Essentially, in term of accounting research as a social practice, the core difficult sage which the accounting has been facing, that there is no standard theory to be applied in general model as it is being accepted universally.
This essay is aimed to focus on this concept as there are several approaches will be discussed, such as the concept of the term theory an general and in accounting particularly, as well as an example of two different theories which treat the same issue will be discussed.(in this term, the approaches of current purchasing cost accounting and current cost accounting will be discussed in the case of changing the prices )
2. The concept of the accounting as a theory
Generally, it could be illustrate that in the term of accounting, there is no particular theory in accounting as there has been considerable various theories in the financial accounting (Deegan 2001, pp2-3). In fact, however, there has not been any particular theory that accepted universally. In term of defending the meaning of the accounting theory, there are several though in term of defying the theory, as there is no particular view that how theory should be defined (Deegan, 2003, p5). However, the theory of accounting can be defined in different circumstances, because it might curry several meaning of things. Thus, it could be simply defined the theory of accounting as "a statement of a belief expressed in a language" (Godfry 2007, p22). Other point of view which defined the accounting theory as task which provide or obtain an understanding in order to provide a good enough explanation or prescription of 'particular phenomena' to create a basis or practice in order to cope with this issue(Gaffikin, 2007, p4).
According to Frost et al (2003: 4), theory is a set of ideas which used to express and explain the real world observations. However, in related to this issue on accounting theory, as Hendrikson (1970: 1), and Chambers (1963, quoted in Frost et al, 2003, p.4) introduced definitions of the 'theory' and the 'accounting theory' which might be expedient to this concept. The both definitions are set below respectively:
"….the coherent set of hypothetical, conceptual and pragmatic principle forming the general framework of reference for a field of inquiry".
" …logical reasoning in the term of a set of broad principles that (1) provide a general framework of reference by which accounting practice can be evaluated and (2) guide the development of new practices and procedures".
What the above definitions imply is that the theory should be based on logical (coherent) reasoning. As there is no one view of a theory that would admit a particular definition universally acceptable (Gaffikin 2007, pp 4-5). However, in term of what the purposes of a theory in general and in the accounting as a science particularly are? In fact, however, it could this question be answered in different ways: theory can provides the humanity (in the term of accounting and finance field) with a particular view of a phenomenon under different circumstances (Arnold and Hope, 1983:4-5), other point that the alternative theories can provide several view of the same phenomenon differently.
3. The different aspects of accounting theory
According to the many authors in the accounting field; Deegan and Unerman (2006:2-8) for example, state that the accounting theories do different tasks; they do not only seek to provide prediction or explanation based on a particular phenomenon, but also they prescribe what should be done (which is opposed to describing or predicting what is done) in particular circumstances, as the different accounting theories are shown in Fugger (1). However, as it mentioned before, in term of accounting as a science: there is no particular theory accepted universally. In fact, as Deegan (2001: 4-5), reports that any universally agreed perspective of the accenting how to be develop. Therefore, this might because those different researches have different perspective in term of the role of accounting theory, and also that what is the core role or object of financial accounting should be.
As an example of the different view of accounting researches; there are many researches think that essential role of the accounting theory should to explain or predict particular phenomenon related (positive theories) - (for instance, to explain why several accounts prefer a particular method, whereas other accountants might chose another or alternative manner) (Ibid: 6). Comparatively, other researches might consider that the accounting theory's role is to prescribe (Normative theories) - (which is opposed to describe) particular manner to accounting( as an example of this; that kind of theory/ theories prescribe particular assets that should be valued as the market value set rather than historical costs) (Deegan 2001: 4-5).
From this, theories are seen that very important, as mentioned, theories can do different aspects as in accounting there are many as shown in the figure (1).
Figure (1): the different classification of the accounting theories
Source: Lectures Note (Merkel-Davies, 2009)
4. Normative theories in accounting and their role in changing the prices
Obviously, as mentioned before, that normative theories do not explain or describe a particular phenomenon as what is occurring, but inkstand of that: theses theory make suggestions or recommendations about what should be, In other words, they are the theories that provide prescriptions concerned to what should occurred ( Dever et al, 2007: 11). However, Deegan et al (2006) state that over time, many criticisms have been raised about applying the historical cost accounting concerned its ability in term of providing reliable information, particularly in rising prices time. Thus, the issue of changing the prices is one of the main approaches which are discussed through these categories of theories:
4.1 Current purchasing power accounting (CPPA)
This approach was a consequence of the early works by Sweeny (1936). Since that, it has been favoured by many accounting researches (Deegan, 2003). The CPPA has also been supported internationally by several professional accounting bodies (as it more in the form of supplementary disclosures to accounting financial statements which prepared consistent with the principle of historical cost accounting) (Deegan 2001). However, the core concept of the (CPPA) that it was developed on the basis of the idea that during the rising prices period (Inflation) that if an entity ware to take part of unadjusted profit which based on historical costs, and therefore the consequences might reduce the real value of this entity: because that the entity could cause a risk distributing part of its capital in the real in the real term (ibid: 128).
Under the consideration of the accounting development in term of changing the prices, the majority of research initially related to restating historical costs to account for changing prices by using historical cost accounts as the basis, but restating the accounts by use of particular price indices ( Frost et al 2003:140-141).
However, in term of applying the level accounting of general prices, it must be apply the priced index, as the price index is a weighted average of the current prices of both goods and services which can be relative to a weighted average of prices in a particular period, which is often considered as a base period (Deegan 2003: 129). However, price indices might relate to changes in pricing of a particulate asset in a particular industry (which as a specific price index). Alternatively, they might base on a broad cross-section of particular goods and services which could be consumed (the general price index, such as in the UK (CPI) which is the Consumer Price Index).
According to Deegan and Unerman (2006:129), in term of explaining one of the common ways which indices might be constructed, it could considered the following example which investigates how the CPI s determined, for that purpose, there are three sorts of commodities are assumed (A and B), as consumed in a base year quantities priced as following:
Obviously, from the data shown above, it can be easily notice that prices have increased, as the price index in the year 2007(the base year) in frequently given an amount value of 100 as well as it is assumed that the quantities of consumption remain the same value. However, the price index at the end of 2008 can be computed as following:
From the calculation's result, it can be pointed out that the price of the good shown above has been rising in 2009by 11.111% compared with the year 2007. Thus, the change in general purchasing power within mentioned period is represented by the price index (Deegan 2001).
In term of evaluate the approach, the main advantages that it is easy to be applied. However, the main limitations of this, is that in time of rising prices, the movement in the prices of services and goods which included in the general price index could not be reflective of this increase in prices which involved in different industries, and therefore, inflation might impact these industries differently (Deegan and Unerman, 2006) .
4.2 Current cost accounting
Current cost accenting (CCA) is accounting in which assets are evaluated at the current market buying prices and profit is determined by allocated based on current costs (Frost et al, 2003). However, in this position; the question: why current cost is used? The answer might require a consideration of that kind of decisions that managers are faced during running a business. However, this approached was supported by Notable, Paton (1922), and Edward and Bell (1961), who did rejected both: the historical cost of accounting and current purchasing power accounting because CCA do consideration to the actual value (Deegan, 2001). The main concept of this approach that it differentiates between the profits which come from trading and those gains which is earned as a result of holding an asset. In other words, these profits are treated differently. In addition, this approach used the actual evaluation of assets which can be typically based on replacement costs (ibid).
According to Deegan and Unerman (2006), it is considered that holding gains as realized or unrealized. It can be treated holding gain or loses as income, if financial perspective is adopted with respect to the recognition of income. However, in term of providing further understanding of this approach, it is assumed that there are 150 items of stock required by an entity, at cost of £10.00 each. 100 items out of 150 were sold for £15 each when £12 for the replacement cost to the mentioned entity. Thus, under this approach, the operating profit would be £300 (100*(15-12)), and therefore, there would be a released holding gain on that items which were sold (ibid).
According to Frost et al (2003) the main criticisms of current cost is that the purchase price of an item is not the resalable value, as the real value is the logical expanses of a cost. On the other hand, the core downside of it that replacement cost might have little relevance, in case of an entity is not considering replacing an asset, and therefore, this replacement might not actually reflect the current value of the assets in question in the market(Deegan, 2001).
5. Conclusion
To sum up, theory is helpful to understand theoretical underpinnings in order to be possible to critical the same phenomenon, as the accounting is a social science ( which means that the accounting is a social practice as there is no particular measurement that it could be applied), and therefore, there is no particular truth in this field.
In accounting, there are different types of theories that accounting can be used for various purposes. These theories have developed in order to explain, describe, or predict how accounting is applied in different aspects, as well as how it should be.
Under the normative theories, Current purchasing power accounting (CPPA) and current cost accounting (CCA) are one of those approaches which discussed and treated the phenomenon of changing the prices and against the historical cost accounting. However, each approach of those has its strength and weakness as there is no any of those methods has universally accepted by professional accounting bodies.
