REPORT 1

ADVANCEDFINANCIAL REPORTING

ACCOUNTING THEORY (INDUCTIVE APPROACH)

Accounting theory can be defined  (Hendrickson): as a set of broad principles that provides a frame of reference by which accounting practices can be evaluated and guides the development of new practices and procedures.

There have been many approaches to accounting theory over the years, ranging from the classical methods of inductive and deductive reasoning, ethical, sociological, and economical approaches to the modern approaches of the positive and normative accounting theories.

This report will be focusing on the positive method of theory which is the inductive approach, stating its strengths, weaknesses and limitations.  A comparison will be made to the deductive theory in order to gain an insight into the inductive theory, thereby enabling us to understand how it has contributed to the development of

existing accounting practices.

The inductive theory is a logical reasoning that a general law exists because particular cases that seem to be examples of it exist. In other words the inductive approach looks at accounting in practice as the particular and forms a general theory that suits this practice by analysing recurring relationships.

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The nature of the inductive approach takes form in the following stages:

  1. Observation and recording of all observations
  2. Analysis and classifications of these observations to detect recurring relationships.
  3. Inductive derivation of generalisations and principles of accounting from those observations that depict recurring relationships.
  4. Testing of the generalisations.

From the stages of the inductive approach, we can see that during the process of induction, you begin with some data and determine what general conclusions can be logically derived from those data. There is not one theory that can be considered as the best since ...

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