Normative Accounting Theories Essay Example
A theory refers to a fundamental principle of a particular empirical phenomena or variable that has been apparently formulated and systematically organized, mounted, and well verified to give a generalization about an underlying variable in the future predictions (Pratama, 2015)
The basis of the normative accounting theories is that normative accounting theory explains what the optimal condition is or what ought to be done at the present as opposed to the positive accounting theories that takes what is already underlying. As concerned with the optimal accounting performance, the normative accounting theories provide a basis for further studies to continue formulating various new ways of thinking different in the vibrant competitive world of production to attain efficiency. The normative theory focuses on what should be in place of what is (Pratama, 2015). Contrary to the positive accounting theories, the normative accounting generalizations have ben deductively deduced to try to analyze the approaches and set of objectives that apply logic in formulating these decisions since in history of accountants.
The Normative Accounting Theories
The following are the normative accounting theories that have changed overtime to gain their applicability in the current accounting system:
1. The Current Purchasing Power Accounting theory
The Current Purchasing Power Accounting theory has changed over time from CPPA, CCA to CoCoA. The theory was collectively preferred by book keeping standard-setters since the 1960s to the middle of 1970s with a number of nations supporting and practicing with a number of countries (Pratama, 2015).
Capital maintenance and Purchasing power
Current Purchasing Power was designed on the foundation that when there is inflation in an economy, it has to take into consideration the unadjusted profits and distribute them on the basis of sun costs that is the capital would in sense be partly distributed. It relies on the use of indices and it has been regarded as the easiest way to work out the valuations of a particular asset.
Conducting current purchase power adjustments
All alterations are done at the end of given financial period and the sunk costs taken into consideration.
2. Continuously contemporary accounting — CoCoA
This theory was developed from 1955 to 1966 and was proposed by an Australian Scholar Raymond Chambers. This theory is led by the notion that the managers are cognizant of the owners’ objectives. Chamber regards the firm or entity as an adaptive entity associated with buying and selling of commodities. This means that the business will always adjust to the changing trends of the vibrant and robust market to suit the rational and individual desires of the owner to remain economically relevant in the market. The asset of a firm should be valued at its exit price.
According to its proponents, they argue that the purchase price of an item is not an indication that the firm will go into the market with the price in the future but rather would depend on such factors as he cost of production and demand (Pratama, 2015).
3. Current cost accounting (CCA)
The two ingredients of the current cost accounting are Current operating profit (COP) and Realizable cost savings (RCS). COP refers to the excess of the present value of the output sold over the current cost of the interrelated inputs whereas RCS are the increase in the current cost of the assets held by the firm in the contemporary period.
The Current Cost Accounting has variant options to historical accounting and it has gained much of its acceptance in the contemporary accounting. The theory advocates for the differentiation of the trading profits from those obtained from holding an asset that is those assets that are out of business transactions.
4. The AICPA supported general price-level restatement in Accounting
Current Cost Accounting has all been gaining preference since 1975 as a lager organizations are required to issue an accompanying data concerning the approximated current value of obtaining new stock and the productive volume or capacity at the end of any trading period and a balance sheet is needed for comparison of any two trading periods. The depreciation of an asset is then estimated from these figures of the most current periods (Pratama, 2015). Later in 1970s and early 1980s, The FASB released SFAS 33 as an example of the mixture of information, was proposed by majority of the accounting standard setters who published a proposal that favored revelation grounded on the combination of Current Purchasing Power accounting and Current Cost Accounting on a mixture of current purchasing power accounting and current cost accounting.
Pratama, A. (2015). Bridging the Gap between Academicians and Practitioners on Accountant Competencies: An Analysis of International Education Standards (IES) Implementation on Indonesia’s Accounting Education. Procedia — Social and Behavioral Sciences, 211, pp.19-26.
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