Deductive Reasoning In Accounting

Reasoning style is of great significance for theorizing. Developing a theory of accounting was initially based on induction, i.e. forming ideas or theories through observation. From 1920s to 1960s, the accounting theories were commonly based on the observation of what the accountants did in practice, that is, they were formed based on the induction process. This contrasts the method which forms theories based on deductive reasoning which relies on using logic instead of observation. Referring to using observations in developing generalizable theories (inductive reasoning) after observing what accountants do in practice, the common practice turns into accounting doctrines or conventions (e.g. conservatism doctrine). The significant theories

First the AAA was established with 20 propositions regarding costs, values, income, and capital and surplus (AAA, 1936). This was not a comprehensive financial accounting theory, it was merely a theoretical review of some of the specific accounting practices using a deductive approach. This statement strengthened the conservatism and historical cost accounting principles and supported a comprehensive concept of income. Later on, Paton and Littleton extended the 1936 statement of AAA (Paton & Littleton, 1940). It can be claimed as the first institutional attempt to develop a theory of accounting and it is certainly the first conceptual framework of accounting standards. The statement enjoyed an inductive approach towards accounting theory and provided an explanatory framework for accounting based on historical cost. Notions such as entity, going concern, historical cost, and the conformity of these concepts was explained in chapters of the statement on costs, income, benefit, and surplus by Paton and Littleton. Nevertheless, the professionals and academicians were not convinced by Paton and Littleton 's entity concept. The significance of their study is manifested in the fact that most of its basic and fundamental ideas are still present in the conceptual framework and standards of modern day

The history explained here, introduced two kinds of theories and theorists, the first referring to individual efforts for explaining and predicting how the profession of accounting works. These replaced from inductive studies on pragmatic procedures, to imperative prescriptions that became competitive and finally put aside as non-practical, and along with empirical observations of what is done in practice. The result of such a theory was lack of success in challenging the problems related to the conventional practice. The second kind of theory and theoretician related to the basic conceptual framework that supported the conventional practice