Question

Do you think that the so-called equity theories of accounting are really theories in the scientific sense? How would you classify them? 6. Why do you think the equity theories are less important today than they were 50 years ago?

Answer 1

5th answer

understanding of equity theory in general is determining if the equity distribution is fair to both parties. With this concept comes five theories, proprietary, entity, residual equity, fund, and commandertheory. I will review each theory and classify each and make a decision whether these theories can be scientific theories. First is proprietary theory, this theory assumes the owners and the firm are the same.Proprietary theory, assets belong to the firm’s owners, the liabilities are their obligations, and ownership equities accrue to the owners, balance sheet equation is Assets – Liabilities = Owner’s Equity. Second is entity theory, the firm and its owners are separate bodies, assets belong to the firm and both liability and equity holders are investors in those assets with different rights and claims against them. The balance sheet equation is Assets = Equities + Liabilities. Thirdly residual equity theory, information appropriate for decision-making purposes must be supplied to the residual equity holders. The balance sheet equation is Assets – Specific Equities (including liabilities and preferred stock) = Residual Equity.

6th answer

Empirically testable hypotheses are much richer in terms of providing insights than the deductively derived equity theories. The equity theories provide interesting outlooks, but they are simply too narrow in scope to provide extensive insights into complicated problems. However, they do have their uses. See the discussion of stock options