Please enable JavaScript.
Coggle requires JavaScript to display documents.
ACCOUNTING THEORY - Coggle Diagram
ACCOUNTING THEORY
Positive theories
Explain the reasons for current practice
Predict the role of accounting information in decision-making
Based on ‘experiences’ or ‘facts’ of the real world
Positive theories vs Normative theories
Normative theories prescribe how people such as accountants should behave to achieve an outcome that is judged to be right, moral, just, or otherwise a 'good' outcome.
describe how people do behave (regardless of
whether it is 'right'); they explain why people behave in a certain manner, and they predict what people have done or will do
PARAGMATIC THEORIES
Descriptive pragmatic approach
tested by observing whether accountants do act in the way theory suggests
based on observed behaviour of accountants
Criticism
does not consider the quality of an accountant’s action
does not provide for accounting practices to be challenged
focuses on accountants’ behaviour not on measuring the attributes of the firm
Psychological pragmatic approach
theory depends on observations of the reactions of users to the accountants’ outputs
a reaction is taken as evidence that the outputs are useful and contain relevant information
Criticism
some users may react in an illogical manner
some users might have a preconditioned response
some users may not react when they should
individual reaction instead larger sample size
Normative theories
based on analytic and empirical propositions Financial statements should mean what they say
concentrated on deriving: • true income (profit) • practices that enhance decision-usefulness
policy recommendations with what should be done, rather than with analysing and explaining the currently accepted practice
what is true income – a single measure for assets
- a unique and correct profit figure
Decision usefulness: – the basic objective of accounting is to aid the decision -making process of certain ‘users’ of accounting reports by providing useful accounting data