What is Accounting Theory?

An accounting theory is a notion that uses speculations, methodologies, and frameworks in the study of financial reporting (as well as how financial reporting principles are applied in the accounting industry). 

Basically, accounting theories serve as a basis for the understanding of financial reporting and how companies channel their financial statements using the appropriate strategies. 

An in depth study of accounting theory entails a look into existing accounting practices, how they evolved, and the modifications or additions done to them overtime. These accounting principles serve as framework for accurate financial reporting and statements.

How is Accounting Theory Used?

Accounting theories are basically the skeleton for accounting practices. That is, an accounting theory guides accounting practices. 

All accounting theories rest on the tenets or framework of accounting provided by the Financial Accounting Standards Board (FASB). This board is responsible for stating the acceptable practices of financial reporting as well as the key objectives of financial reporting. 

The FASB is an autonomous organization that oversees the preparation of financial statements by both private and public enterprises. 

Key Elements of Accounting Theory

There are some crucial elements in accounting theory that makes it an indispensable framework for accounting practices. The key elements include the following;

• Relevance - this is a crucial element of an accounting theory. Information provided by accounting theories are relevant in all aspects.
• Usefulness - accounting theory is useful for the compilation of financial reports of statements. It helps corporate businesses make informed decisions as regards finance.
• Reliability - an accounting theory is reliable. It follows the standards of general accepted accounting principles (GAAP).
• Consistency - this is another key element of accounting theory.

Furthermore, accounting theory generally maintains that professionals in the accounting industry operate based on assumptions which are:

• Discrepancy between a business and its owner, 
• continuity of the business, and
• preparation of financial statements using dollar representation and compilation of statements monthly, quarterly or annually.

The Origins and Evolution of Accounting Theory

The evolution of accounting theory can be traced to the inception of accounting as one of the major disciplines. Accounting as a discipline was developed in the 15th century and this birthed accounting theories used by corporate businesses. Due to the changes in accounting practices, a number of modifications and additions were also done to accounting theory. The Financial Accounting Standards Board helps to regulate and revise accounting theories. Certified Professional Accountants (CPAs) also help corporate businesses adjust to these modifications and new standards.