School Of Business BUACC 2606 Financial Accounting Summer 20

School Of Businessbuacc 2606 Financial Accountingsummer 201213assignm

Analyze the contrast between normative and positive accounting theories, and discuss whether a new paradigm has emerged in accounting theory. Additionally, evaluate the historical cost concept by examining its application, dominance, valuation issues, and criticisms in accounting practice.

Paper For Above instruction

Accounting theories serve as foundational frameworks that guide the development, interpretation, and application of accounting practices. Over time, various theoretical perspectives have evolved, notably the normative and positive theories, each with distinct philosophical underpinnings and practical implications. This paper critically examines the contrast between these two theories, explores the hypothesis that a new paradigm may be emerging, and evaluates the concept of historical cost from multiple perspectives.

Normative vs. Positive Theories in Accounting

The normative accounting theory is prescriptive in nature, emphasizing how accounting should be conducted according to an ideal set of principles or ethical standards. It aims to establish standards that promote transparency, fairness, and stakeholder trust, guiding the development of accounting policies that are deemed 'correct' or 'moral.' Normative theories are rooted in valuation models, ethical considerations, and normative standards that are aspirational, often driven by the desire to improve the quality of information and its usefulness for decision-making (Miller & Bahnson, 2017).

In contrast, positive accounting theory (PAT) is descriptive, focusing on explaining and predicting actual accounting practices based on observed behavior. Positivist scholars, such as Watts and Zimmerman (1986), argue that accounting practices are shaped by economic incentives, institutional pressures, and social factors rather than by normative ideals. PAT does not prescribe how accounting should be; instead, it seeks to understand why certain practices prevail and how they are influenced by the interests of various social actors (Watts & Zimmerman, 1986).

Has a New Paradigm Emerged?

The debate surrounding whether accounting has transitioned into a new paradigm is ongoing. Traditionally, normative approaches dominated, emphasizing ideal standards and ethical principles. However, Watts and Zimmerman’s (1986) articulation of PAT marked a significant shift towards understanding accounting as a social and economic phenomenon influenced by self-interest and market forces.

Recently, some scholars propose that we are witnessing the emergence of a new paradigm characterized by a focus on usefulness, vocational training, and practical application—often referred to as the "pragmatic" or "instrumentalist" approach. This paradigm emphasizes the utility of accounting information in managerial decision-making, corporate governance, and regulatory compliance, often sidelining normative ideals in favor of relevance and functionality (Power, 2010).

While some argue this represents a fundamental shift, others contend that normative ideals still underpin certain facets of accounting regulation and standards, suggesting a hybrid model rather than a complete paradigm replacement. The evolution from normative to positive, and potentially to pragmatic modes, reflects an ongoing transformation driven by economic, technological, and social changes (Hopwood, 1987).

Conclusion

In conclusion, the contrast between normative and positive accounting theories highlights different approaches to understanding and developing accounting practice. While normative theories emphasize ideals and ethical considerations, positive theories prioritize explaining actual behavior based on incentives and social dynamics. The debate over whether a new paradigm has fully emerged remains open, with indications of a hybrid approach that leans towards practical utility and market relevance. This ongoing evolution underscores the dynamic nature of accounting theory in response to changing social, economic, and technological contexts.

References

• Hopwood, A. G. (1987). The Archaeology of accounting systems. Accounting, Organizations and Society, 12(3), 207-234.
• Miller, P., & Bahnson, P. (2017). Normative and Positive Theories of Accounting. In Handbook of the Economics of Accounting (pp. 45-73). Elsevier.
• Power, M. (2010). The Youth of Positivist Accounting: Or, the Birth of Pragmatism? Critical Perspectives on Accounting, 21(4), 317-330.
• Watts, R. L., & Zimmerman, J. L. (1986). The Demand and Supply of Accounting Theories: The Market for Excuses. The Accounting Review, 61(3), 365-385.