Accounting theory has a formidable significance in the domain of corporate finance as it facilitates beneficial outcomes such as methodologies for processing financial statements and acquiring vital information that can be used for formulating effective business decisions. Accounting theory can be described as the mathematical science of gathering, recording, and compiling financial information into a systematic formal which will help in communicating that information to its end users effectively. The accounting theory not only comprises the historical basis but also includes how these accounting theories have evolved with time. These principles and theories are also implemented are not implemented in business organizations but they also encompass the framework of governments to keep a record of the financial statements and reporting. A detailed analysis of normative and positive accounting theory has been done in this report (Godfrey, 2010).
Various dimensions of positive accounting theory suggest the competencies for analyzing the evolution of trends in the existing world and integrating the information in their accounting transaction based on accounting theory (Wolk 2009). It also endeavors to comprehend and envisage the response of the organizations during the launching of new accounting policies. It has also a major role in elucidating the dissimilarity in implementing the different accounting policies and their effect on the organization. Normative accounting theory undergoes multiple accounting processes to identify the appropriate accounting opinions (Godfrey, 2010). Thus, it can be said that this theory is the best accounting theory.
The positive accounting theory deals with real scenarios and can thus be a subject that can be argued on, while the normative accounting theory deals with such information that has another subject. On the contrary, it is impossible to prove and test the normative theory as it works on mere opinions and does not involve any objectivity in it (Baxter, 2014).
In this report, the two research journals have been considered to assist the research and findings of the positive and normative accounting theory. Firstly, this report will summarize the articles and hypothesis and then a thorough discussion will be provided on the theoretical, their significance, and limitations (Schroeder, Clark & Cathey 2011).
A comprehensive analysis of both articles suggests that the first article concentrates on the positive accounting theory and its improvements in the past few years. It gives details about how this theory has evolved with the development of the ways businesses run around the world. The article has also illustrated a comprehensive evaluation of positive accounting theory based on the works of three prominent researchers such as Popper, Kuhn, and Lakatos (Schroeder, Clark & Cathey 2011). It has been observed in the comprehension of the article that positive accounting theory is the amalgamation of all these science accounts which is not equivalent to their methodological frameworks. Positive accounting theory implies that data is not the major authority in a theory but it works simultaneously to frame and improve that theory (Baldvinsdottir, Mitchell & Nørreklit 2010). Hence, this theory relies on the facts that are going around in all the companies. It is possible to eliminate a respective theory only if a new theory in that regard is proposed along with a strong explanation, discussion, and framework. If this is not so, then the existing theories cannot be eliminated (Schroeder, Clark & Cathey 2011). This article, also argues that such theories which have a higher quality of explanation, can thus be applied at another time of that theory’s lifecycle (Riahi-Belkaoui 2004). Hence, the selection of the most apt theory becomes a bit difficult due to the existence of several such theories which are very competitive. This article also argues the fact that despite using natural science for the comprehension of the positive accounting theory, it is unable to equal the success that natural science achieved during its time. Therefore, it is very complicated to access the human while studying and implementing the positive accounting theory. It is a major issue that positive accounting theory relies on the institutional environment as they are different at different places (Baldvinsdottir, Mitchell & Nørreklit 2010).
The second article relied primarily on the descriptive evaluation of normative accounting theory concerning the works of five prominent scholars. The article depicted prominent indications towards the identification of issues in the accounting theory and a critical reflection on the dissimilarities among the theories. The major dissimilarities revolve around the information needs and basic assumptions of its users (Milne 2002). The normative accounting theory is not based on observation but it concentrates on how an accounting process must be conducted. According to various scholars, normative accounting theory uses various dissimilar approaches to drive one appropriate accounting opinion. This method utilizes a distinctive formula to ascertain the income based on value, not cost. The normative accounting theory enables accounting policy developers what should be done based on a theoretical principle rather than focusing on what is already happening in companies today (Tengblad & Ohlsson 2010). Hence, it can be said that this theory is a great way of differentiating the old theories from the old theories, and is thus, very helpful for the companies. The dissimilarities among those theories result in several other recognition and gauging proposals. Lastly, this article also conducted an assessment of present accounting practices. At the beginning of the twentieth century which indicated the proliferation of accounting theories, the primary emphasis was concentrated on the development and framing of accounting principles. The relations between normative accounting theory and deductive theories can also be observed specifically from the article (Williams 2010).
The research questions can be easily ascertained by comprehending the central theme of the research article (Godfrey 2010). The theme can be considered as the answer to the research questions. The research questions identified in both the articles are listed below:
The theoretical framework for the research activity is essential to determine theoretical paradigms about the research issue alongside obtaining particular insights to resolve specific research questions (Behn et. al. 2012). The theoretical framework is responsible for establishing a foundation on which the researcher can identify benchmarks for the review of collected data alongside the identification of opportunities for validating the data. The first article related to Positive Accounting Theory PAT framework has been implemented which has helped in explaining the article. The framework has also been significant in describing the stock return to the incentives for the effective management of reporting related to finance (Barnett 2007).
Consequently, the second article has utilized the below-mentioned framework that has become a basis for assessing other theories and has also applied it to the other theories that are assessed in this article (Bay 2011).
For ascertaining a similar and balanced conclusion, it becomes essential to utilize such a framework which is similar to the evaluation and assessment of all the theories (Schroeder, Clark & Cathey 2011).
The recognition of an appropriate audience is crucial for the effective circulation of the article and the communication of information about normative accounting. Normative accounting has been associated with extensive debates on whether the utilization of accounting theories can result in accountability or improve the reflection of the market (Baxter 2014). Thus, FRS (IASB) can very well use the results to expand the other practices related to accounting. However, it can also be supportive for business organizations as they can do their financial reporting more significantly in comparison to the previous methods (Bay, 2011). Not only that, but it has also great importance for the investors and other stakeholders as they are concerned and get influenced by the financial position of the business organizations. Thus, it is essential for the entire stakeholder that the financial reports depict the true sense and connotation of the financial position of the organization. It also has huge significance for other researchers who can get assistance from the existing theories and can develop those theories in the future (Bay, 2011).
The theory of Positive Accounting Theory facilitated prolific implications in the corporate sector as it helps the management identify the strategic direction to understand accounting choices. Generally, the management of business organizations is concerned with the availability of various practices that would suit their interest and competencies. Moreover, the same may not be very advantageous for other investors and stakeholders. There are requirements for incentivizing management to select the most appropriate framework that can be performed with the PAT. It is beneficial for the researchers associated with normal science (Wolk, 2009).
The limitations associated with the individual articles are largely dependent on the research approach adopted in both articles. The profound limitations that could be associated with the methodology of the articles can be observed in the qualitative approach of the articles. Qualitative data is devoid of numeric representations that raise concerns about the validity and reliability of the data which can be obtained in quantitative data (Behn et. al. 2012). There are various limitations of the qualitative approach as it can consist of bias and various forms of unfair interpretation which are not effectively considered by the respective author. Therefore, the authors frequently get attention higher than what is factually correct in the articles. The exploratory nature of the research could also be assumed as a profound limitation in the context of this research activity that led to the subjective nature of the research without any specification of particular objectives thereby leading to ambiguities (Wolk, 2009).
The research activity depicted the proficiency of accounting theories such as normative and positive accounting theories alongside an illustration of prolific references to the works of various researchers. In that context, this report comprehensively concentrated on some of the major accounting theories.
The major objective of this research was aligned towards the identification of disparities between the two theories mentioned in the literature and therefore the research questions were fabricated accordingly to present authentic evidence. It is essential to frame research questions to provide a specific direction for this research work (Hurt & Zhen 2008). The above comprehension suggested that Positive accounting theory is fact-based and normative accounting theory is purely opinion-based. The first article spoke about the positive accounting theory which used the framework of PAT that is very helpful in explaining the stock return along with hikes that are related to financial reporting in any organization. Similarly, the second article is comprised of a common framework that has been implemented to ensure a common ground on which various theories can be explained (Baldvinsdottir, Mitchell & Nørreklit 2010). It is vital to develop an effective framework for better comparison and analysis of all the accounting theories to derive an unbiased and common conclusion regarding the selection of the theories. To ensure the substantial development of accounting practices it is essential to utilize the IASB or FRS (Wolk 2009). However, this can also be advantageous for business organizations as they will be capable of making their financial reports more significant compared to the traditional or existing accounting theories. Thus, a better financial report will help the companies to understand the finances of the company better and the management will be able to design more improvised financial terms for that organization. Apart from business concerns, accounting theories can be utilized by other investors, researchers, and stakeholders to make unbiased decisions.
Baldvinsdottir, G., Mitchell, F. and Nørreklit, H., 2010. Issues in the relationship between theory and practice in management accounting. Management Accounting Research, 21(2), pp.79-82.
Barnett, M.L., 2007. Stakeholder influence capacity and the variability of financial returns to corporate social responsibility. Academy of Management Review, 32(3), pp.794-816.
Baxter, W. (2014). Accounting Theory. 1st ed. Hoboken: Taylor and Francis.
Bay, C. (2011). Framing financial responsibility: An analysis of the limitations of accounting. Critical Perspectives on Accounting, 22(6), pp.593-607.
Behn, B.K., Ezzell, W.F., Murphy, L.A., Rayburn, J.D., Stith, M.T. and Strawser, J.R., 2012. The Pathways Commission on Accounting Higher Education: Charting a national strategy for the next generation of accountants. Issues in Accounting Education, 27(3), pp.595-600.
Godfrey, J. (2010). Accounting theory. 1st ed. Milton Qld: John Wiley & Sons Australia.
Hurt, R.L. and Zhen, F., 2008. Accounting information systems: Basic concepts and current issues. McGraw-Hill Irwin.
Milne, M.J., 2002. Positive accounting theory, political costs, and social disclosure analyses: A critical look. Critical perspectives on accounting, 13(3), pp.369-395.
Riahi-Belkaoui, A. (2004). Accounting theory. 1st ed. London: International Thomson Business.
Schroeder, R.G., Clark, M.W. and Cathey, J.M., 2011. Financial accounting theory and analysis: text and cases. John Wiley and Sons.
Tengblad, S. and Ohlsson, C., 2010. The framing of corporate social responsibility and the globalization of national business systems: A longitudinal case study. Journal of Business Ethics, 93(4), pp.653-669.
Wolk, H. (2009). Accounting theory. 1st ed. Los Angeles [Calif.]: SAGE.Order Now