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2nd week: FORMULATION OF ACCOUNTING THEORY Describe the process of accounting theory formulation As in any other discipline, a methodology is required for the formulation of the accounting theory. The divergence of opinions, approaches, and values between accounting practice and accounting research has led to the use of the two methodologies. One is descriptive, the other normative. The descriptive accounting approach has been criticized by proponents of a normative methodology. Normative accounting theory attempts to justify what ought to be, rather than what is. At the risk of oversimplifying, we may assume that, given the complex nature of accounting phenomena and issues, both methodologies may be needed to formulate an accounting theory. The descriptive methodology will attempt to justify some of the accounting practices that are deemed useful, and the normative methodology will attempt to justify some of the accounting practices that ought to be adopted. The need for accounting theory Accounting theories is needed because they provide both the theoretical basis and the rules based on that theoretical basis used to guide accountants in creating useful financial documents. Accounting theories are basically the bones that lend them shape and structure for accounting practices. Further, accounting theory can be thought of as the logical reasoning that helps evaluate and guide accounting practices. Accounting theory, as regulatory standards evolve, also helps develop new accounting practices and procedures. Explain different approach in accounting theory formulation 

PRAGMATIC THEORIES

Pragmatic approaches are based on observing the behavior of accountants or those who use the information generated by accountants. The descriptive pragmatic approach to accounting theory construction is an inductive approach - it is based on continual observation of the behavior of accountants in order to copy their accounting procedures and principles. Hence, a theory can be developed from observations of how accountants act in certain situations. The theory can be tested by observing whether accountants do, in fact, act in the way the theory suggests.

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SYNTACTIC AND SEMANTIC THEORIES

Syntactic approaches rely on logical argument, based on a set of premises, and semantic approaches concern how theories correspond to real-world events. 

NORMATIVE THEORIES

Normative theories rely on both semantic and syntactic approaches. 

POSITIVE THEORIES

Positive approaches test hypotheses against actual events. Positivism or empiricism means testing or relating accounting hypotheses or theories back to experiences or facts of the real world. Positive accounting research first focused on empirically testing some of the assumptions made by the normative accounting theorists. 

NATURALISTIC THEORIES

Naturalistic approaches consider individual cases and do not try to generalize. The naturalistic approach can be compared with 'scientific' accounting research, which is more prone to aggregating the results from testing a number of hypotheses in order to form 'general theories of accounting'. Naturalistic research starts from specific realworld situations; the main intention is to answer the question 'What is going on here?', not to provide generalizable conditions for wide segments of society. Differences between normative accounting theory and positive accounting theory The main difference between normative and positive theories is that normative theories are prescriptive, whereas positive theories are descriptive, explanatory or predictive. Normative theories prescribe how people such as accountants should behave to achieve an outcome that is judged to be right, moral, just, or otherwise a 'good' outcome. Positive theories do not prescribe how people (e.g. accountants) should behave to achieve an outcome that is judged to be 'good'. Rather, they avoid making value-laden prescriptions. Instead, they describe how people do behave (regardless of whether it is 'right'); they explain why people behave in a certain manner, for example to achieve some objective such as maximizing share values or their personal wealth (regardless of whether that is 'right'); or they predict what people have done or will do (again, regardless of whether that is 'right' or 'best behavior').

Many positive theory researchers are largely dismissive of normative viewpoints. Similarly, many normative theorists do not accept the value of positive accounting research. In fact, the theories can coexist, and can complement each other. Positive accounting theory can help provide an understanding of the role of accounting which, in turn, can form the basis for developing normative theories to improve the practice of accounting. According to Watts & Zimmermann (1986), normative theories are almost entirely devoted to the examination of questions of "what ought to be done." Thus, this theory attempts to prescribe what information ought to be communicated and how it ought to be presented. In other words, the normative theories attempt to explain what accounting "should be" rather than what accounting "is." On the other hand, positive theories attempt to explain why accounting is what it is. They describe not only what accounting information should and how it should be communicated to its users, but also why accountants do what they do and the effects of all this on people and resource utilization (Christenson, 1983). However, as suggested by Schroeder and Clark (1995), ideally there should be no such distinction (normative versus positive) because a well-developed and complete theory encompasses both what should be and what it is....