Introduction
The concepts behind theories and their application in different fields of studies have existed for centuries. Theories have been useful in examining how individuals in the field of research and development have had different opinions, perceptions, and even discernments on important educational and life models and how they correlate with practical living. The principal purpose of accounting theory is to present several principles and relationships that elucidate observed practices and forecast unseen practices (Coetsee 2010). The two main theoretical approaches in accounting theory are the normative approach and the positive approach.
The two alternative approaches would generally be appropriate to differing circumstances. Despite substantial literature existing on the two theoretical principles, much remains anonymous to the circumstances of their applications. Therefore, this essay explores the two main theoretical approaches to their apposite applications.
Synopsis of the theories and profession
Accounting information has been paramount to numerous organisations as well as governments as they provide information that facilitates informed decision making by decision and policymakers. Porwal (2001) notes, “accounting is the measurement of and communication of financial information about economic activities to the interested persons” (p.22). Accounting theory, on the other hand, can refer to a consistent set of logical ideologies that continuously provide an advanced understanding of the prevailing users of accounting information.
The theory has also been the significant conceptual framework for estimating the existing accounting practices as well as acting as guides to the development of new procedures and practices useful in the accounting profession. Porwal (2001) notes that accounting theories fall into three distinct classifications: “inductive versus deductive, normative versus positive and according to prediction levels” (p.22). However, despite having an interdependence connection between theories and practice, much remains anticipated, as controversies in their submissions in the accounting profession have been in continuous debates.
For the past three consecutive decades, the gap between existing theory and related theory as predetermined by the initial developers of theories is increasingly becoming eminent in the profession of accounting. Since the 1970s, the concept and science behind the determination of accounting standards have continuously been a critical issue and till recently as evidenced in the prolonged controversies in numerous organisations and governments. Typically, as postulated above, there are two main approaches in accounting theory namely normative and positive accounting approaches.
The two accounting theories have been in constant use for numerous years with differences in their application becoming more protracted and evident in controversial comportment. Differences in the accounting standards and principles inherent in the two theories are intensifying with arguments on the different measurement proposals rising. The protracting differences on the prevailing discrepancies in the professional application of normative and positive accounting have raised awareness of members involved in the accounting profession and the entire accounting research and development paradigm.
Normative accounting theory
For several decades, philosophers, researchers, and mathematicians have continuously argued over certain principles governing the accounting profession with individuals having differing perceptions or rather discernments. Normative theoretical approaches are among the earliest form of accounting theories that laid the foundation of several principles of accounting. Under the basic definition that applies in almost all literature sources, normative accounting theories are a form of accounting presumptions that describe ideas, ideologies, and philosophies on how individuals should undertake the accounting process.
According to Mattessich (1995), the normative accounting approach typically assists in homogenising the practice of accounting in the accounting profession and proponents of this approach have continuously argued that it suits the profession in both academics and practical application. Another probable name used to refer to normative theories in the existing literature is a prescriptive theory (Porwal 2001). Contrary to the positive accounting theory approaches, the normative approach does not in any way depend on radical changes in the practice to determine or justify the current practices in accounting.
Normative theories in their principles are a form of theories that attempt to explain or elucidate on how researchers, mathematicians, or philosophers should collect, analyse and communicate financial information pertinent to accounting practices. According to Porwal (2001), normative accounting approaches depend entirely on principles that accountants must adopt in their profession. In short, the normative is approach sounds more authoritarian compared to the positive accounting approach. Coetsee (2010) postulates, “Normative theory represents real-world situations, not as they are, but as they should be”.
The methodology used in research and development of normative approach depends entirely on standardised accounting principles to validate any information pertinent to the accounting practice. Given such principles correlative to normative approaches, accounting models using these approaches must be specific for the possibility of its achievement to remain positive, successful, and believable to humans, failure to which they remain irrelevant. However, the approach has continuously proven significant in the current epoch, though with numerous criticisms as evident in the accessible literature.
Positive accounting theory
Positive accounting theory seems to be the most contemporary accounting approach that has become almost acceptable, though with numerous critiques just as the normative accounting approaches (Jeanjean & Ramirez 2009). The positive accounting theory approach sometimes can appear as descriptive in some studies. According to prior studies, the modern positive accounting approach and its relative research began blooming in the 1960s as researchers provided empirical finance methods for evaluating the prevailing principles governing accounting practice (Kabir 2010). Positive accounting theory approaches are presumptions based on observations, analyses, and decisions depending on the contemporary changes occurring in principles of accounting.
According to Porwal (2001), the descriptive or positive methodology will attempt to justify some of the accounting practices deemed useful and the normative or prescriptive methodology will attempt to justify some of the accounting that accountants ought to adopt (p.11). Typically, the positive or descriptive accounting methodology depends on other numerous accounting approaches to establish relevant principles in the accounting profession. The principles are not constant and change depending on radical changes in the contemporary accounting profession.
Critiques of the theories
The complexities and non-uniformity in the two main accounting theories and their relative principles are constantly raising different reactions and protracted debates amongst accounting professionals. Despite their equal significance in the accounting profession, normative and positive theory approaches possess numerous loop whorls in the sense that the critiques on their validity and reliability emerge, making it uneasy to ascertain basic accounting principles. According to Jeanjean and Ramirez (2009), normative accounting theory approaches in several instances have failed to have the most essential theoretical principle that involves acting as a guide to the development of new procedures and practices useful in the accounting profession, since it assumes contemporary matters.
On the other hand, Jeanjean and Ramirez (2009) postulate that positive theory approaches have few substantive links between theory and the determination of the practices themselves and hence require a high degree of decoupling between research and development of accounting techniques to validate their significance. With these disparities and more, the following is a breakdown of critiques on normative and positive accounting theory approaches.
Critiques on normative accounting approach
Normative accounting approaches have insisted on the improvement and standardisation of practices and profession of accounting. As postulated earlier, it does not rely on radical changes in the accounting practice to ascertain its principles. However, according to Belkaoui (1996), the principal purpose of an accounting theory is to present a logical basis necessary for the prediction and justification of accounting behaviour and procedures.
In several cases, the most common criticisms on the application of the normative or prescriptive accounting approach occur when the convectional model engenders outcomes that are spontaneously dissimilar from the observer’s objectivity. In this sense, two important things exist in this account, when independently rational actions result in most unpleasant outcomes contrary to the prevailing accounting principles and when preferences give the impression of destructiveness to societies or individuals interests. Normative or prescriptive accounting theory approaches tend to support most government organisations where the majority of the criticism emerge, making the entire approach, including its validity and reliability in the accounting profession questionable.
Normative or prescriptive accounting technique has been a form of historical cost accounting strategy. In their support for the more contemporary positive accounting approach, numerous researchers have argued upon the reliability of the normative accounting approach. Researchers have argued that normative accounting approaches rarely consider contemporary matters arising from the accounting profession and therefore give chance for manipulation.
Watts and Zimmerman (1990) have constantly argued since the 1970s on the normative accounting approach that government regulation “creates the incentive for individuals to lobby and that accounting theories justify political lobbying” (p.4).
Based on its definition and the principles it rests upon, the normative accounting approach does not depend on radical changes in the behaviour and events of the profession, it becomes ineffective in the decision-making procedure undertaken in the contemporary accounting profession (Coetsee 2011). Enforcing accounting principles in the contemporary accounting world may seem autocratic, as the prevailing accounting, the profession has intensified democratic decision-making based on logical ideologies than presumptions existing in outdated theories.
The normative or prescriptive accounting approach neglects several basic radical changes that may prove significant in determining the outcomes of the accounting procedures. Normative theorists have continuously argued that the emergent trends in the market and production paradigms have no impact on the accounting principles (Mattessich 1995). They have constantly posited that standardisation of accounting principles is necessary to eradicate multi-manipulative practices in the accounting profession. The accounting procedure typically fails to recognise radical changes in the market entities, which provides no significance in the validity of accounting in the contemporary business world.
The must use of ideologies and standards produced by the normative accounting experts may not precisely provide logical solutions to the current situations that need consideration in the current business world (Mattessich 1995). As the normative accounting, strategy claims that the positive accounting approach falls under the self-interested income reducing strategies, proponents of this accounting approach have failed to produce evidence on how managers manipulate the accounting standards. With such circumstances, normative uncertainly remains a historically biased accounting approach.
Critiques on positive accounting approach
Despite it being a modern accounting approach based on observations and analysis of the prevailing changes in the accounting profession, positive or descriptive accounting methodology has received several criticisms from various positive approach adversaries. According to Watts and Zimmerman (1990), the criticisms of the positive accounting approach stem from two main perspectives: those concerning issues related to research methods (inclusive of the inferences employed) and issues on the accounting methodology itself (including the philosophy of accounting science). According to Coetsee (2010), “in its broadest sense, positivism is a rejection of metaphysics…it is about finding truth and providing it through empirical means” (p. 5).
However, in the real sense research methodology must remain imperative throughout the research and development process by ensuring the parameters of validity and reliability remain significant (Whittington 2007). The rationality and lucidity of the accounting research methodologies have constantly argued and elucidated on the importance of validity of research methodology and hence any study contrary to such principles remains irrelevant.
Disproportionately, the research methodologies used in the positive accounting theory approaches have continuously varied depending on researchers and the prevailing circumstances in the accounting profession. According to Watts and Zimmerman (1990), following evidence from the empirical facts reviewed in the positive accounting analyses, researching using descriptive accounting techniques may result in numerous disparities.
For instance, the firm size and dividend plans in accounting research may understudy or omit relevant accounting variables; positive theories may be value-laden, demonstrate a sense of masking conservative biasness, or even inappropriate methods used in researching may produce irrelevant theories. Sometimes the presentation of the arguments in the research or studies undertaken in a positive accounting approach may reveal biasness or the empirical evidence may remain unbalanced causing erroneousness in designing accounting principles (Boland & Gordon 1992).
Some approaches may concentrate most on the sociology of accounting, empathise on emerging issues, and forget relevant accounting principles that lead to ambiguities in the results of the research. A positive accounting approach may however remain questionable in the contemporary business environment where management, integrity and employee motivation remain paramount performance variables. In the case of issues on the accounting methodology or profession itself, positive accounting technique remains undesirable.
With the current management scheme, which considers managers as the presidents of the prevailing organisations in the current world, much remains anticipated in the positive accounting technique. According to Jeanjean and Ramirez (2009), the positive accounting technique is vast and depends entirely on several different approaches to arrive at an ultimate accounting opinion, where manipulation of accounting figures and another form of impunity may arise.
In almost all governmental and non-governmental organisations, managers have always played a prevalent role in determining accounting standards. Managers in organisations employing positive accounting techniques may constantly disagree on the opinions governing the determination of accounting standards and principles for personal interests and not according to the company’s desires. Given such facts, managers may propose accounting standards with loop whorls to money looting.
Conclusion
Protracting debates on the principles underlying the presence of normative and positive accounting approaches are becoming the most domineering accounting matters. The existing discrepancies in the two main accounting principles are constantly raising differing opinions across the accounting profession with an individual having difficulties in understanding basic accounting principles necessary in delivering accurate accounts in the present world.
However, despite the justification of both accounting approaches in numerous empirical pieces of evidence, the debate is continuously overwhelming and confusion in the accounting process is augmenting. The positive accounting approach appeared predominantly to provide a significant shift from the monotonous practice of formulating accounting people through standardised means and improving accounting through contemporary issues. The normative accounting approach instead did not cease from arguing on its significance in the accounting profession. Nonetheless, based on my personal opinions positivism in accounting is essential to improve the profession.
Reference List
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