Question 1
(a) Explain the differences of developing a theory by induction and developing theory by
deduction in terms of the theory development.
Inductive theory development
Induction theory development is a way to explain a set of particular facts,
organize the observational evidence for a general proposition to form a theory. In
short, the theory that is developed based on induction reasoning is a result of
undertaking a series of observations of particular events, and the basis of these
observation is developed. This theory mainly observes what actually happened in
the organization and relying on real-world observation and not based on logic.
For example, early theory of the accounting such as the accounting theory
will often developed by observing what accountant will actually doing in the practice
in 1960. This is will lead to formulation of accounting concept and convention.
Deductive theory development
Deductive theory is mostly use as a way to explain a set of particular facts
based on logic mind of theorist rather than observations. The logic will provide
prescription or suggestions about what people should performed. It also not driven
by existing practice of what accountants should do.
Deductive theory will be based on what the researcher believes that should
occur logically in particular circumstances. The research was not based on existing
practices, but it was based on the deductive nature which is the logic argument of
the theories that have the intention on developing new methods of accounting or
prescribe a particular approach on new methods in doing thing.
Sometimes, the theory using deductive reasoning will be called as normative
theories. We can de’ne this theory which are using ‘deductive approach where they
believe the researchers will develop based on norms or values. They will develop a
basis or theory in telling or informing people what to do.
A way to explain a set of particular facts – observational evidence – such as a result
of undertaking a series of observations of particular events – theory is developed –
explain early theories of accounting
** cannot answer in table form
Deductive
– seek to explain a set of particular facts – depends on logic rather than
observations – suggestions
– Based on what the researcher believes should occur (logically) – not driven by
existing practices – logic deduction – develop new methods
–
(b) Give an example each on accounting theories developed by induction and deduction.
Induction theories
The example of inductive theory is a research commissioned by the American
Institute of Certi’ed Public Accountants (AICPA) which developed by Grady in year
1965. The research paper formed the basis of APB Statement No 4 ‘Basic Concepts
and Accounting Principles Underlying the Financial Statements of Business
Enterpriese’ which will re7ect the generally accepted accounting principles at that
time.
Induction approach involving observing many accountants from di8erent
types of business or location. Generalisation is found in this theory such as the
concept of conservatism or prudence concept is developed after observing what
accountant did in the practice. This common practice will then codify or organize as
a theory called conservatism concept of accounting theory.
Deduction theories
The example of deductive theories is the conceptual frameworks which
provide persecuted about issue of the qualitative characteristics that ‘nancial
information should possess, the identi’cation of the types of entities that should
produce general purpose ‘nancial reports and more. The conceptual framework will
be providing prescription telling people what should do and this was considered as a
normative theory.
Another example is the research studies done by Moonitz & Sprouse. AICPA
commission Moonitz & Sprouse to conduct a research paper about the accounting
measurement. This is because historical cost was considered to be outdated during
that time. Hence, AICPA would like to ‘nd out what is the opinion of theories and the
way to improve by implement any new method. They are proposing new
accounting measurement system and proposed to change from the historical cost to
current cost. This research that written by Moonitz & Sprouse is not based on actual
current practice. Hence, the research paper was rejected by AICPA after they send
to AICPA for review purpose. This is because it is extremely different from the
current practice.
UK accounting environment
IASB – Develop Conceptual Framework (objective) which lead to consistency in
accounting standards
Positive theories
The theory developed during the 1970s is the positive theories. Positive theories are developed at
the later stage in term of theory development which has been shifting from informing in the
normative theory to explaining and predicting accounting practices by using hypothesis. As the
inductive theories didn’t encourage address the most suitable behavior in certain circumstances,
