Advanced financial accounting

ACCOUNTING THEORIES6

Accounting Theories

Accounting Theories

Introduction

Evidently, there are different theories that ensure that the process of accounting is conducted in an ethical and sustainable manner (Papadopoulos, 2013). The following paper seeks to discuss positive accounting theory, legitimacy theory, stakeholder theory, and institutional theory. The objective of the paper is to outline the role played by the four theories in ensuring sustainability in accounting process and organizational operations.

Positive Accounting Theory (PAT)

Positive Accounting Theory attempts to provide good predictions of real events in the world and translating them into accounting transactions (Papadopoulos, 2013). Unlike many normative theories that tend to recommend what is needed to be done, positive theory tries to not only explain but also predict the accounting actions such as the policies to be chosen by organizations as well as the reaction of firms to any proposed accounting standards. Notably, the overall intention of positive accounting theory is to predict and understand the choice of polices related to accounting in different organizations. Understandably, this theory los recognizes the existence of economic consequences after making accounting decisions.

Further, under positive accounting theory, organizations can maximize their prospects for surviving an industry, which helps them in managing their resources efficiently (Papadopoulos, 2013). At the same time, organization is seen as being the accumulation of contracts that they have entered into. In reference positive accounting theory, since organizations see the need to be efficient, they try as much possible to minimize the costs that related to contracts. For example, organizations incur contacts costs in monitoring, negotiations as well as renegotiation. In this way, the only way to reduce the contact cost is by choosing the best accounting policies.

In reference to the policies chosen by an organization, it should be noted that positive accounting helps in ensuring sustainable accounting for firms (Papadopoulos, 2013). Notably, PAT recognizes the expected changes that require managers to be flexible in selecting and implementing accounting policies. For example, accounting process requires that a company disclosures its financial performance to the public as part of corporate social responsibility, which consequently ensures sustainability of the accounting process, besides improving its reputation.

Legitimacy Theory

Legitimacy theory posits that organizations and their businesses are bound by social agreements and contracts in which companies accept to act in socially desired ways in order to receive approval of their goals at organizational and social levels (Papadopoulos, 2013). Consequently, by acting responsibly to the society, an organization is able to continue operating its businesses while at the same time improving its reputation to the public.

In the legitimacy theory, the word “legitimacy” is taken as a general assumption or perception that the business operations of an organization are proper, desirable, and appropriate within socially constructed systems of beliefs, values, norms, and definitions (Papadopoulos, 2013). In this respect, the role of legitimacy theory is to explain the behavior and operations of companies when implementing as well as developing voluntary environmental and social disclosure of information. The objective of such processes is to fulfill the social contract in enabling the recognition of the survival and objectives of an organization in turbulent and bumpy business environment or situation. Therefore, in reference to legitimacy theory, organizations are able to meet the expectations of the society by ensuring that organizational activities are conducted according to the demands of the public (Papadopoulos, 2013). Important to note is that in situations where an organization is not able to meet the expectations of the society, the firm is highly suctioned and it may receive negative reputation which may in turn affect the general performance.

Stakeholder Theory

According to the stakeholder theory, the main purpose of a business is to provide as much value to the stakeholders as possible(Papadopoulos, 2013). In order to ensure that an organization meets its goals and becomes sustainable over a given period of time, management have the responsibility of keeping the interests of suppliers, customers, shareholders and communities aligned with the general goals of a business.

Notably, organizations need to be more innovative in order to keep such interests aligned with the general objectives, which is critically more important compared to trading off the stakeholders against one another(Papadopoulos, 2013). In this way, if an organization manages for stakeholders, the personnel are able to bring as much value to the financiers and shareholders as possible. In accounting, an organization has the responsibility of ensuring that stakeholders are provided with the right financial information, which gives the general picture of the company’s current and expected performance within a given period. Therefore, any finance department of a company is expected to be answerable to its stakeholders, which also determines the organization’s business sustainability.

Institutional Theory

Institutional theory asserts that the environment in an institution plays a critical role in the development of formal structures in a firm more profoundly than stresses in the market (Papadopoulos, 2013). Institutional theory examines the processes in which structures, rules, schemas, and routines are established as authoritative guidelines that determine social behavior. Understandably, after reaching levels of legitimization, the failure to meet innovative structures is considered as not only “negligent” but also “irrational. In this way, an organization has the responsibility of establishing structures that meet the needs of the firm as well as the corporate social responsibility, which helps in sustainability.

Conclusion

Based on the above theories it is clear that organizations have the responsibility of establishing appropriate policies that determine their sustainability. Additionally, accosting process should take consideration of not only organizational objectives but also expectations of all stakeholders including society to ensure sustainability.

References

Papadopoulos, P. (2013). Approaches and theories to standard setting in accounting. Place of

publication not identified: Grin Verlag.