Accounting Theories: Normative, Positive, and Critical Analysis

This essay provides a comparative analysis of normative, positive, and critical accounting perspectives. It defines normative accounting theory as a framework for how accounting processes should be performed, often emphasizing value over cost. Positive accounting theory is presented as a predictive tool, focusing on real-world events and how accounting personnel translate them into transactions, with an emphasis on predicting firms' accounting policy choices. The critical perspective of accounting is discussed in terms of its role in assessing financial accounting processes in capital formation, stock market stability, and international banking. The essay concludes that positive theory is more effective than normative theory as it allows for flexibility in accounting approaches, enabling the development of a competent policy framework. The essay references online sources to support its arguments.

Compare and Contrast Normative, Positive and
Critical Perspectives Accounting

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY..................................................................................................................................3
CONCLUSION................................................................................................................................4
REFERENCES................................................................................................................................5

INTRODUCTION
Accounting theories include the review of historical foundation of practices and the
manner n which they are getting changed as compared to the prior times. Hence, theories of
accounting provide deeper insight about the new framework added which in turn governs
financial accounting and reporting in an effectual way. In this, the present essay will furnish
information about the normative, positive and critical perspective of accounting.
MAIN BODY
Normative accounting theory may be defined as one which is not based on an
observation. However, it clearly entails the manner in which accounting process should be
performed. Normative theory of accounting is highly significant which in turn helps in assessing
the income based on value rather than cost. Thus, it can be stated that normative accounting
aspect higher differs from the fundamentals. Moreover, such theory provides deeper insight to
the accounting policy makers about the changes required on the basis of theoretical principle
rather than placing emphasis on company’s happening. On the other side, positive theories of
accounting lays high level of focus on making appropriate predictions regarding the real worlds
events. Hence, by making estimation of events accounting personnel translates them into
transactions in the best possible way. It can be presented from such aspect those positive theories
of accounting assist in predicting the actions which accounting firm needs to choose.
Along with this, positive theories also help in identifying the manner in which firms will
react towards the newly proposed accounting standards. The main focus of positive theory is to
assess and predict the choice of accounting policies across the varied firms. It focuses on the
identification of accounting policies that offer high level flexibility to manager. Further, critical
perspective of accounting shows the role of financial accounting process in capital formation.
Stock market stability and international banking practices can be assessed through the means of
critical perspective of accounting (What Are the Differences between Positive and Normative
Accounting, 2017). Along with this, research area of critical perspective of accounting includes
identification of the role of management accountant. Further, relationship between the

accounting and various social formations can also be evaluated through the means of critical
perspective of accounting.
By making assessment, it has been identified that positive theory of accounting is highly
effectual as compared to the normative. Moreover, positive accounting theory places emphasis
on making evaluation of examining the real life occurrence. Thus, by making evaluation of real
life events accounts and focusing on the manner companies can address the accounting treatment
of transactions in the best possible manner (Positive accounting theory, 2017). However, on the
critical note, it can be stated that normative theory completely avoids the real life events or
accounting problems. Hence, normative accounting theory is the deductive process as compared
to the positive accounting theory. Moreover, normative theory starts with the policies and
deduces to the specific level. On the other side, positive theory of accounting starts with the
specific theory and ends with the generalization of higher level principles.
From assessment, it has been identified that positive theory is highly based on three
hypothesis such as bonus plan, debt covenant and political cost. Manager of the firm who has
bonus plan places high level of emphasis on choosing specific accounting process. It reports
earnings from future period to the current period. Thus, by considering such aspect it can be
stated that manager can increase their revenue by undertaking bonus hypothesis. In addition to
this, debt covenant hypothesis company can increase earnings by less violating debt covenants.
Further, third hypothesis shows that business unit needs to place emphasis on following specific
accounting process when political cost faced by the firm. Hence, by making evaluation of all the
above mentioned aspects it can be stated that positive approach is highly effectual as compared
to others.
CONCLUSION
From the above report, it has been concluded that positive theory of accounting is highly
effectual as compared to normative. It can be seen in the report, manager requires flexibility in
terms of accounting approach and practices. Thus, by using positive theory accounting team can
develop highly competent policy framework.

REFERENCES
Online
What Are the Differences Between Positive and Normative Accounting. 2017. Online. Available
through: < https://www.fool.com/knowledge-center/differences-between-positive-normative-
accounting.aspx>. [Accessed on 29th April 2017].
Positive accounting theory. 2017. Online. Available through: <
http://www.accountingscholar.com/positive-accounting-theory.html>. [Accessed on 29th April
2017].