Question

Distinguish normative accounting their and positive accounting their with cleae examples

Answer 1

Positive accounting is mostly concerned with explaining and predicting current accounting practices. Which means the focus is on understanding and explaining the various techniques and methods that accountants currently use and why we have ended up with the most conventional historical cost accounting system. Under positive accounting, an accountant will collect and look at real data such as a company’s revenue and expenses for the past year, and then derive actionable conclusions based off of the financial numbers. Examples of Positive accounting are:

• Explaining why firms opt or select specific accounting policies;
• Predicting that which firms will revoke new or revised accounting rules;
• Explaining the reaction/movement of share price associated with the accounting information release of a firm.

Normative accounting approach dismisses the conventional historical cost accounting as being meaningless or not decision useful and prescribe the use of more 'useful' system of accounting based on inflation adjustment. Normative accounting is more customized as in what principles should be used for a specific type of situation as compared to positive accounting. It aims to describe what a company or investor should do, often using subjective morality derived from some theory. Examples of Normative accounting are:

• Specification of the preferred measurement system;
• Defining elements of financial statements;
• Theories/Principles to be used as to the objective of general purpose financial reporting.