Accounting Theory

Which research methodologies are used in formulating an accounting theory?

“ The divergence of opinions, approaches and values between accounting practice and accounting research have led to the use of two methodologies, one descriptive and the other normative”-Belkauli, “Accounting Theory”.

 The research sequence follows the cyclical patterns in the following manner:

In this sequence, the mode is sometimes deductive, while at other times inductive.

Like in the other discipline, a methodology is required for the formulation of an accounting theory. Two primary methods of reasoning are applied in research:

(i)                  Inductive approach and

(ii)                Deductive approach.

            

(i)                Inductive Method:

The inductive method involves reasoning from the particular to the general. It is the process of drawing generalized conclusion from detailed observation and measurements. If recurring relationship can be found, the generalization can be formulated. 

For example, if every cow which we have observed eats grass, by induction, we may induct that all cows eat grass.

Figure: Example of an inductive approach

The advantage of inductive approach is that it is not necessarily considered by a preconceived model or structure. The researchers are free to make any observation they may deem relevant.

(ii)                Deductive Method: The deductive method involves reasoning from the general to the particular. According to Hendrick, “The deductive method of reasoning in accounting is the process of starting with objectives and postulates and from these deriving logical principles that provide the basis of practical application.

For example, from the general proposition that all cows eat grass, we may deduction that some cows eat grass.

   

Figure: Example of a deductive approach

The structure of deductive process should include the following:

(i)                  The formulation of general or specific objectives of financial report;

(ii)                A statement of the postulates of accounting concerning the economic, political and sociological environment.

(iii)               A set of constraints to guide the reasoning process.

(iv)              A framework in which ideas can be expressed and summarized.

(v)                The development of a set of definition.

(vi)              The formulation of a generalizes statement and

(vii)             Finally the application of the principle to specific situation and establishment of the procedures.

                   A= L + P

  One of the main advantages of the deductive method is that if any of the postulates and premises are false, the conclusion may also be false.