Understanding Accounting Theory
What Is Deference between Positive Accounting Theory and Normative Accounting Theory?
The main purpose of the assignment is to bring out the differences on theories that is, positive accounting and normative accounting (Miller, P. and Power, M., 2013). Accounting is the concept of business that gives executive as well as shareholder a consistent scheme so that they can represent the cash of their corporation in a way where it should be apparent, revealing and dependable in the most appropriate way. Both the theories named as Positive and normative accounting is the theories that essentially help in creating scheme for shareholder as well as executive so that they can use this hypothesis in a particular time.
As stated by Glover (2014), the theory on positive accounting help in examining the real life occurrence and brings out clear facts about the companies who deal with the accounting treatment for different types of transactions. Positive accounting theory views at the real world that consists of transactions and events where the companies need to keep an account on the ongoing events for gaining insights of information on the economic consequences of the accounting decisions. Furthermore, the theory anticipates through use of knowledge on how business actually takes a look on the transactions and events that happen in the future. The theory is based on facts. Therefore, Positive accounting theory deals with identifying the economic statistics and data that is derived at conclusion based on the anticipated figures (Fernando, S. and Lawrence, S., 2014).
As rightly put forward by Deegan (2014), the theory on normative accounting considered as a deductive process that takes place after making the comparison with the positive accounting theory. In that way, the theory starts with the problem recognition and then it goes to specific policies when there need positive start with the application of proper polices and generalization to the higher-level principles. On comparison, it can be stated that normative accounting practices considers as the proper form of value judgment that introduces the subjective morality into accounting practices. It is then when the theory starts executing the process on accounting after deriving at the value based income and bringing out the approaches that are needed by the companies (Deegan, C., 2013).
Positive accounting theory
Normative accounting theory
The theory is generally predictive and descriptive
The theory is purely perspective in nature
Positive accounting theory has been explaining as well as predicting the accounting policies
Normative accounting theory indicates true representation of income as a single measured that needs to be used for treating the assets for arriving at correct figures (Bonin, H., 2013)
Positive accounting theory is grounded in economic theory
Normative accounting theory is the theory that takes place at the time of decision-making process where the fundamental objective of potential users is to present the financial reports of a company so that it can analyze the useful accounting data
Positive accounting theory mainly believes in maintaining cordial relationship with the individuals that gets involved in the activities of providing adequate resources in business enterprise and termed as agency relationship (Beattie, V., 2014).
The relationship need to be maintained between the owners or managers with the managers or debt providers.
The theory on normative theory is subjective and focuses on detailing on the fact on what are the economic future needs to be for either business enterprise or investor.
When to use:
The theory on positive accounting can be best used at the time when it is needed to analyze the past financial events and causes that has the ability to involve in business or individual recent monetary standing.
Positive accounting theory will guide ways after explaining the reason behind how business enterprise is operating at a net loss as well as there is an urgent implementation of positive accounting theory. This has been done after comparing actual revenue with the actual expenses for specified financial years. Furthermore, the theory can be easily used at the time of preparation of financial documents such as balance sheet and cash flow statements.
When to use:
The theory on normative accounting can be best used when there is required to set out the future economic policy that depends upon the given theory (Aryee et al. 2015)
It is necessary to understand the fact that marketing strategy for a given business organization takes into consideration aspects from the business plans that are mentioned in the normative statements. It is for this reason that normative statements predicts the business ideas when the company require to understand
It is important to consider the fact that positive financial planning for any company need to theory on both positive accounting and normative accounting. It is based on the factual practices of the theory on positive accounting as it deals with the basics of attributes where the business engages with the normative accounting that presents an idealistic view. This is regarding the fact on how business start operating as well as still generates revenue from their operations. It was opined by the economist that financial policies are used with the help of analyzing the normative accounting statements. In reality, the normative accounting statements depends upon the financial realities that comes from given positive accounting policies in the most appropriate way
When business growth permit company for enhancing the shareholder dividends over the past dividend payments where the theory explains the growth is the cause behind stakeholder dividends. Furthermore, it is the bookkeeping and data collection that merges with the theory on positive as well as economic theory
When companies increase in their dividend payment, then it is needed to make use of funds for bringing augmentation of corporate sustainability measures. It is the case when normative accounting theory can be used for representing the money on how much it is invested in the given measures for bringing sustainability of actions.
From the above analysis, it is accomplished that both the secretarial theories are significant depending upon the circumstances the business faces. To explain, Positive accounting theory tries in creation good forecast in the real world proceedings as well as translates into exact secretarial dealings. On the other hand, normative theories tend to advise what should be done. Entire assignment evidently defines both the assumption, its benefits that give proper insights of facts that when this hypothesis should be used by executive and shareholder.
Aryee, S., Walumbwa, F.O., Mondejar, R. and Chu, C.W., 2015. Accounting for the influence of overall justice on job performance: Integrating self?determination and social exchange theories. Journal of Management Studies, 52(2), pp.231-252.
Beattie, V., 2014. Accounting narratives and the narrative turn in accounting research: Issues, theory, methodology, methods and a research framework. The British Accounting Review, 46(2), pp.111-134.
Bonin, H., 2013. Generational accounting: theory and application. Springer Science & Business Media.
Deegan, C., 2013. Financial accounting theory. McGraw-Hill Education Australia.
Deegan, C., 2014. An overview of legitimacy theory as applied within the social and environmental accounting literature. Sustainability accounting and accountability, pp.248-272.
Fernando, S. and Lawrence, S., 2014. A theoretical framework for CSR practices: integrating legitimacy theory, stakeholder theory and institutional theory. Journal of Theoretical Accounting Research, 10(1), pp.149-178.
Glover, J., 2014. Have Academic Accountants and Financial Accounting Standard Setters Traded Places?. Accounting, Economics and Law Account. Econ. Law, 4(1), pp.17-26.
Miller, P. and Power, M., 2013. Accounting, organizing, and economizing: Connecting accounting research and organization theory. Academy of Management Annals, 7(1), pp.557-605.
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