ACCOUNTING THEORY

UNIVERSITY OF ATLANTIC
2018-2
 DEFINITION OF THEORY

To understand what Accounting Theory is, you must first

know the definition of theory.
(gr. theory)
• Purely rational speculative knowledge

• Set of knowledge that gives the complete explanation

of a certain order of events

• Systematized set of opinions and ideas The term

“accounting theory” is very extensive to define, since
there are many and varied ways of seeing it by
accounting scholars, however the American
Association of Public Accountants defines that:
“Accounting theory is a set cohesive " hypothetical
and pragmatic conceptual propositions that explain
and guide the action of the accountant in the
identification, measurement and communication of
economic information" that is, it tries to explain and
predict the phenomena that arise in the practice
accountant.
NIF A-1 states that the theory of financial
accounting is the application of reflective thinking
about what happens in practice, in order to obtain
propositions that serve as a frame of reference in
the issuance of financial information. The generally
accepted accounting principles at a given place and
date constitute, therefore, the theoretical basis for
issuing financial information.”
What is accounting theory actually used for?

The answer is very clear, since in reality what the

accounting profession is based on is the
application of paradigms that are verifiable,
applicable, useful, but most importantly that they
are durable and explain any economic situation .
Accounting theory has a great impact on the
application of accounting within organizations,
since this is the main tool to solve possible changes
that may arise in the future economic reality, thus
giving the accountant a new perspective in which
he must base your new responsibility against to the
company.
At this point, the development of accounting
thought and the understanding of scientific
language itself cannot be overlooked, thus
“Mattessich considers accounting as an applied
science that pursues a practical goal such as
measuring the factors of wealth in an economic
entity” (Mejía, 2005, 140),
Accounting is considered a true science, of a social
and applied nature, therefore it requires an
interdisciplinary level when encountering other
scientific disciplines in its pragmatic management.
The development of accounting theory, with which
progress is made in the scientific discourse of
accounting, with an increasingly specialized
language and conceptual bases for the construction
of coherent accounting theory
Does accounting theory exist or not?

Rather than denying or affirming this question,

what is proposed is a constructivist search
proposal.
Fundamental elements are recognized:
- knowing subject
- Object to know

Ricardo Lucio states: “in perception the subject

organizes or constructs the perceived object.”

Accounting subject?
The public accountant appears as an agent; beings of
flesh and blood who at some point in history were slaves,
friars, recording artists or professionals of different
knowledge.
 Study object
From a generic point of view, an object is
understood as everything that is a matter of
consideration or knowledge by the subject.

The formal object of accounting focuses on

qualitative and quantitative knowledge of
economic reality.
The material object of a science is: the
set of issues that in general terms are
the subject of that science
With the decomposition of the object of
knowledge into material and formal, it can be
stated that Accounting can answer two questions:
• What do you know?: material object (heritage,
wealth, control, in a dynamic sense).
• How do you know it?: formal object (set of
theories, principles, procedures, techniques,
methods and standards that explain its material
object).

Accounting principles generally

accepted
Set of basic concepts and rules that must be
observed when recording and reporting
accounting on the affairs and activities of
natural or legal persons" (Article 6 of Law 43
of 1990)".
Economic
Entity

Recognizes the company as an economic unit with

identity own,
independent of the owners or partners. It implies
that the company's assets are separate from the
personal assets of the partners. ( Types of
companies )
Continuity
This principle assumes that the financial statements
presented belong to a going concern , which will continue
its operations for an indefinite period of time. However, it
is necessary to demonstrate it through the planning of
operational and strategic activities. In the event that there
is uncertainty or indicators that warn of the possibility of
not continuing to operate, the accounting information must
disclose it.
Unit of measurement

Because the accounting refers to goods with economic

value, it must be expressed in a functional currency,
that is, in the monetary unit of legal tender of the
country.
 Accounting period
The life of the company is divided into uniform
periods in which it must present its financial
statements, as well as comply with legal provisions.
Any accounting information must expressly indicate
the period to which it refers. This period must be at
least 12 months , generally the school year is used,
which is why most companies close on December 31.
It is also known as accounting year or economic year.
Valuation or measurement

It is the way to quantify economic resources and facts

monetarily. The most widely used criterion is the
historical value or cost, although other criteria can
also be used such as the current or replacement
value, the realizable or market value and the present
or discounted value.
 Accounting Processes
Historical value or cost is that which represents the
original amount consumed or obtained in cash, or its
equivalent, at the time of carrying out an economic
event.

Current or replacement value is the amount that

represents the amount in cash, or its equivalent, that
would be consumed to replace an asset or would be
required to settle an obligation, at the current time.
(Art 72 ET asset value)
 Realization or market value is what represents the
amount in cash, or its equivalent, in which
waiting for an asset to be converted or a liability to be
settled, in
the normal course of business. (Law of market supply and
demand)

Net realizable value (IFRS 13) Inventories is understood to

be the result of deducting from the market value the
expenses directly attributable to the conversion of the
asset or the settlement of the liability, such as
commissions, taxes, transportation and packaging.
VNR Example
We have a product in progress, which is estimated
to be able to be sold as a finished product at the
end of its useful life for 10,000 pesos. In order to
sell it we estimate that we will have to incur 1000
pesos to be able to advertise it. The costs
necessary for its completion are 3000 pesos.

Net realizable value = 10.000 – 1000 – 3000 =

6,000 pesos
Present or discounted value is the value that
represents the current amount of net inflows or
outflows in cash, or its equivalent, that an asset or
liability would generate, once its future value has
been discounted at the agreed rate.

Suppose that $1,000 will be received after a

year. If the opportunity cost of funds is 7%, the
question is: what sum of money today will equal
$1,000 after one year at 7% interest?
VP = K / (1 + r)n

PV = $1,000 /1.07 = $934.58

Similarly, the present value of $1,000 that will be

received two years from now is equal to:

$1.000 /(1,07)2 = $ 873,44

 Essence over form: In accounting terms,
economic reality must prevail over legal
formalities, that is, it is the real consequences
that must predominate over the legal condition
of an operation.

Realization: Only transactions or economic

events carried out are counted, that is, those
that can effectively be verified and measured.
Association: Requires the registration, during the
same period, of the income received and the
expenses incurred to obtain that income.

Asset maintenance: Refers to the profit obtained

from operations, once all necessary deductions and
adjustments have been made. (ENG- COSTS and
EXPENSES)
Full disclosure: Concerns the presentation of
financial information, which must be shown
through concise and clear financial statements,
where the economic and financial situation can be
correctly appreciated.
The disclosures in IFRS are included in the same
notes to the financial statements.
Relative importance or materiality: Common
sense prevails in this principle, according to which
greater importance should be given to the facts
that warrant it, either because of their material
importance, as in the case of fixed assets, or
because of their relative importance, What is cash
like? That is, the impact that an event produces on
assets, liabilities, equity or results is weighed, in
addition to considering the possible consequences
of decisions in this regard.
Prudence: It is put into practice when there is
doubt in the measurement of an economic fact. In
this situation, the most conservative option must
be chosen, in terms of avoiding an overestimation
of assets and income or an underestimation of
liabilities and expenses. This principle puts the
moral and professional quality of the accountant at
stake, because it can give way to what has been
called creative accounting, the result of
malpractice in the makeup of accounts , with the
aim of generating complacent financial
statements. to interests individuals.
 IFRS GAAP and SFC Nonnas

It is based on PRINCIPLES and very few rules that According to the Ait. 1 of Decree 2649/93. The
are issued by a single Governing Body. conceptual framework includes a set of basic
International Accounting Standards Board IASB concepts and RULES that must be observed when
made up of more than 100 countries. recording and accounting for the affairs and
This organization has as its fundamental objectives: activities of natural or legal persons.
1. Formulate and publish accounting standards to In summary: It has a Mandatory Legal nature
be observed in the presentation of financial because 2649 of 1993 is a legal norm and these
statements. principles lead the legal system.
2. Work to improve and harmonize regulations,
accounting standards and procedures relating The legal system in Colombia states that accounting
to the presentation of financial statements. is a commercial issue and must be regulated by the
Commercial Law. Therefore, based on the
This Conceptual Framework is not an International regulations in the Commercial Code and Law 190
Accounting Standard, and therefore does not define of 1995
rules for any particular type of measurement or
presentation.
It is based on norms or RULES that arise from the
Law and specific instructions issued by various
government entities.
 ACCOUNTING PRACTICE
“ Every generally accepted principle is born from
practice”, this is the basis and starting point from
which accounting practice takes its foundations,
since this is a utilitarian activity that provides
immediate solutions to problems that arise without
the slightest theoretical base, resulting in a set of
formulations lacking structure, it can thus be
established that: accounting practice is sustained by
experiences that satisfy economic needs
and that are made known and enter a process of
acceptance by the people who handle the
accounting technique .

When evaluated, they are collected or rejected,

perpetuating themselves if by the common
consensus of the people they are legalized through
formal processes or, on the contrary, if they are
insolvent and inapplicable, they are discarded and a
new selection process begins.
The accounting practice in this case is what forms
the theoretical part of accounting , since it
successfully explains the economic and social
reality by basing what is currently known as the
generally accepted accounting principles, which
are the rules that will govern and guide to the
practical accountant in the performance of his
work.
Accounting theory and practice

Accounting has taken a new direction in recent times,

the information obtained from financial analysis has
made it acquire greater importance day by day in the
structural organization of companies. The accountant
has acquired greater responsibility in making decisions,
this forces him to create new techniques to improve his
performance in predicting economic phenomena, but
for this he must have excellent training in accounting
practice and a great investigative spirit. to prepare and
train you as a comprehensive professional
When there is a fragmentation between theory
and practice, the foundations of the profession
tend to weaken. You can think about changing the
entire theoretical compendium, but in reality the
problem could be the teaching methodology in
the accounting discipline. .
When the aim is to teach the accounting
fundamentals on the basis of a purely application
technique in which processes are mechanized on
a principle, the future professional will be more
concerned with the practical than with the
foundation of the process itself, " More in doing,
than in know". The accountant trained under this
vision will be poorly prepared to face the changes
presented by the economic reality, since he will
not have the basis to interpret them correctly,
remaining subject only to accounting regulations.
When you opt for research and theoretical
teaching, greater effort is required, since
accounting is not taken as a set of standardized
rules, but as “A set of epistemological
foundations of rules, knowledge that is applied to
a case.” concrete to obtain a standard." The
accounting professional who is trained with this
conception will be able to accept or reject
certain norms or rules and even create new
techniques that over time could become, why
not, generally accepted theories .
What is wanted is that both theory and practice
must be accompanied, they must cohere to form
a single strong criterion with which the economic
reality of organizations can be explained as much
as possible and that facilitates decision making.