Important Theories of Accounting-Answers to Students-Myassignment

Question: What is the Difference between Positive Accounting Theory and Normative Accounting Theory? Answer: Introduction In the area of accounting, positive accounting theory and normative accounting theory are two important accounting theories. Both these theories play an important role to enhance the transparency and accuracy of business finances in an effective and a more comprehensive manner. Both positive and normative accounting theories offer best and most accurate methods to portray the performance of business firms properly. Apart from this, there are numerous differences exist between positive accounting theory and normative accounting theory. This research paper illustrates the differences between positive as well as normative theory of accounting. Difference between Positive Accounting Theory and Normative Accounting Theory Both positive accounting theory and normative accounting theory have their importance in the field of accounting. But, there are some differences exist that make them differ from one another. Business firms are required to understand these differences to choose appropriate accounting methods and practices to enhance the financial performance of businesses. For case, the major difference is related to the nature and purpose of each theory. Positive accounting theory is objective and also based on actual facts. The major aim of the theory is to analyze the data and provide conclusions on the basis of data at hand (Malmi and Granlund, 2009). Apart from this, normative accounting theory is subjective and predicts future growth of businesses. The key purpose of the theory is to portray the future of a company. Normative theory is a form of value judgment. It establishes subjective principles into accounting. On the other hand, positive accounting theory is generally used to depict past financial events. It also portrays the causes of current financial standing of businesses or individuals. The positive accounting practices of businesses are used to develop financial documents including balance sheet and cash flow statements of business organizations. In opposed to this, normative accounting theory is used to make future predictions and economic policies for the growth of businesses (Wolk, Dodd and Rozycki, 2008). Moreover, the mission statements that are integrated in business plans of business organizations can be analyzed as normative statements. These normative statements reveal the business ideals that business firms want to accomplish in future time period. Along with this, positive accounting theory scrutinizes real life occurrences mainly. In other words, it can be said that, the theory observes real world transactions as well as events; and also observes that how business firms are accounting for those transactions and events. The theory portrays the economic consequences of accounting decisions of business corporations. Apart from this, normative accounting theory is a totally different approach. It focuses on the future aspects rather than past aspects of businesses. It does not involve the things that had happened in past years (Chatfield and Vangermeersch, 2014). But, it is helpful for accounting policy makers to decide what should be done in future time period. Logically, normative accounting theory is a more deductive process than positive accounting theory. It is because of normative theory starts with the theory and infers specific policies; whereas positive theory begins with explicit policies, and deduces to the higher-leve l principles. In addition to this, the positive accounting theory predicts and explains the phenomena that are happening in the world. The positive theory of accounting is derived by using the inductive method. The inductive method starts with available assumptions and depicts the current accounting practices in different business organizations. By considering inductive method, positive accounting theory provides optional accounting practices for businesses to select from (Wolk, Dodd and Rozycki, 2016). But, normative accounting theory does not envisage what practices are suitable for business firms. Instead of prediction, it tells practices as well as standards that are adequate for the organizations. The theory is derived by using the deductive method. The normative accounting theory arrives with new practices; so business firms can enhance their overall performance in an appropriate manner. On the other hand, positive accounting theory plays a major role to predict actions that business firms will make at the time of the selection of new proposed accounting standards as well as accounting policies (Hoque, 2006). Positive theory is all about to comprehend and envisage the choice of accounting policies across different business firms. Moreover, under the positive theory of accounting, business associations manage themselves efficiently to exploit their prospects for endurance. In opposed to this, normative accounting theory tells what people or business organization should do to survive. The normative theory is not only assessed by analytical value, but this is also estimated by its logical constancy of how rational persons should work (Wilson, 2015). As a consequence, it can be assumed that, positive theory makes forecasts of real world events and incidents; while normative theory tries to notify what people or business associations should do. Along with this, positive accounting theory is a division of economics that is based on data and facts of real world. But, normative theory is a division of economics that is totally based on opinions, values, and judgments. The nature of positive theory is descriptive; whereas the nature of normative theory is prescriptive. Moreover, positive accounting theory plays a major role in order to analysis cause and effect relationship. While, normative theory plays a major role in order to provide value judgments. The viewpoint of positive theory is objective; whereas the viewpoint of normative theory is subjective (Mourik and Walton, 2013). Apart from this, the statements of positive accounting theory can be analyzed with scientific methods. But, the statements of normative accounting theory cannot be analyzed. In addition to this, positive theory does study of actual events; while normative theory tells what should be. Positive theory expresses economic issue in a very neat and clear manner. But, normative theory offers effective solutions for the economic issue. These solutions would be based on opinions, values and judgments (Chambers and Dean, 2013). On the whole, it can be supposed that, both positive and normative accounting theories are not contradictory to one another. But, the fact is that, they are complementary of each other. Conclusion On the basis of the above analysis, it can be said that, both positive accounting theory and normative accounting theory are important theories of accounting as well as economics. Along with this, it is also observed that, there are numerous differences that make both these theories differ from one another. Positive theory involves events of real words in its prediction. But, the predictions of normative theory are based on values and judgments. Overall, it can be said that, it is true that there are numerous differences between positive and normative accounting theory; but after these differences they are complementary of each other. References Chambers, R.J. and Dean, G. W. (2013). Chambers on Accounting: Logic, Law and Ethics. NY: Routledge. Chatfield, M. and Vangermeersch, R. (2014). The History of Accounting (RLE Accounting): An International Encylopedia. NY: Routledge. Hoque, Z. (2006). Methodological Issues in Accounting Research: Theories, Methods and Issues. Australia: Spiramus Press Ltd. Malmi, T. and Granlund, M. (2009). In search of management accounting theory. European Accounting Review, 18(3), pp.597-620. Mourik, C.V. and Walton, P. (2013). The Routledge Companion to Accounting, Reporting and Regulation. NY: Routledge. Wilson, R.M.S. (2015). Accounting Education Research: Prize-winning Contributions. NY: Routledge. Wolk, H.I., Dodd, J.L. and Rozycki, J.J. (2008). Accounting theory: conceptual issues in a political and economic environment (Vol. 2). USA: Sage. Wolk, H.I., Dodd, J.L. and Rozycki, J.J. (2016). Accounting Theory: Conceptual Issues in a Political and Economic Environment. USA: SAGE Publications.