Accounting Theory

What is Accounting Theory?

Accounting theory is a set of frameworks, assumptions, and methods that are used in the application and study of financial reporting principles. The accounting theory study comprises a review of essential practicalities of accounting practices.

These practices are altered and added to the supervisory framework that regulates financial reporting and statements.

Nature of Accounting Theory

All accounting theories are assured by the theoretical framework of accounting, which is provided by a specific entity to outline and establish primary objectives of financial reporting by both public and private businesses.

Furthermore, accounting theory can also be regarded as the logical reasoning that helps to assess and guiding practices of accounting. Not just that, but it also helps develop new methods and procedures.

One essential aspect of this theory is its usefulness. In the corporate world, all financial statement should have crucial information that readers can use to make informed and cautious decisions for businesses.

Moreover, accounting theory is flexible to produce adequate information, despite the noticeable changes in the legal environment. Along with that, the theory also states that all of the data should be consistent, comparable, reliable and relevant.

Lastly, the theory needs that all financial and accounting professionals should operate under four different assumptions:

• A business should be a separate entity from its creditors and owners
• The company should continue to exist and should not come under the list of bankrupts
• All of the financial statements should be prepared with rupee amounts and not any other numbers such as production units and more
• All of the financial statements should be prepared either on a monthly Basis or annual basis

Special Approaches to Accounting Theory

Surprisingly, accounting has been in existing since the 15th century. Since then, both economies and businesses have significantly evolved. Accounting theory is a consistently evolving subject and must be adapted to newer ways of business, latest technology and other aspects of reporting mechanism.

For instance, there are organizations and entities that help create and alter practical applications of this theory through modifications to the reporting standards. And thus, companies and larger organizations are obligated to adhere to these changes while creating their financial reports and statements.