Accounting Theory

Do you enjoy college life? Do you enjoy teaching others? If so, you might want to consider a career as a college professor. Although a position as a college professor may pay less than some other career alternatives, the intangible benefits are beyond measure. A college professor can make a real difference in the lives of hundreds, even thousands, of students over a career. Students come to college with great potential, but are in need of some additional training and guidance. The work of a college professor is a valuable investment in our nation's most valuable resource - people.

College faculty generally teach fewer hours each week than elementary and secondary school teachers. This is because most college faculty have at least two additional important responsibilities: research and service. The research component represents far more than just summarizing what others have already learned. It represents arriving at new knowledge by discovering things that previously were unknown. For instance, accounting research has demonstrated the ways in which accounting numbers such as earnings and stockholder's equity are related to stock prices. This illustrates the importance of accounting numbers and has resulted in a large stream of discovery called Capital Markets research. Besides teaching and research, most faculty have significant service responsibilities as well. Accounting faculty are involved in service to the university, the accounting profession, and to the general public. Many college faculty dedicate 10-20 hours or more each week to the service component of their jobs.

The demand for college professors varies greatly by discipline. In fields such as English, Fine Arts, Philosophy, and Psychology there is a large supply of candidates with advanced degrees and, thus, the competition for positions as college professors in these areas is intense. However, in applied fields such as accounting and engineering, there is a shortage of candidates with advanced degrees. The opportunities for professors in these applied fields are excellent, and the chance to make a real difference in the lives of others is exciting.

Chapter 1 briefly introduced the body of theory underlying accounting procedures. In this chapter, we discuss accounting theory in greater depth. Now that you have learned some accounting procedures, you are better able to relate these theoretical concepts to accounting practice. Accounting theory is "a set of basic concepts and assumptions and related principles that explain and guide the accountant's actions in identifying, measuring, and communicating economic information".

To some people, the word theory implies something abstract and out of reach. Understanding the theory behind the accounting process, however, helps one make decisions in diverse accounting situations. Accounting theory provides a logical framework for accounting practice.

The first part of the chapter describes underlying accounting assumptions or concepts, the measurement process, the major principles, and modifying conventions or constraints. Accounting theory has developed over the years and is contained in authoritative accounting literature and textbooks. The next part of the chapter describes the development of the Financial Accounting Standards Board's (FASB) conceptual framework for accounting. This framework builds on accounting theory developed over time and serves as a basis for formulating accounting standards in the future. Presenting the traditional body of theory first and the conceptual framework second gives you a sense of the historical development of accounting theory. Despite some overlap between the two parts of the chapter, remember that FASB's conceptual framework builds on traditional theory rather than replaces it. The final part of the chapter discusses significant accounting policies contained in annual reports issued by companies and illustrates them with an actual example from an annual report of the Walt Disney Company.