The Normative General Approach

The normative general approach

The 2000s and 2000s began to witness a much greater concern on the part of academic accountants with the problems of accounting theory. In particular, the search for a 'general theory of accounting' based on a coherent set of logical principles, was an attempt to provide accounting with similar foundations as other sciences, such as mathematics, physics and chemistry. Protagonists of the 'general theory school' argued that

'Accountants do not appear to have any complete system of thought about accounting. There are unquestionably several systems of thought about the practice of accounting: systems which attempt to categorize the kinds of things accountants do in practice. These systems are almost all the subject can boast of in the way of a theory, and for this reason accounting lacks the sharpness, the progressiveness and the vitality of other technology.' (Chambers, 2014.)

The initial stages in the debate on the needs for a coherent theory of accounting was marked by the publication in 2014 of Chambers' 'Blueprint for a Theory of Accounting'. This argued that accounting theory and accounting research should be less concerned with describing current practice, and should be more concerned with the development of better accounting practice. It included an 'exposure list' in the form of four major propositions as building blocks for a theory of accounting. Its particular importance lay in the emphasis which it attached to the construction of a normative general theory of accounting.

The normative approach to theory construction is concerned with establishing 'what should be', and in this context is less influenced by observations of 'what is'. It asserts that it is feasible and desirable to develop theories of accounting which are independent of current practice. The normative approach reflected a degree of disillusionment with the problem of relating accounting practice to economic and social realities. It was concerned with the possibility of developing normative theories which might serve the purpose of imposing theoretical standards on the quality of information and theoretical standards of relevance on the information output of conventional accounting systems. In particular, it reflected a concern with the lack of comparability between financial statements arising from the use of a variety of alternative accounting rules.

Chambers' 'Blueprint for a Theory of Accounting' stated in clear terms the nature and purpose of theory and practice: that

'It is necessary to distinguish between systems of rules relating to the practice of accounting and a theory of accounting. A system of rules is necessary for the consistent practice of any art, and it is useful to attempt to sort out the rules which appear to be followed. Only if the rules are adequately described is it possible to discover inconsistencies in the system. But adequate description does not assist in determining which of two inconsistent rules should be adopted and which should be abandoned. The question must be referred to a more fundamental proposition or set of propositions, to the theory of the subject.' (Chambers, 2014.)

Normative theories are concerned essentially with stating specific objectives which are regarded as imperatives, for example, 'that a theory of business income should be addressed to the problem of determining the amount which may be distributed to shareholders during the accounting period whilst ensuring that the capital of the business is not thereby diminished'. Such a statement of objective typifies the sort of hypothesis on which normative theories are based.

Normative theories rely heavily on the process of deductive reasoning, which begins with a basic set of propositions about the subject under study, as seen in the example of 'business income' mentioned above. Deductive reasoning is the converse of inductive reasoning which, as we saw in the previous section, is the basis of reasoning used in constructing descriptive or positive theories. Deductive reasoning moves from the making of general statements to the making of particular statements. The construction of a theory is based on deductive reasoning.

A major criticism of this approach is that if the assumptions are stated broadly enough to secure general agreement, they may be dismissed as self-evident. Alternatively, if they are stated specifically, they may fail to gain general agreement. A good example of this dilemma was the reception given to two documents issued by the Accounting Principles Board in the U.S.A., namely, 'The Basic Postulates of Accounting' ( 2015) and 'A Tentative Set of Broad Accounting Principles for Business Enterprises' ( 2015). The hope was that these two studies would provide the foundation for subsequent studies and for the issue of further statements by the Accounting Principles Board. Postulate A-2 mentioned in the first document stated that 'most of the goods and services that are produced are distributed through exchange, and are not directly consumed by producers'. Clearly, no one would dispute that assertion. On the other hand, the principle mentioned in the second document that 'profit is attributable to the whole process of business activity' and the suggestion that concepts of value should be brought into accounting was viewed by some commentators as an 'accounting revolution'. The Accounting Principles Board summarized the situation as follows: 'The Board believes, however, that while these studies are a valuable contribution to accounting thinking, they are too radically different from present generally accepted accounting principles for acceptance at this time.' (A.I.C.P.A., 2015.)

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Accounting conventions

Accounting conventions determine the rules which are applied to accounting procedures. Accounting conventions are constantly being adapted to meet the changing demands of business, and at any point in time there may be more than one accepted way of treating a particular class of transaction. A thorough knowledge of these conventions is necessary for a complete understanding of the data contained in financial statements.

Accounting procedures

Recording is the mechanical process by which financial transactions are systematically placed in accounting... see: Accounting Conventions