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Financial Accounting

This essay is to critically evaluate the usefulness of the accounting theory to practicing accountants today. It will provide a general assessment of information asymmetry and the fundamental problem of accounting, and it will also briefly discuss the normative and positive accounting theories and their usefulness to practicing accountants. After those discussions, it will specifically discuss the strength and limitation of positive accounting theory and assess its usefulness to practicing accountants.

Critically evaluate means that it must discuss the strengths and limitations of the topic. Therefore, evaluate the usefulness of accounting theory to practicing accountants today must discuss the advantages and the disadvantages of the accounting theory. To be usefulness, accounting theory should include the stewardship and information roles. It means that accounting theory should provide the relevant and reliable information to practicing accountants. First of all, it is important to understand what accounting theory is and who the practicing accountants are. The practicing accountants should include those people who work in or relate to the accounting, such as the financial accountants, management accountants, auditors and regulators.
Hendriksen (1970, p. 1) defined the accounting theory as:
…logical reasoning in the form of a set of board principles that (1) provide a general framework of reference by which accounting practice can be evaluated and (2) guide the development of new practices and procedures.
Normative theories and positive theories are the two major parts of accounting theory. Normative theories dominated the 1950s and 1960s. The normative theorists paid their attention to make the accountants know what should be done to get a good outcome (Godfrey et al. 2006). Positive theories were developed during 1970s. The positive theorists paid more attention to describe the behaviors of people, find the reasons for those behaviors and forecast what...