Normative Accounting Theory

The importance of accounting theory to a business' decisions vary according to the nature of its industry. For some businesses, especially in the financial sector, the effort to develop better accounting practices and adapt to new challenges of modern business are very important. All businesses are ultimately affected in some way by the impact of theoretical discussions in accounting if they use generally accepted accounting principles to keep track of their finances.

Accounting theory is the basic assumptions, definitions and concepts that underlie the practice of recording and reporting financial information. Accounting theorists develop the concepts of accounting and test principles with the ultimate goal of understanding and improving accounting practices. This improvement is intended to make it possible for business managers and their investors to better plan for growth and adapt to changing markets. All of the generally accepted accounting principles used in business were at one time theoretical.

Normative accounting is a branch of accounting theory that is concerned with the differences between different accounting systems and the ways in which one system might be better than another. Normative accounting theorists tend to advocate not only for a standardized system of accounting, but also for a particular system that is thought to be superior to others. Those who study normative accounting seek to understand the objectives of accounting in practice and compare its ability to meet those objectives with other systems. Normative accounting theory is generally more prescriptive than other ways of approaching accounting theory.

Normative accounting theory is subject to considerable critique from accounting and business professionals. According to the VentureLine online accounting dictionary, "theorists tend to rely heavily upon anecdotal evidence (e.g., examples of fraud) that generally fails to meet tests of academic rigor," thus suggesting challenges in developing a set of accounting concepts that could be considered objectively superior to another. Fearing its conclusions were nonscientific, accounting theorists tended to shift away from normative accounting after the "normative period," from 1956 to 1970.

Normative accounting exists in contrast to other forms of accounting theory. In positive accounting theory, for example, theorists tend to develop accounting principles and concepts according "to a more scientific methodology of explaining and predicting the practice," rather than working to develop a more ideal system of accounting, according to Meditari Accountancy Research. In the view of some researchers, accounting has no unified theory that describes an objective system, outside of how it is used by an individual firm, investor or government.