In order to be understandable and reliable, accounting must be used in accordance with specific rules and regulations. It would be chaos of Babylonian proportions if each person used their own grammar and vocabulary: no one would understand the others. It is also essential that accounting be used in accordance with generally accepted standards.
The first prerequisite is that the accounting agrees or conforms to the basic truths according to which our economic system works; current business and economic practices and applicable law as incorporated in statutory regulations or common law. Accordingly, it is important that uniformity in accounting practice be maintained; In other words, a specific set of circumstances, wherever found, must be treated by everyone in exactly the same way within the accounting process.
Accounting theory creates a framework that ensures that accounting practice meets compliance and uniformity requirements. This theory is embodied in a set of principles, policies, methods, procedures and conventions. The increasing scope and complexity of our economic system requires a corresponding adaptation process in accounting so that relevant information on economic activities can be recorded. It is critical that everyone involved in accounting understand this adaptation process; Furthermore, a prerequisite for such an understanding is an understanding not only of accounting theory, but also of the structure of that theory.
Accounting theory is based on a set of basic economic truths that are dual in nature. First, accounting theory is based on generally accepted propositions in the economic order of a particular society. For example, consider the concept of personal property: A generally accepted principle of our society is the exclusive right of each person to own things: they are their personal property and no one else’s. This concept is a basic economic truth.
Second, basic economic truths have characteristics similar to those of natural laws in the sense that specific causes generate specific consequences. If, for example, someone gets more value from a transaction than what was invested in the transaction, his net worth, his wealth, will have increased by the excess amount. This is also a basic economic truth. These economic truths are formulated as concepts and postulates. A concept is a generally accepted view of a specific phenomenon, which is described in specific terms. A postulate is a generally accepted hypothesis or assumption of a specific condition or phenomenon, which serves as the basis for the formulation of principles.
In the development of accounting theory, concepts and postulates serve as formulations of the basic truths or propositions on which the theory is based. They do not attempt to prescribe how the accounting process works, but simply the basis on which the structure of accounting is based.
