Question

(a) What is the difference between a positive theory of accounting and a normative theory of accounting?
(b) What is the difference between developing a theory by induction and developing a theory by deduction?

Answer 1

a. What is the difference between a positive theory of accounting and a normative theory of accounting?

Positive theory of accounting thinks of efficiency as the core driver of comany success . It views the company as the total of contracts they have entered into.

In other words, this theory looks at the real world transactions and events , examines how companies are accounting for those and then understands the economic consequences of those accounting decisions.

Normative theory of accounting takes a different approach. It does not look what is happening to the companies today rather it tells accounting policy makers what should be done based on a theoritical principle.

It is more of a deducted process that starts with the theory and deduces to specific policies. But positive theory starts with specific policies and generalises to higher level principles.

b. What is the difference between developing a theory by induction and developing a theory by deduction?

Developing a theory by induction

1. It is concerned with generation of new theories emerging from data

2. It uses research questions to narrow the scope of study

3. The aim is usually focussed on exploring new phenomenon or looking at a previously researched from a different perspective.

4. They are generally associated with qualitative research.

Developing a theory by deduction

1. It is concerned with testing theories

2. It usually begins with a hypothesis.

3. The emphasis is generally on causality

4. They are more commonly associated with quantitative research.