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Accounting Theories and Standards - Assignment Example

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In the paper “Accounting Theories and Standards” the author contrasts the role of Positive Accounting Theory (PAT) and Normative Accounting Theory Positive accounting theory is an accounting based theory that seeks to state, explain and predict accounting methods…
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Accounting Theories and Standards
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Download file to see previous pages To predict the reactions, accountants need to conduct research. Therefore, they need to develop a research accounting problem, objectives and hypothesis. The accounting based hypothesis would be tested by observing the environment and collecting appropriate data that would be analyzed. The data may include various types of costs, revenues, and relevant accounting ratios. Positive accounting theory can thus be tested and refuted because facts are collected and availed for analysis. The theory may predict that if the financial statements will be audited or closely monitored, the agents will not assume self-interest and profits will not be overstated. The theory also predicts that firms put in place better systems and mechanisms that align the interest of managers of a given firm to those of the shareholders. The theory suggests that managers should be flexible to adapt to changing accounting policies. Positive accounting theory does not suggest an accounting method that a firm should use but rather predicts it.
The second theory is the Normative accounting theory. This is an accounting based theory arrived at because of applying some norms, standards or objectives that the entity aims to achieve . the theory is based on prescriptions. Therefore, it cannot be ascertained or refuted because it uses deductive reasoning rather than empirical or evidence analysis. Normative accounting theory seeks to prescribe accounting methods that companies should use and standards that must be maintained at all times in their accounting activities. For example, it suggests expenses, revenues, assets, and liabilities that can be reported in a particular case. ...Download file to see next pagesRead More
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