The Imporance of Accounting Theory to the Field of Accounting

1912 WordsJul 10, 20118 Pages
The Importance of Accounting Theory to the Field Of Accounting The objective of theory is to explain and predict. One of the basic goals of the theory of a particular discipline is to have a well-defined body of knowledge that has been systematically accumulated, organized, and verified well enough to provide a frame of reference for future actions. The Webster’s definition of theory is the systematically organized knowledge, applicable in a relatively wide variety of circumstances, a system of assumptions, accepted principles and rules of procedure to analyze, predict, or otherwise explain the nature of behavior of a specified set of phenomena. Theories may be described as normative or positive. Normative theories explain what…show more content…
Changes in accounting principle is, for example, changing method of computing depreciation from straight-line to sum-of-the-years'-digits. However, changes in estimates do not qualify. Because of its importance, earnings per share (EPS) are required to be disclosed on the face of the income statement. A company which reports any of the irregular items must also report EPS for these items either in the statement or in the notes. There are two forms of EPS reported in the income statement. Those forms are the basic form and the diluted form. The basic form in this case, is the weighted average of shares outstanding includes only actual stocks outstanding. The diluted form in this case, is the weighted average of shares outstanding is calculated as if all stock options, convertible bonds, and other securities that could be transformed into shares are transformed. This way number of shares increases and EPS decreases. Diluted EPS is considered to be a more accurate way to measure EPS. In formal bookkeeping and accounting, a balance sheet is a statement of the book value of all of the assets and liabilities of a business or other organization or person at a particular date, such as the end of a "fiscal year." It is known as a balance sheet because it reflects an accounting identity: the components of the balance sheet must be equal, or in

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