imperfect or asymmetric information.

All parties know the rules, the various outcomes probability, but do not know the spot or stops. In a less certain environment is increasingly complex, the accounting entry as an application or a contract in responsibility system [ 26 ]. We can think of each organization as a contracts set between participating individuals or groups.

Accounting Theory

The common information provision among contracting parties helps them design and implement these agreements, and help organizations operate [ 2326 ]. Contracts are mutual designs, explicit or implicit, in the short term or long term. Rental space and a lunch date with a friend are contracts. Agents are reasonable in the sense that they do not choose what they do not like. The contracts require each agent to contribute resources in order to receive income.

Accounting and control systems perform essential functions in these contracts. They each party contributions measure to resources, income distribution; determine the contract completion degree, and the information dissemination to potential participants in the contract system. Accounting also helps provide CK reduction and conflict resolution. The variables use, which is not in CK contracts, causing the controversy and disappointment. CK is the observability of an event by all sides. Each party must also realize its observability to another.

When some people know about an event, but not the others knowledge when on, they may try to use such information and adopt an opportunistic behavior, creating an avoidable conflict with the CK. Common knowledge can help us to gain insights into many areas of accounting research, standards, treatment information, financial analysis, trading volume, price bubbles, and mathematical modeling of accounting phenomena. Accounting standards serve many functions in society. Provide general frame of reference by which accounting practice can be evaluated.

Guide the development of new practices and procedures. This is to eliminate unnecessary diversities in accounting treatment for similar items.

From the evaluation of existing practices, reasons for diversity that cannot be eliminated may be discovered and explained. This will enhance our understanding of current practice and facilitate in the regulating the profession by policy makers. Theory also assist in the development of future practice where it serves as basis in the development of accounting standards. As business practices becomes more sophisticatednew accounting problems may arise that require development of new techniques and procedures.

The goal of theory is to provide coherent set of logical principles that form the general frame of reference for evaluating and developing new accounting practices.

To provide a frame of reference for resolving accounting questions in the absence of a specific promulgated standard. To determine bounds for judgment in preparing financial statements.

Improve the image of the profession. Descriptive — inductive theory which derived from factual empirical observation, describe what reality is like. Normative — deductive theory which describe what the empirical world should be regardless of its reality.

Decision usefulness approach 3. Welfare approach 8 Descriptive Approach Theories developed are concerned with what accountants do, that is the practice of accounting.

relationship between accounting theory and policy making

Making observation to look for similarity and recurrence and drawing generalized conclusions from those observation or practices. In standard setting the setter are concerned with discussing the varied practices used by accountant and reaching a consensus on the most feasible basis to reduce diversity of practices within which descriptive theory has developed.

Involves the process of specifying the objectives of financial statements, selecting the postulates of accounts, deriving the principles of accounting and developing the techniques of accounting.

Two types of theories in this approach are empirical and normative theories. Empirical Approach — employs statistical technique research to make accounting research more rigorous and to improve the reliability of results. Normative Method — concerned with specifying the manner in which decision to be made serves as a precondition to considering the information requirement.

It focus on decision models used by decision maker and provides insight on information needs of decision makers as a basis for developing accounting theory. Refer to page 34 10 Welfare Approach An extension of decision making approach which consider the effects of decision making in social welfare due to the effects of the decision made base on the accounting information do have effect to the external society. It resulted in a social welfare dimension to accounting theory — Social Responsibility Accounting.

Accounting profession as a regulatory body deals with problems of accounting standards implied in financial reports.