Explaining Positive And Normative Accounting Theories And Their Contribution To Accounting Profession

Accounting Theories & Current Issues

Positive Accounting Theory

Question:

Discuss about the Accounting Theory and Current Issues.

This study deals with explaining the concept of accounting theory and current issues in present world scenario (Williams 2014). In this assignment, proper emphasis has been given to address the following issues and provide with justified reasoning to the reader. The current segment explains positive accounting theory and even highlighted the theory with reference. In the next segment, there is proper comparison and contrast made between the theories such as positive accounting theories and normative accounting theories. The next segment explains about the ways by which normative accounting theory contribute to the development of accounting profession. The present study properly explains the difference between both the theories of accounting and when it is applied and how it is applied by most of the business enterprise (Smith 2017).

Positive accounting theory is one of the accounting theories that try to make good forecasting of real life or world events as well as interpret it into secretarial dealings at the same time (Bebbington, Unerman and O’Dwyer 2014). Under Positive Accounting theory, business firms tend to maximize their prospects for survival in order to organize in an effective way. Positive accounting theory tries in explaining and predicting the real world events in the most appropriate way. The firm needs to select the accounting policies based on their knowledge. Positive accounting theory highlights that changing situations or circumstances need manager to remain flexible in selecting the accounting policies (Mora and Walker 2015). Positive accounting theory can be attained by altering the accounting policies, managing with the optional accruals, and time of adoption of any new accounting standards. Furthermore, Positive Accounting Theory can even be attained by changing the real variables such as research & development, repairs & maintenance as well as advertising. Furthermore, PAT can be achieved by capitalizing operating expenses in the most appropriate way (Deegan 2016).

In this question, it is needed to relate Positive accounting theory with system-based theories such as stakeholder theory, legitimacy theory and institutional theory. Positive accounting theory is directly related to system-based theories and each of the theory is explained below with proper justification:

Systems-oriented theories with Positive accounting theory

Stakeholder theory- This theory does not stipulate about what facts need to be revealed other than indicating the fact about provision of facts that is useful for the sustained operations of the business unit. Managerial branch involves information relating to financial and social that is used for controlling over conflicting demands of different groups of stakeholders.

Normative Accounting Theory

Legitimacy Theory- This theory is based on social contract between the society as well as business enterprise as a whole. Business enterprise seeks to understand the fact about how the activities operate within the bounds as well as norms of society.

Institutional theory- This theory must overlap with legitimacy theory as well as stakeholder theory.

There are theories that explain about why specific accounting theories are made (Positive Accounting Theory, Stakeholder theory and legitimacy theory). In addition, it is how business enterprise forms exist (institutional theory). Furthermore, there are several theories that explain about particular regulation such as accounting regulations are developed. Accounting disclosures as well as specific organizational forms are seen as a way for managing relations with specific groups outside the organization or business enterprise.

Positive Accounting Theory	Normative Accounting Theory
Examines real life occurrences as well as find ways to understand how actual business firm address the accounting treatment for those transactions (Mora and Walker 2015)	Takes fundamental different approach In this theory, accounting policy makers plans for what need to be done based on the theoretical principle (Bebbington, Unerman and O’Dwyer 2014).
Looks at actual world transactions and events Examines further on how business firms are accounting for those events as well as highlight the economic consequences of those accounting decisions (Deegan 2014). The theory is then predicted on how business firms will account for transactions as well as events in the upcoming financial year (Mora and Walker 2015).	More like a deductive process as compared to positive accounting theory. Starts with the theory as then deduced to specific policies (Deegan 2013).
Positive accounting theory and its accounting practices are quite objective by nature as well as based on fact (Bebbington, Unerman and O’Dwyer 2014). Descriptions are given for future enhancement for making different logical analysis and predictions of most suitable or acceptable accounting practices or standards used by different business enterprise or accounting firms. This accounting theory actually gives optional practices for both firms who decide whether to use this approach or not in their accounting operations.	Normative accounting theory and its accounting practices are quite subjective by nature as well as explains about what the economic future will be for any company or investor (Mora and Walker 2015)
Focus mainly on analyzing the statistics as well as data that are present after deriving at conclusions based on those figures (Crawford and Lepine 2013)	This normative accounting practice is in the form of a value judgment that helps in introducing subjective morality into accounting (Bonin 2013).
Predictable model where the validity of actions are kept independent of the acceptance of any of the goal structure. Justifying some accounting practices (Bebbington, Unerman and O’Dwyer 2014)	Need commitment to goals and it is the responsibility of the policy makers to undertake further judgment as a whole. Useful in determining the suitability of some of the accounting practices that follows or use normative theories in their business places (Mora and Walker 2015).
For instance, If corporate growth allows any business enterprise for increasing shareholder dividends over past dividend payments, then positive accounting theory would conclude that corporate growth actually causes an increase in stockholder dividends. In addition, most of the bookkeeping as well as data collection take into consideration accounting related theory and this is positive economic theory (Mora and Walker 2015).	For instance, If any business tends to increase dividend payment by using funds for improving corporate sustainability measures, then normative accounting statement would highlight the fact on how normative accounting deals with future events rather than previous data and this come under the domain of positive accounting practices (Bebbington, Unerman and O’Dwyer 2014).
Positive accounting theory can be best used for explaining past financial events and causes of business or any of the current financial standing of an individual (Bertomeu and Cheynel 2013). It further need to determine the reason behind why operating at a net loss of a business need positive accounting practices for comparing actual revenues with actual expenses for a given course of time period. Accounting practices used in this theory help in constructing documents like cash flow statements as well as balance sheets.	Normative accounting theory can be best used for explaining the set future economic policy based on theory The mission statement of business enterprise or any of the marketing strategies are properly mentioned in the business plans and normative statements.  In this normative statement, it properly reflect about how business ideals to be or accomplish to be in the upcoming financial year (Mora and Walker 2015).
Working together Appropriate financial planning for any of the trade enterprise or individual need the use of both positive accounting theory and normative accounting practices. Based on large scale economy, it shows that financial policies make use of normative financial statements but these statements are based upon financial realities as found from the positive accounting practice. In addition, the factual-based practices of positive accounting help in providing basic for business enterprise for engaging in normative accounting and that gives more realistic view on how company operates and still earns profits in the upcoming financial years (Bebbington, Unerman and O’Dwyer 2014).

At the time of examining the theories of accounting, it is found out that these theories are developed long before and this underpins the conceptual framework for accounting. The normative theory contributes to the development of accounting profession. This theory was developed to focus on an estimation rather than just observation (Beattie 2014). The normative approach to the expansion of accounting theory actually explain the positivistic nature of normal accounting research where decisions are taken using the theory of accounting and the role of interpretive and serious research. There are various developmental approaches that prove to be beneficial to accounting and leads to a diversity of research approaches and it collectively bring improvements in the status of accounting research (Bebbington, Unerman and O’Dwyer 2014). Therefore, the role of these development aims at fulfilling the needs as well as creating appropriate accounting policies as and when needed

Beattie (2014) had brought accounting research for overcoming its normative framework for a technical regulation for developing research work as accounting profession. The authors were of the opinion that for a scientific approach, it is needed to study the accounting theories that emerges from a normative examination to an axis of technical research. The approaches had been designed as it claimed a perspective that further highlights as well as explain about accounting policies as it demolishes with previous theories. Based on the evolution of financial accounting, it is understood that normative theory speculates about the dimension selection in most of the cases (Ball 2013).

Altogether, a new horizon was explained in scientific reorientation as well as the framework used for normative prepositions (Mora and Walker 2015). In addition, the scientific orientation explain clearly about methodological foundation for the accounting study and this is treated as values systems and further explain the relationship between the researcher and the subject as a whole. It is important to focus on the research study where the accounting practices explain about the accounting products development as it had emerged like an observed legalization procedure as it is hypothetical to supposed realities (Aryee et al. 2015).

Systems-oriented theories with Positive accounting theory

There are several strategies that main focus upon certain interest groups as well as engages in surveying their perceptions and attitudes on matters relating to disclosures. The strategy need to be determined to which specific items of significant information and facts are disclosed especially in the corporate annual reports by using normative index of disclosure based on assessment (Mora and Walker 2015). Normative models or goals advocates in policy discussion based on conviction and preferences rather than using inductive system of the existing system.  In addition, it is noted that normative events theory had been used for increasing the forecasting accuracy of accounting reports and this was done by emphasizing on relevant attributes of events as it is crucial to the users. Normative theory had been used and attempts to prescribe what data need to be communicated as well as how it is presented in given form (Bebbington, Unerman and O’Dwyer 2014).

It is important to understand the fact that government regulations relates to accounting and reporting where it act as a major force for creating of demand for several normative accounting theories that had been employed for employing public interest arguments. The theory further proposes to demonstrate findings from certain accounting procedures as it help in better decision-making process for several investors.

Conclusion

At the end of the study, it is concluded that both positive and normative accounting theory has its own advantages and limitations. The above analysis properly explains about positive accounting theory on how it helps in predicting the activities of what is happening in the world. This particular theory had been derived from the concept of inductive theory or method. The methods initially begin with given assumptions that describe the accounting practice in various business firms. On the other hand, normative theory fails to predict about the practices that are acceptable in any form. This theory explains about the practice or standards that are readily acceptable. The theory had been derived from deductive method or approach that does not consider other practices that is all about coming up with new practices or ideas at the same time.

References

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