Normative and Positive Theories

Normative and Positive Theories

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Introduction

Accounting theory is a set of basic assumptions, definitions, principles, and concepts surrounding the accounting rule (Belkaoui, 2004). It includes the reporting of accounting and financial information to relevant or interested parties. There are several approaches that are used in the development of accounting theory. The two main ones are normative theory approach and the positive theory approach.

Normative theory approach is a theory that is not based on observation. It is based on how things in the accounting process should be done. This approach comprises of different approaches to have a single but effective accounting approach (Khandelwal, & Jain, 2008). This kind of approach uses a formula to come up with an income based on value, not costs.

On the other hand, positive or descriptive theoretical approach to accounting theory is a set of theories that is concerned with what accountants actually do (Rosenfield, 2006). These theories rely on a process of inductive thinking, which involves making observations and drawing inferences from them. The main purpose of making observations is to identify certain similarities, identify the number of instances that the similarities are actually observed to deduce a certain degree of assurance necessary to set up a theory about all the similar instances (Ackert, & Deaves, 2009).

Each of these accounting theoretical approaches are applicable in any business today. However, it would be difficult to apply them together at the same time, since each of them has different objectives (Ackert, & Deaves, 2009). It is therefore up to an accountant to decide what approach is most accurate or best suited for what situation. This calls for the right judgment of accountants to be able to make the right decision in every situation or challenge that a business entity is faced with.

1) Normative Theory Approach

There are several approaches covered in...