Accounting theory is a set of assumptions, frameworks, and methodologies used in the study and application of financial reporting principles. The study of accounting theory involves a review of both the historical foundations of accounting practices, as well as the way in which accounting practices are changed and added to the regulatory framework that governs financial statements and financial reporting.
Accounting theory provides a guide for effective accounting and financial reporting. Accounting theory involves the assumptions and methodologies used in financial reporting, requiring a review of accounting practices and the regulatory framework. The Financial Accounting Standards Board (FASB) issues generally accepted accounting principles (GAAP) which aim to improve comparability and consistency in accounting information. Accounting theory is a continuously evolving subject, and it must adapt to new ways of doing business, new technological standards, and gaps that are discovered in reporting mechanisms.