Accounting Theory

Theoretically, 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. According to Hendriksen probably the most relevant definition of accounting theory is that it represents the coherent set of hypothetical, conceptual and pragmatic principles. Hence Accounting Theory should provide the following:

• A general frame of reference by which accounting practices can be evaluated.
• Guidance for the development of new practices and procedures.

However, a single general theory of accounting though highly desirable, yet accounting as a logical and empirical (social) science is still in too primitive a stage for such a development.  The best that can be accomplished at this stage is a set of theories (models) and sub theories that may be complementary or competing. By definition, each theory consists of a set of statements or propositions connected by rules of logic or inferential reasoning. In any event, we should always bear in mind that all theories are subject to modification or abandonment with the development of new information or new theories that permit better predictions.

Behavioural (Pragmatic) Theories: These theories emphasize the behavioral or decision oriented effects of accounting information/reports/statements. The most commonly used dictionary meaning of the word "pragmatic" is "practical". This kind of accounting theories is called "practical" because to whom the periodic financial statement (Balance Sheet and the Profit and Loss Account) are sent, use them for the most practical use that is, taking decisions on the basis of such financial statements. In this category the focus is on the relevance of information being communicated to decision-makers and the "behaviour" of different individuals or groups as a result of the presentation of accounting information.  The literal meaning of the word "behaviour" is the manner in which an individual (or a group) reacts.