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5. Accounting theory

Learning objectives

After studying this chapter, you should be able to:
• Identify and discuss the underlying assumptions or concepts of accounting.
• Identify and discuss the major principles of accounting.
• Identify and discuss the modifying conventions (or constraints) of accounting.
• Describe the conceptual framework project of the Financial Accounting Standards Board.
• Discuss the nature and content of a company's summary of significant accounting policies in its annual

report.
A career as an accounting professor
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

Accounting Principles: A Business Perspective 198 A Global Text