INTRODUCTION

Accounting is the art of collecting, analyzing, recording, summarizing, presenting,

and interpreting financial and operating information for use by management and

other users for decision making purpose.

The primary function of financial accounting is to provide relevant and reliable

financial information to users, both internal and external to the business enterprise.

The focus of financial accounting is on the information needs of investors and

creditors. These users make critical resource allocation decisions that affect the

nation’s economy. The primary means of conveying financial information to

external users is through financial statements and related notes.

For financial statements of businesses to perform their role of helping the external

users to make decisions there must be uniformity in their preparations. This is

normally ensured by accounting standards and principles.

THE NATURE OF ACCOUNTING STANDARDS

Generally accepted accounting principles – standards, as they are sometimes called

consist of the financial accounting and reporting conventions, rules and procedures

that a business enterprise must use in preparing external financial statements that

are subject to audit by an independent certified public accountant (Chasteen et al,

1995).

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Accounting principles are not like physical laws; they do not exist in nature

awaiting discovery by man. Rather, they are developed by man, in light of what

we consider to be the most important objectives of financial reporting.

Accounting principles are developed in so many ways. Sometimes an accounting

procedure becomes widely used over time by professional accountants. The

organisations responsible for developing accounting principles might recognize

the procedure and include it in Generally Accepted Accounting Practice (GAAP).

In other cases accounting standards result from a decision by the rule-making

organisation to adopt one alternative among several methods in practice.

Sometimes the rule-making bodies develop standards based on logic or deductive

reasoning because no clearly defined practices are being used to account for

certain transactions or events.

In many ways the (GAAP) are similar to the rules established for an organized

sport, such as football or basketball. For example, accounting principles, like

sports rules:

Originate from a combination of tradition, experience, and official decree.

Require authoritative support and some means of enforcement.

Are sometimes arbitrary.

May change over time as shortcomings in the existing rules come to light.

Must be clearly understood and observed by all participants in the process.

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IMPORTANCE

Generally accepted accounting principles help increase the confidence of financial

statement users that the statements are representationally faithful. They provide

companies and accountants who prepare financial statements with guidance on

how to account and report economic activities. And provide independent auditors

of financial statements with a basis for evaluating the fairness and completeness of

the statements.

GAAP are extremely important to independent auditors. An independent auditor’s

(certified public accountant’s) unqualified opinion about a company’s financial

statement asserts that the financial statements fairly present the company’s

financial position, results of operations, and cash flow in conformity with

generally accepted accounting principles

Financial accounting and reporting standards require many estimates, assumptions

and professional judgments by management and accountants. Calculations of

depreciation expense and estimates of uncollectible accounts receivable are two

examples. Personal bias, mis-assessment of facts, errors in estimation, and

ambiguity may affect the measurement and communication of economic events.

The potential for such factors to influence financial accounting information is not

surprising when one considers, for example, the significance of accounting

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information in wage negotiations, management bonuses bank lending decisions,

and other resource allocations.

Financial statements must have credibility to external users. In addition, given

accounting’s service nature, it is essential that the information in financial

statements be useful in decision making. The existence of standards or principles

for accounting and reporting is very important to the credibility and usefulness of

financial data. Without standards to guide accounting and reporting practice, each

accountant would, in effect, have to develop his or her own financial accounting

theory, practices and procedures. Under these circumstances, users of financial

accounting information would find reported information offered little help when

they had to make comparisons among competing uses of scarce resources.

Moreover, without standards, users would have little assurance of the credibility of

reported data. Historically, setting standards for financial accounting and reporting

has proven to be in the public interest.

According to Addo (2007), international accounting standards have the following

importance:

(i) Investors, both individuals and corporate, would be able to compare the

results of different companies internationally as well as nationally in

making investment decisions.

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(ii) Multinational companies would benefit from international standards for

many reasons including the following.

(1) Better access would be gained to foreign investor funds.

(2) Management control would be improved, because harmonisation

would aid internal communication of financial information.

(3) Appraisal of foreign entities for take-overs and mergers would be

more straightforward.

(4) It would be easier to comply with reporting requirements of oversees

stock exchange.

(5) Preparation of group accounts would be easier.

(6) A reduction in audit costs might be achieved.

(7) Transfer of accounting staff across national borders would be easier.

(iii) Governments of development countries would save time and money if

they could adopt international standards and, if these were used

internally, governments of developing countries could attempt to control

the activities of foreign multinational companies in their own country.

These companies could not ‘hide’ behind foreign accounting practices

which are difficult to understand.

(iv) It would be easier to calculate the tax liability of investors, including

multinationals who receive income from overseas sources.

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(v) Regional economic groups usually promote trade within specific

geographical region. This would be aided by common accounting

practices within the region.

(vi) Large international accounting firms would benefit as accounting and

auditing would be much easier if similar accounting practices existed

through out the world.

ACCOUNTING STANDARDS OVERLOAD

As mentioned earlier accounting standards are the regulatory framework that

governs the preparation of periodic financial statements of business organisations.

There are several of such standards in Ghana and international world. Each

industry seems to have its own regulatory document. In Ghana mention can be

made of such legislation as the Ghana National Accounting Standards, the

Companies Code 1963, Act 179, and the Incorporated Private Partnership Act,

1962, Act 152. Other legislations governing the financial reporting include the

following:

(i) Securities Industry Law, 1993 (PNDCL 333)

(ii) Securities Industry (Amendment) Act, 2000 (Act 590)

(iii) Banking Law, 1989 (PNDCL 225)

(iv) Insurance Law, 1989 (PNDCL 227)

(v) Ghana Investment Promotion Centre Act, 1994 Act 478)

(vi) Free Zones Act, 1995 (Act 504)

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(vii) Internal Revenue Act, 2000 (Act 592)

(viii) Stock Exchange (Ghana Stock Exchange Listing Regulations 1990), (LI

1509)

(ix) Stock Exchange (Ghana Stock Exchange Membership Regulations,

1991) (LI 1510) as amended (1993)

(x) Securities and Exchange Commission Regulation 2003 (LI 1728).

Each of these frameworks sometimes gives contrasting views of how certain items

must be treated.

Accounting principles also somewhat vary from country to country. The phrase

“generally accepted accounting principles” (GAAP) refers to the accounting

concepts in the United States. Great Britain and many other countries also have

their own standards. Great Britain, for instance, uses the Statement of Standard

Accounting Practice (SSAP). Even though these standards from different countries

have many things in common they sometimes differ in the way certain items are

treated. For instance in Germany, the amortization period for an intangible asset is

five years. In the United States, a maximum period of forty years is allowed. In the

Netherlands, assets are valued at their economic worth or replacement value. In

the United States, assets are generally valued at historical cost. In Japan, income

smoothing is permitted because firms are allowed discretionary charges to income

for such items as depreciation and bad debts. In the United States, arbitrary

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charges to income are not permitted. These are just some of the ways in which

reporting practices in the United States differ from reporting practices in other

countries (Kieso et al, 1987).

Because these differences exist, it is often difficult to make comparisons among

enterprises. Many believe that this lack of standardisation inhibits the free flow of

capital across borders and often prompts international investors to demand

unnecessary risk premiums. In addition, many contend that differences in

reporting standards can lead to unfair competitive advantages.

Most companies recognize the need for more uniform standards. As a result, the

International Accounting Standards Committee (IASC) was formed in 1973 to

attempt to narrow the areas of divergence. Because the objectives of financial

reporting in the United States often differ from those in other countries, the

institutional structures are often not comparable, and strong national tendencies are

pervasive, such narrowing will not be easy.

DEFINITION OF ACCOUNTING THEORY

Accounting theory may be defined as a logical reasoning in the form of a set of

broad principles that (1) provide a general frame of reference by which accounting

practice can be evaluated, and (2) guide the development of new practices and

procedures. Accounting theory may also be used to explain the existing practices

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to obtain a better understanding of them. But the most important goal of

accounting theory should be to provide a coherent set of logical principles that

form the general frame of reference for the evaluation and development of sound

accounting practices (Hendriksen, 1992).

APPROACHES TO THE DEVELOPMENT OF ACCOUNTING THEORY

The complex nature of accounting phenomena and issues results in the fact that no

single methodology of accounting will be sufficient in finding solutions to

accounting problems. Consequently, the choice of the most appropriate theory

depends of how well it supports the development of procedures and techniques

that best fulfill the objectives of accounting. Since there is no single

comprehensive theory of accounting, various accounting theories of a middle

range have resulted from the use of different approaches. Some of the

methodological techniques or approaches to the development of accounting

theory, which are known as the traditional approaches, include the following:

Deductive, Inductive, Ethical, Behavioral, Sociological and Welfare approaches

Deductive Approach

The deductive approach to the development of accounting theory starts with the

proposition or postulates and derives logical conclusions about the situation. When

used in accounting, this approach starts with the basic premises and then makes

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accounting principles out of them. The deductive approach starts from the general

to the specific situation. The steps used in developing accounting theory by this

approach are as follows:

(1) Specifying the objective of financial statements.

(2) Selecting the “postulates” of accounting.

(3) Deriving the “principles” of accounting.

(4) Developing the “techniques” of accounting.

The formulation of objectives is very important in the deductive approach because

different objectives might require entirely different structures and result in

different principles and techniques. Essentially, accounting theory should be

flexible enough to provide the needs of different objectives but rigid enough to

provide for some uniformity and consistency in financial reporting to shareholders

and the general public.

Inductive Approach

The inductive approach to the development of accounting theory begins with

observations and measurement and move towards generalized conclusions. When

used in the development of accounting theory, the inductive approach stars with

the making of observations about financial information of an enterprise and moves

on to the construction of generalizations and principles of accounting. This

approach starts from the particular to the general. The inductive approach to the

development of accounting theory involves the following four stages:

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(1) Recording all observations.

(2) Analysis and classifications of these observations to detect recurring

relationships (“likes” and “similarities”).

(3) Inductive derivation of generalizations and principles of accounting

from observation that depict recurring relationships.

(4) Testing the generalizations

Through this process, new ideas and principles can be derived, particularly if the

observer does not let himself to be influenced by current principles and practices.

The advantage of the inductive approach is that it is not necessarily constrained by

a preconceived model or structure. The researcher is free to make any observation

he may deem relevant. But once generalizations or principles are formulated, they

should be confirmed by the logical process of the deductive approach.

CONCLUSION

To sum up, accounting standards can be described as the guidelines that have been

developed to govern financial reporting of companies. They are not discovered but

developed to meet the needs of society. Accounting standards are important

because they provide financial statements with uniformity, comparability, and

credibility. However, accounting standards overload has made the presentation of

financial statements quite difficult. Ghana’s adoption of the IFRS is a good step

towards the rationalisation of its standards to meet international requirements.

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Accounting theory may be developed through several approaches including the

deductive and inductive approaches. The deductive approach starts from the

general and moves to the specific while the inductive approach starts from the

specific and moves to the general.

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REFERENCES

Kieso, E.D. and Weygandt, J.J. (1983) Intermediate Accounting, 4th ed., New York: John

Wiley & Sons.

Kieso, E.D. and Weygandt, J.J. (1987) Intermediate Accounting, 6th ed., New York: John

Wiley & Sons.

Chasteen, G.L., Flaherty, E.R., and O’Connor, C.M. (1995) Intermediate Accounting, 5th

ed., New York: McGraw-Hill.

Hendrksen, E.S. (1982) Accounting Theory, 4th ed., Richard D. Irwin.

Hermanson, R.H., Edwards, J.D., and Maher, W.M. (1992) Accounting Principles, 5th ed.,

Boston: Richard D. Irwin Inc.

Meigs, F.R., Meigs, A.M., Betner, M. and Whittington, R. (1996) Accounting The Basis

for Business Decisions, 10th ed., New York: McGraw-Hill.

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