Financial Accounting Theory

At present, financial accounting standards are established and propagated on the basis of two key conceptual structures, namely, Financial Accounting Standards Board (FASB) and International Accounting Standards Boards (IASB) (Cong 2013). This essay will discuss and justify that accounting theory played a role in setting of accounting practices but it played no significant role in setting of accounting standards. Rather, several accounting standards were set by the conceptual frameworks formulated by the accounting standards-setting groups. Several examples will be presented for supporting the arguments. There is need to analyze and justify the evolution of accounting theory to conceptual structures because accounting standards play a vital

According to FASB and IASB conceptual structures, a conceptual framework is defined as a framework which places concepts that motivated the formulation and demonstration of financial statement to be viewed and used by external users. Generally, conceptual frameworks are employed for organizing reality into groups that facilitate individuals to manage complication for making it more comprehensible. The significance of conceptual framework rises when any described phenomenon are not obvious (Spraakman and Jackling 2014). Development of accounting theory in Germany. During the onset of 20th century, the accounting theory was developed significantly by Germany (Hoffmann and Detzen 2013). There are some factors which highlighted the contrast between accounting in the United Kingdom language arena and that of Germany. These factors include significance of accounting theory and formation of an academic basis for accounting practice. In UK, there was more stress upon importance of accounting practice, whereas, in Germany, accounting theory was conventionally more emphasized (Knauer and Wömpener

Accounting theory advanced in the United States when William Paton wrote the book ‘Accounting theory’ in which he introduced various assumptions that were basically the core principles of financial accounting. Similarly, John Canning presented a hypothetical structure which assessed assets and determined the accounting profit. This approach was analogous to the static approach of accounting theory that was presented in Germany by Schmalenbach. All of these studies substantially affected the advancement of accounting theory in the United States (MAHONEY 2009). A.C. Littleton also majorly affected the accounting theory since he had previous knowledge of German accounting theory’s dynamic approach. Littleton debated that accounting’s main objective is to reduce the account. According to him, the accomplishment of this objective is challenging if accounting measurements are based on market values. Thus, he prohibited the usage of market values since he considered value as a subjective entity that cannot be measured authentically. He also preferred the usage of future prices over labor costs (Littleton