The basic differences between accounting theory and behavioral theory are the principles and practices underlying them. The former focuses on how monetary investments are made, while behavioral theory focuses on the behaviors of key decision makers. In addition, behavioral accounting uses principles based on human nature rather than abstract theory to understand and explain behavior. As the latter emphasizes the importance of communication, both of these approaches differ from one another. But one thing is certain: they are based on the same principle of financial information transmission.
The positive accounting theory focuses on the usefulness of accounting data for decision-making. It examines the company’s past transactions to determine revenue and expenses and predict future ones. For example, positive accounting theorists would deduce that a successful year would result in increased dividend payments for investors. This theory is the most popular among financial accounting experts, despite its limited application in the field. However, some scholars and accounting bodies believe that it is best to avoid adopting both kinds of theories.
The deductive and inductive approaches to accounting theory have their merits and disadvantages. While the former may be simpler, they are not as clear as they might seem. The latter’s focus on the role of human reasoning in accounting decisions is more likely to result in more precise results. Both approaches are useful for accounting research, but they differ in the way they explain certain accounting practices. This means that a simple classification is not always accurate.
The traditional approach, also known as the British Approach, focuses on total cost and is based on the costs of materials, labour, and expenses. In this method, expenses are divided into two categories, namely materials and labour. However, it is also possible to incorporate the financial implications of these factors. Regardless of which approach is used, it is essential to understand the basics of the theory before applying it to practice. The basic goal of accounting theory is to promote accountability in the financial reporting process.
The inductive approach to accounting theory examines observations first. The objective is to derive principles from those observations. The inductive approach emphasizes drawing generalisations from observations and financial information. It also emphasizes testing generalisations to ensure that they are accurate. Inductive theories are considered to be more qualitative than quantitative, and are largely based on empirical evidence and observations. If applied to an accounting practice, it can help improve the way financial information is reported.
Decision-usefulness theory focuses on the usefulness of information to decision-makers. The theory considers the different types of individuals who use financial statements. The most common users of financial statements are investors, creditors, customers, and government authorities. Moreover, decision-usefulness theory also considers the impact of external reports on management decisions. Theorists of decision-usefulness often use the techniques of behavioural science to explain how financial information is used.
