### *DOWNLOAD PDF AND READ NOTES* *AN INTRODUCTION TO ACCOUNTING THEORY*

WHAT THEORY?
IS Accounting theory is about theory. How does theory differ from a law and from a hypothesis? A theory is an explanation, but not just any explanation. A theory asserts that wherever a set of circumstances occur, a similar result will be seen. For example, suppose someone has a theory of speeding. It goes like this. Whenever a car is driven over the speed limit, the probability of an accident greatly exceeds the probability of an accident for cars driven below the limit. In plainer language, the theory says speeding drivers are more likely than regular drivers to have accidents. This is a proper theory, because it applies to any car anywhere there is a speed limit. Also, a proper theory can be tested for its accuracy against the known facts. The facts here would be the number of accidents recorded in a particular jurisdiction, the number of cars driving over the limit and also the number under the limit associated with recorded accidents. As a matter of fact, accidents will generally show an association with speeding or they will not. If they do, the theory is supported by the facts. If they do not, the theory is not supported; but it is still a theory – just not a correct one. A theory makes general statements, either of cause and effect or of association between two things, and a theory is testable against facts. A theory need not be right every single time, but it does need to be right often enough to be rely on most of the time. It differs from a law which needs be right all of the time; else it is not a law but still a theory. A law is always right. A theory is usually right.
HYPOTHESES Inside theories there are postulates. As atoms are to molecules, so postulates are to theories. Postulates we can test in real life are called hypotheses. Formulating a hypothesis is called hypothesizing. For example, I could hypothesize that if I sneeze, I will blow my nose. This is not a good hypothesis, because, since it only refers to me, it can tell us nothing about the world in general. A better hypothesis would be: whenever people sneeze, they blow their noses. Hypotheses should apply to a whole class of people, not just to one person. In social science, hypotheses are tested in their negative form. In the nose blowing case, the hypothesis would be: whenever people sneeze, they do not blow their noses. This form of the hypothesis is called the null hypothesis.
New theory is created when the null hypothesis is wrong and instead the facts support the positive form of the hypothesis. That support has to come from repeated observations of many different samples, so we can be sure we are looking at most of the ways that the circumstances occur in real life. If the results of all those observations show a pattern happening far more often than chance would predict, then the null hypothesis is not supported and the alternative, the positive hypothesis, is supported, which means our hypothesis is likely to be correct. That in turn builds a little bit of good new theory.

THEORIES, LAWS AND THEOREMS A theory is not a law – it is sometimes wrong. It is also not a theorem. Only mathematics has theorems, because only in the abstract world of algebra, geometry and numbers can we transcend the assumptions and approximations of the real world. In geometry we have Pythagoras’ Theorem that you probably had to learn in school it says the length of the hypotenuse of any right angled triangle is the square root of the sum of the squares of the lengths of the two other sides.
A theory would add, other things being equal. A theorem is a special kind of law. It is always true and has no exceptions. In addition it has “all particulars included” which means there is nothing left out of the theorem and its specifications are exact not approximate. Nothing left out means everything else is irrelevant such as the size and colour of the page, the thickness of the lines drawing the triangle or the size of the other two angles beside the corner right angle. Theories on the other hand are rarely fully specified in this way – they tend to be simplifications of real patterns focusing on the most important patterns but not extending to all the patterns. So with a theory of cause and effect, such as A causes B, it may be true but it is not exhaustive. M N and O might also have some effect on B. A might also cause X Y and Z. A theorem on the other hand is exhaustive.