Question

Compare positive versus normative accounting theories, and judge which broad category of accounting theories that the current APES 110 Code of Ethics fits in, i.e. Positive or normative accounting theories?

Answer 1

Positive Accounting
Positive accounting theory, known as the practical approach, looks at what is currently happening in a business it’s based on cold, hard statistics. This approach is regularly used within bookkeeping and data collection,positive accounting scrutinises the real world transactions of a company and compares the incomings with the outgoings to identify any discrepancies. This approach allows the accountant to see whether a business is making or losing money.

Normative Accounting
Unlike positive accounting which is based on observation, normative accounting theory advises policy makers on what should be done based on a theoretical principle,it starts with a theory and deduces specific policies from this. While positive accounting looks at past data, normative works with events in the future. It is most commonly used in a firm’s marketing or business plan and aims to sum up what the future of the company will look like financially while advising on how to plan for future events.
Both practical and normative accounting are influential theories, but which of the two is preferred and can or should they be used together? Today, although a business may opt for one theory over the other, it’s common place for a company to use a combination of practical and normative; in many cases, the theories complement each other. Those within finance may use normative accounting theory to come up with new policies, but these standardised policies are usually based on the factual explanations identified in positive accounting. Proper financial planning for any business or individual requires the use of both positive and normative accounting practices. On a large scale, economists indicate financial policies through normative accounting statements, but these normative statements must be based on the financial realities found through positive accounting practices. The factual-based practices of positive accounting provide a foundation for companies to engage in normative accounting, and a more idealistic view of how the company can operate while still earning a profit.