INTRODUCTION

Accounting is the art of collecting, analyzing, recording, summarizing, presenting, and interpreting financial and operating information for use by management and other users for decision making purpose.

The primary function of financial accounting is to provide relevant and reliable financial information to users, both internal and external to the business enterprise. The focus of financial accounting is on the information needs of investors and creditors. These users make critical resource allocation decisions that affect the nations economy. The primary means of conveying financial information to external users is through financial statements and related notes.

For financial statements of businesses to perform their role of helping the external users to make decisions there must be uniformity in their preparations. This is normally ensured by accounting standards and principles.

THE NATURE OF ACCOUNTING STANDARDS Generally accepted accounting principles standards, as they are sometimes called consist of the financial accounting and reporting conventions, rules and procedures that a business enterprise must use in preparing external financial statements that are subject to audit by an independent certified public accountant (Chasteen et al, 1995).
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Accounting principles are not like physical laws; they do not exist in nature awaiting discovery by man. Rather, they are developed by man, in light of what we consider to be the most important objectives of financial reporting. Accounting principles are developed in so many ways. Sometimes an accounting procedure becomes widely used over time by professional accountants. The organisations responsible for developing accounting principles might recognize the procedure and include it in Generally Accepted Accounting Practice (GAAP). In other cases accounting standards result from a decision by the rule-making organisation to adopt one alternative among several methods in practice. Sometimes the rule-making bodies develop standards based on logic or deductive reasoning because no clearly defined practices are being used to account for certain transactions or events.

In many ways the (GAAP) are similar to the rules established for an organized sport, such as football or basketball. For example, accounting principles, like sports rules: Originate from a combination of tradition, experience, and official decree. Require authoritative support and some means of enforcement. Are sometimes arbitrary. May change over time as shortcomings in the existing rules come to light.

 Must be clearly understood and observed by all participants in the process.

IMPORTANCE Generally accepted accounting principles help increase the confidence of financial statement users that the statements are representationally faithful. They provide companies and accountants who prepare financial statements with guidance on how to account and report economic activities. And provide independent auditors of financial statements with a basis for evaluating the fairness and completeness of the statements.

GAAP are extremely important to independent auditors. An independent auditors (certified public accountants) unqualified opinion about a companys financial statement asserts that the financial statements fairly present the companys financial position, results of operations, and cash flow in conformity with generally accepted accounting principles

Financial accounting and reporting standards require many estimates, assumptions and professional judgments by management and accountants. Calculations of depreciation expense and estimates of uncollectible accounts receivable are two examples. Personal bias, mis-assessment of facts, errors in estimation, and ambiguity may affect the measurement and communication of economic events. The potential for such factors to influence financial accounting information is not
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surprising when one considers, for example, the significance of accounting information in wage negotiations, management bonuses bank lending decisions, and other resource allocations.

Financial statements must have credibility to external users. In addition, given accountings service nature, it is essential that the information in financial statements be useful in decision making. The existence of standards or principles for accounting and reporting is very important to the credibility and usefulness of financial data. Without standards to guide accounting and reporting practice, each accountant would, in effect, have to develop his or her own financial accounting theory, practices and procedures. Under these circumstances, users of financial accounting information would find reported information offered little help when they had to make comparisons among competing uses of scarce resources. Moreover, without standards, users would have little assurance of the credibility of reported data. Historically, setting standards for financial accounting and reporting has proven to be in the public interest.

According to Addo (2007), international accounting standards have the following importance:
(i)

Investors, both individuals and corporate, would be able to compare the results of different companies internationally as well as nationally in making investment decisions.
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(ii)

Multinational companies would benefit from international standards for many reasons including the following. (1) Better access would be gained to foreign investor funds.
(2) Management control would be improved, because harmonisation

would aid internal communication of financial information.

(3) Appraisal of foreign entities for take-overs and mergers would be

more straightforward. (4) It would be easier to comply with reporting requirements of oversees stock exchange. (5) Preparation of group accounts would be easier. (6) A reduction in audit costs might be achieved. (7) Transfer of accounting staff across national borders would be easier.
(iii)

Governments of development countries would save time and money if they could adopt international standards and, if these were used internally, governments of developing countries could attempt to control the activities of foreign multinational companies in their own country. These companies could not hide behind foreign accounting practices which are difficult to understand.

(iv)

It would be easier to calculate the tax liability of investors, including multinationals who receive income from overseas sources.

(v)

Regional economic groups usually promote trade within specific geographical region. This would be aided by common accounting practices within the region.

(vi)

Large international accounting firms would benefit as accounting and auditing would be much easier if similar accounting practices existed through out the world.

ACCOUNTING STANDARDS OVERLOAD As mentioned earlier accounting standards are the regulatory framework that governs the preparation of periodic financial statements of business organisations. There are several of such standards in Ghana and international world. Each industry seems to have its own regulatory document. In Ghana mention can be made of such legislation as the Ghana National Accounting Standards, the Companies Code 1963, Act 179, and the Incorporated Private Partnership Act, 1962, Act 152. Other legislations governing the financial reporting include the following: (i) (ii) (iii) (iv) (v) (vi) Securities Industry Law, 1993 (PNDCL 333) Securities Industry (Amendment) Act, 2000 (Act 590) Banking Law, 1989 (PNDCL 225) Insurance Law, 1989 (PNDCL 227) Ghana Investment Promotion Centre Act, 1994 Act 478) Free Zones Act, 1995 (Act 504)
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(vii)

Internal Revenue Act, 2000 (Act 592)

(viii) Stock Exchange (Ghana Stock Exchange Listing Regulations 1990), (LI 1509) (ix) Stock Exchange (Ghana Stock Exchange Membership Regulations, 1991) (LI 1510) as amended (1993) (x) Securities and Exchange Commission Regulation 2003 (LI 1728).

Each of these frameworks sometimes gives contrasting views of how certain items must be treated.

Accounting principles also somewhat vary from country to country. The phrase generally accepted accounting principles (GAAP) refers to the accounting concepts in the United States. Great Britain and many other countries also have their own standards. Great Britain, for instance, uses the Statement of Standard Accounting Practice (SSAP). Even though these standards from different countries have many things in common they sometimes differ in the way certain items are treated. For instance in Germany, the amortization period for an intangible asset is five years. In the United States, a maximum period of forty years is allowed. In the Netherlands, assets are valued at their economic worth or replacement value. In the United States, assets are generally valued at historical cost. In Japan, income smoothing is permitted because firms are allowed discretionary charges to income for such items as depreciation and bad debts. In the United States, arbitrary
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charges to income are not permitted. These are just some of the ways in which reporting practices in the United States differ from reporting practices in other countries (Kieso et al, 1987).

Because these differences exist, it is often difficult to make comparisons among enterprises. Many believe that this lack of standardisation inhibits the free flow of capital across borders and often prompts international investors to demand unnecessary risk premiums. In addition, many contend that differences in reporting standards can lead to unfair competitive advantages.

Most companies recognize the need for more uniform standards. As a result, the International Accounting Standards Committee (IASC) was formed in 1973 to attempt to narrow the areas of divergence. Because the objectives of financial reporting in the United States often differ from those in other countries, the institutional structures are often not comparable, and strong national tendencies are pervasive, such narrowing will not be easy.

DEFINITION OF ACCOUNTING THEORY Accounting theory may be defined as a logical reasoning in the form of a set of broad principles that (1) provide a general frame of reference by which accounting practice can be evaluated, and (2) guide the development of new practices and procedures. Accounting theory may also be used to explain the existing practices
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to obtain a better understanding of them. But the most important goal of accounting theory should be to provide a coherent set of logical principles that form the general frame of reference for the evaluation and development of sound accounting practices (Hendriksen, 1992).

APPROACHES TO THE DEVELOPMENT OF ACCOUNTING THEORY The complex nature of accounting phenomena and issues results in the fact that no single methodology of accounting will be sufficient in finding solutions to accounting problems. Consequently, the choice of the most appropriate theory depends of how well it supports the development of procedures and techniques that best fulfill the objectives of accounting. Since there is no single comprehensive theory of accounting, various accounting theories of a middle range have resulted from the use of different approaches. Some of the methodological techniques or approaches to the development of accounting theory, which are known as the traditional approaches, include the following: Deductive, Inductive, Ethical, Behavioral, Sociological and Welfare approaches

Deductive Approach The deductive approach to the development of accounting theory starts with the proposition or postulates and derives logical conclusions about the situation. When used in accounting, this approach starts with the basic premises and then makes
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accounting principles out of them. The deductive approach starts from the general to the specific situation. The steps used in developing accounting theory by this approach are as follows:
(1) Specifying the objective of financial statements. (2) Selecting the postulates of accounting. (3) Deriving the principles of accounting. (4) Developing the techniques of accounting.

The formulation of objectives is very important in the deductive approach because different objectives might require entirely different structures and result in different principles and techniques. Essentially, accounting theory should be flexible enough to provide the needs of different objectives but rigid enough to provide for some uniformity and consistency in financial reporting to shareholders and the general public.

Inductive Approach The inductive approach to the development of accounting theory begins with observations and measurement and move towards generalized conclusions. When used in the development of accounting theory, the inductive approach stars with the making of observations about financial information of an enterprise and moves on to the construction of generalizations and principles of accounting. This approach starts from the particular to the general. The inductive approach to the development of accounting theory involves the following four stages:
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(1) Recording all observations. (2) Analysis and classifications of these observations to detect recurring

relationships (likes and similarities). (3) Inductive derivation of generalizations and principles of accounting from observation that depict recurring relationships.
(4) Testing the generalizations

Through this process, new ideas and principles can be derived, particularly if the observer does not let himself to be influenced by current principles and practices. The advantage of the inductive approach is that it is not necessarily constrained by a preconceived model or structure. The researcher is free to make any observation he may deem relevant. But once generalizations or principles are formulated, they should be confirmed by the logical process of the deductive approach.

CONCLUSION To sum up, accounting standards can be described as the guidelines that have been developed to govern financial reporting of companies. They are not discovered but developed to meet the needs of society. Accounting standards are important because they provide financial statements with uniformity, comparability, and credibility. However, accounting standards overload has made the presentation of financial statements quite difficult. Ghanas adoption of the IFRS is a good step towards the rationalisation of its standards to meet international requirements.
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Accounting theory may be developed through several approaches including the deductive and inductive approaches. The deductive approach starts from the general and moves to the specific while the inductive approach starts from the specific and moves to the general.

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REFERENCES Kieso, E.D. and Weygandt, J.J. (1983) Intermediate Accounting, 4th ed., New York: John Wiley & Sons. Kieso, E.D. and Weygandt, J.J. (1987) Intermediate Accounting, 6th ed., New York: John Wiley & Sons. Chasteen, G.L., Flaherty, E.R., and OConnor, C.M. (1995) Intermediate Accounting, 5th ed., New York: McGraw-Hill.

Hendrksen, E.S. (1982) Accounting Theory, 4th ed., Richard D. Irwin.

Hermanson, R.H., Edwards, J.D., and Maher, W.M. (1992) Accounting Principles, 5th ed., Boston: Richard D. Irwin Inc. Meigs, F.R., Meigs, A.M., Betner, M. and Whittington, R. (1996) Accounting The Basis for Business Decisions, 10th ed., New York: McGraw-Hill.

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