Accounting Theory Dr. P. Pratheepkanth

Accounting Theory

Dr.P.Pratheepkanth

Differentiate normative accounting theory from positive accounting theory. Provide an example of each.

• A normative theory prescribes what should be done based on a specific goal or objective. The outcome of a normative theory is derived from logical development based upon a stated objective; e.g., the Conceptual Framework prescribes principles, such as recognition criteria for elements of financial statements, based upon an explicit objective of financial reporting. In contrast, the role of a positive theory is to describe, explain or predict. For example, agency theory is a positive theory because it is used to explain why managers prefer accounting policies that increase profit in certain situations, such as when there is a bonus plan linked to accounting profit.