The nature of the inductive approach takes form in the following stages:
- Observation and recording of all observations
- Analysis and classifications of these observations to detect recurring relationships.
- Inductive derivation of generalisations and principles of accounting from those observations that depict recurring relationships.
- 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 accounting theory cannot be narrowed down to a certain approach. It should therefore be noted that this approach has its strengths and weaknesses in current accounting practices.
An inductive theory is derived from factual, empirical observations and therefore it is very descriptive. It describes what reality is like and therefore the truth and falsity of the propositions does not depend on other propositions, but must be empirically verified.
The inductive approach highlights where changes are most needed as well as where they may be feasible, it does this by deriving goals that are implicit in the behaviour of an existing accounting system.
The theory itself cannot be deemed entirely flawless since it has some flaws which
make it impractical in its prescribed form.
The inductive approach is very reactionary in attitude and therefore cannot provide a basis upon which current practices may be evaluated or from which future improvements may be deduced.
A weakness of the approach is that it assumes that what has been done by the majority is the most appropriate practice. For example the theorists (Ijiri, Patton etc) in favour of the inductive approach believe that the historical cost accounting which is based on past events is the best accounting convention that should be used in the valuation of assets and liabilities. Likewise the inductive approach cannot be used to determine whether a company is going to be bankrupt in the future. It should therefore be noted that the inductive approach is very biased and hard to change.
The theory explains how but not why; for example, it shows the relative relationship between security prices and accounting methods but it does not explain why management may choose a particular method.
When discussing the inductive approach we may need to contrasts it with deductive theory in order to have an insight of the theory we are dealing with. One of the main differences between these theories is that while the inductive theory is driven by observations, it never approaches actual full poof of theory. Accounting propositions that result from the inductive approach imply special accounting techniques only with high probability.
On the other hand, accounting propositions that result from the deductive approach lead to specific accounting techniques with certainty. The deductive theory gives absolute proof but it never makes contact with the real world. There is no place for observation or experimentation and there is no way to test the validity of the premises.
The inductive approach has contributed and influenced current accounting frameworks which exist in practice in the U.K. these contributions include the following:
SSAP 2: this has been replaced by FRS18 and was issued as means of disclosing accounting bases used in arriving at the amount attributed to significant items depending on judgements of value or estimates of future events.
SSAP 9: this accounting framework was issued with the following objectives:
- to narrow the areas of difference and variation in accounting practice on stock and work in progress; and
- To ensure adequate disclosure in the accounts.
Historical cost accounting: the traditional method of accounting for profit and other balance sheet.
FRS 1: the financial reporting standard 1(Revised 1996) cash flow statements requires reporting entities within its scope to prepare a cash flow statement in manner set out in the FRS
All the accounting frameworks above are related to the inductive approach, since they all have an existence in the real world.
In conclusion accounting theory cannot be narrowed to a certain approach but should guide accountants in providing summary of the financial activities for the year. Therefore the inductive approach can not be described as the best approach in accounting theory since in order to develop accounting principles a combination of approaches may have to be used.
An example of this could be the deductive and inductive approach. This is because when Littleton an inductive theorist and Patton a deductive theorist collaborated, the results were of a hybrid nature thereby indicating a compromise between the two approaches.
BIBLIOGRAPHY
Research article on theory
Bromwich, M.(2001), the ACCA/BAA Distinguished Academic 1999 Lecture- Angels and Trolls: the ASB’S Statement of Principles For Financial Reporting ‘ British Accounting Review, Vol.33, pp.47-72
References
Gaultier, M. W. E and Underdown, B; Accounting theory and practice 7th Ed;
Belkaoui, Riahi- Belkaoui; Accounting theory 4th Ed;
Accounting standards (2001/2002)