Normative approach and positive approach Essay Example | Topics and Well Written Essays - 2000 words

Normative approach and positive approach - Essay Example Among various source of income, business needs to maintain everyday transactions, this are known as accounting methods. Accounting theory can be defined as the study, which helps to examine the methodologies of the assumptions, with their frame work in financial accounting principles. By the study on accounting theory helps to understand the review the historical foundations of the accounting practises and the way by which the verification on accounting practises is made and report to the relating regulatory framework which governs the financial statement and also the financial reporting (Evans, 2009, p.67). We also can say that a set of concepts which are interrelated, or descriptions or intensions which help to create a reasonable analysis on the incidents by identifying the relations among the variables that can be described as accounting theory. There is no single proper theory in financial accounting which may govern the process of accounting accurately (Belkaoui, 2004 p.125). T here are differences in approaches, opinions, and values in accounting practise. In the year 2005 Deegan and Unerman stated that to understand the accounting theory a proper methodology is needed to justify the process (Most, 1977, p.56). Nowadays both economics as well as businesses are continuously evolving. Accounting theory is also changing with business and economy. ... For the development of accounting theory several approaches have been made within the last two decades, among which are descriptive, normative, positive, decision making, empirical and welfare ones. However here we concentrate on positive approach and normative approach. Normative theory A normative theory can be defined as a theory, which does not depend on observations, but on the process by which it should be done. According to most of the researchers several different approaches are used in this theory to find a correct opinion about accounting. The formula is used in this method to find out the value what income is based on and not depend on cost. Here the opinions of the theorists are depending upon deductive logic, subjective opinion and inductive methods. On base upon this theory all the other theories are standardized. The other theories tend to give conclusion that some of the accounting rules are better or worse than the others. The normative theories generally depend upon the anecdotal evidence which may not pass the test of academic rigor (Porwal, 2001, p.245). On depending on the personal outlooks, consequent reasoning, and by using of elementary reasoning it aims to approve that there are several accounting practices which are better than others. It helps to understand what ought to be rather than what it actually is. In the part of theory construction the normative approach is likely to depend on the future related answer rather than on its present. That is like here we can find the answer of â€Å"what should be† rather than â€Å"what it is†. According to this theory, the theories will be more feasible and desirable, which does not depend upon the current