Positive vs Normative accounting

Contemporary Issues
in Accounting
 ? What is the main objective of theory

The objective of theory is to explain and predict. Consequently, a basic

goal of the theory of a particular discipline is to have a well-defined body of
knowledge that has been systematically accumulated, organized, and verified
well enough to provide a frame of reference for future actions.
 ? What is the main goal of accounting theory

The goal of accounting theory is to provide a set of principles and

relationships:
that explains observed practices.
and predicts unobserved practices.
Theories may be described as normative or positive.

Normative theories explain what should be.

positive theories explain what is.
Ideally, there should be no such distinction, because a well-developed and
complete theory encompasses both what should be and what is.
• Positive accounting, most typically utilised within data collection and
bookkeeping, takes an objective approach.
• Using a company’s physical transaction history, it analyses and discerns the
ramifications of these expenditures.
• It compares revenue against expenses to figure out if and why an
enterprise is running at a net loss or gain.
• Based around Hypotheses
Positive accounting starts with specific policies and generates higher level
principles based on these, making it the best option for explaining
transactions for the past, or a business’ current economic position.
However, there are disadvantages to this theory, the largest being that it
follows from the assumption that every business owner acts only out of self-
interest, rather than looking out for the fiscal security of their firm.
 ? What are normative theories

• Normative theories are those that seek to inform you of what should be
normal , acceptable or best practices .

• They are not all concerned about what is currently happening or in

predicting what will happen in the future . All normative theories are
concerned with is what should be happening now .

• The conceptual framework is an example of a normative theory . Its

prescribes what financial accountants should or must do ,
 The differences between positive and normative
accounting theories

• While positive accounting looks at past data, normative works with events in
the future.

• Unlike positive accounting which is based on observation, normative

accounting theory advises policy makers on what should be done based
on a theoretical principle; it starts with a theory and deduces specific policies
from this.