Financial accounting theory

This chapter provides a history of financial accounting theory (FAT) in the English-speaking world. Its two principal objectives are to identify the most significant contributions in the development of FAT and assess its success in changing accounting practice. The narrative is written in the context of corporate business, accounting practice, public accountancy, and academic research. The chapter begins with a statement on the meaning of theory and its connection to financial accounting practice. The initial history of FAT extends from the late nineteenth century (with theories of double-entry bookkeeping) to the middle of the twentieth century (with individual theories on specific accounting practice problems). The continuing history, which then extends from mid-twentieth century to the present day, considers government regulation of corporate business affairs and individual and institutional attempts to produce a general statement of FAT in response. The impact of voluntary and mandatory accounting standards is considered in the context of conceptual framework projects, as are theoretical contributions by contemporary academics in the name of science. The chapter concludes with an assessment of the history of FAT and its impact on practice. The overall conclusion is that the long-standing search for a universal FAT has been a failure, although individual theoretical contributions have from time to time produced practice changes and, more generally, served a political role for public accountants and academic researchers seeking professional legitimacy. The question for the future is whether there is merit in continuing to search for a universal FAT to rationalise, explain, and predict financial accounting practice.