Critical Evaluation on the Need of Accounting Theory

Critical evaluation on the need of the Accounting
theory
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Table of Contents
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Introduction.................................................................................................................................................3
Brief evaluation of accounting theories.......................................................................................................3
Overall evaluation of the need of the accounting theory............................................................................3
Conclusion...................................................................................................................................................7
References...................................................................................................................................................9
Introduction
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This paper is offering a critical evaluation of the need of three accounting theories based on the
book naming Financial Accounting Theory written by Craig Deegan and Jeffrey Unerman under
the publication of McGraw-Hill in its 2012 second edition. The primary focus of our evaluation
is to accept the need of the accounting theories or completely rejecting the idea of the need of
accounting theories. The major reason for such evaluation is that accounting is actually a
practical subject, but still accounting theories prevail. Hence it becomes important to understand
that whether they are at all relevant or not (Alieid, 2016).
The three major accounting theories as discussed in this critical evaluation based on the above
referred book are two normative theories like True income theories and decision usefulness
theories, one positive theory that is Agency theory. These theories will help in understanding the
importance as well as the need of the accounting theories in the regular work.
Brief evaluation of accounting theories
The first theory is the Income theory which says that at first it is role of accounting that is to be
decided and only thereafter to decide about the best measure of ascertaining profit. Until and
unless the role of the accounting is defined we cannot decide about the best measurement of the
profit (Alexander, 2016).
It is one of the normative theories that is aimed at providing the prescription as to what to do for
measuring the profit and it is a sort of stipulation.
The second theory is the decision usefulness theory which says that there are various users of the
accounting information; hence it becomes the duty to ask first to those users that what
information they want and thereafter think about supplying the same. Again it is to be kept in
mind that these users are actually the decision makers in their own field (Bizfluent, 2017).
The third theory is the agency theory which talks about the relationship between principals and
the agents, i.e., shareholders and the managers. As per this theory it is being explained that why
selecting a particular accounting method is a matter for consideration. At the same time the
organization has to bear the various costs like monitoring costs, bonding costs and residual costs
for maintaining such agency relationship (Choy, 2018).
Overall evaluation of the need of the accounting theory
There is no doubt here that accounting is a human activity, but the study of financial accounting
without having the knowledge of theories of accounting seems to quite irrational as it is the
accounting theories which consider the implications of the accounting information on the
behavior of the human being r in other words they explain why accounting theories are
important.
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