Positive and Normative Accounting Theories - Essay Example

The paper “Positive and Normative Accounting Theories” is an engrossing example of an essay on finance & accounting. Accounting is an essential part of the organization and proper use of accounting policies helps to provide a complete and correct picture regarding the performance of an organization. Organizations can use different accounting policies and process based on their needs and requirements but the process which has been used need to be followed continuously. This report looks to evaluate the manner in which accounting is used by organizations and provides a framework regarding the different accounting choices which accountants have. This will thereby help to provide a perspective regarding the different accounting theories and the manner in which it will help businesses to improve their performance, reporting, and the manner in which overall results can be achieved in the better way.

Points of Discussion
This aspect discusses the different points and topics which are going to be discussed as a part of the report and present the different highlights based on which accounting theories and perspectives are developed

Positive Accounting Theory
Positive Accounting Theory which has been developed by Watts and Zimmerman provides an overview and guidance regarding the different reasons which have made managers choose one accounting method over the other. The different theories which have been developed and adopted have been based on the premise that the rational assumption of a person is assumed to have taken place and based on that behavior a person looks to accept a particular accounting theory.

The theory profound the fact that the accountant is motivated by self-interest and that particular behavior has an impact on the manner in which a particular accounting method is accepted. This leads towards the fulfillment of the following criteria

Assumptions: Decisions of a person are taken on self-interest and is guided by personal motive and decision making factors

Premise: The manager who has chosen an accounting method is benefitted in the form of an accounting-based bonus and the organization looks towards negotiating the manner in which debt covenants are developed. This will help to develop the overall framework through which better acceptance of accounting policies takes place.

This is despite the fact that positive accounting theory doesn’t state that any accounting process or policies is the best and it depends on the preference and needs of the organization and the managers looking to use it.

Normative Accounting Theory
Positive Accounting Theory is based and developed on empirical evidence whereas normative accounting theory is not based on evidence but instead depends on what the person believes would be the result from the different situation which is being presented. This thereby looks to denote the different actions which are taking place and doesn’t look to be developed based on evidence.

The conceptual framework of accounting is thereby one example that looks to follow the normative theory of accounting. Using the different assumptions and attributes which helps to provide useful information for decision making thereby has a role and is imperative for the normative theory of accounting. This helps to understand the manner in which assets, liabilities, expenses, income, and equity need to be recognized, and measured so that the overall framework will help to develop the mechanism through which better use of accounting policies can be developed and measured.

Evaluating the theories of accounting
To understand the perspective of the positive accounting theory and normative accounting theory it is imperative that the same is understood from different paradigms so that the role that the different accounting research has can be understood. This will help to identify the different paradigms that will help in understanding the accounting policies which have to be used.

The argument between the theories
Researchers started to use different accounting theories at different times based on the different needs and requirements so that research can be carried out at the appropriate time. The use of normative accounting theory is based on the judgment in comparison to positive accounting theory which is based on evidence. This thereby makes the researchers use different theories based on different observations and needs so that a clear and better perspective of the same can be identified.

Rationale
Proponents of the use of positive accounting theory state that the use of positive accounting research doesn’t look to impose their own opinion but rather looks to present the research based on scientific evidence and thereby provides an opportunity where the people can use the research to make their own decision. This provides the people to use the evidence of the research to make different decisions which they feel will help them for better decision making and will improve their overall relevance of the use of accounting policies.

This has also been highlighted by another researcher that the decision-making process for people is based on value judgment so usage of positive accounting theory helps to ensure that the actions of an individual are driven on self-interest and value judgment which helps to improve the overall relevance and usage of the accounting policies. 

Positive accounting theories are further value-laden and help to add a certain value to the organization through the use of different policies. The process thereby helps to have an influence on the research design and determines the different constraints within which the accounting policies are developed and used. Positive accounting theory thereby looks to follow both the predictive and explanatory research phenomenon and presents the manner in which the topic can be investigated based on the different assumptions that the research states. This helps to identify the different preference and expected payoffs so that the different methods and assumptions which are associated can be used. This thereby helps to add value and ensures that the research provides a better perspective and overview regarding the manner in which the different positive value is added through the usage of positive accounting theory.