In this article we will discuss about descriptive and prescriptive accounting concepts.
Larsen and Miller have expressed the opinion that sets of accounting concepts differ in how they are developed and used. In general, when concepts are intended to describe current practice, they are developed by looking at accepted specific practices, and then making some general rules to encompass them.
Such accounting concepts are known as ‘Descriptive Accounting Concepts’ and are developed using bottom-up approach. This bottom-up approach is diagrammed in Figure 2.1 which shows the arrows going from the practices to the concepts.
The outcome of the process is a set of general rules that summarize practice and that can be used for education and for solving some new problems. For example, this approach leads to the concept that assets are recorded at cost.
However, these kinds of concepts often fail to show how new problems should be solved. For example, the concept that assets are recorded at cost does not provide much direct guidance for situations in which assets have no cost because they are donated to a company by a local government.
Further, because these concepts are based on the presumption that current practices are adequate, they do not lead to the development of new and improved accounting methods. To continue the example, the concept that assets are initially recorded at cost does not encourage asking the question of whether they should always be carried at that amount.
In contrast, if accounting concepts are intended to prescribe improvements in accounting practices, they are likely to be designed by a top-down approach (Figure 2.2). The top-down approach starts with broad accounting objectives. The process then generates broad concepts about the types of information that should be reported and known as ‘Prescriptive Accounting Concepts’.
Finally, these accounting concepts should lead to specific practices that ought to be used. The advantage of this approach is that the concepts are good for solving new problems and evaluating old answers; its disadvantage is that the concepts may not be very descriptive of current practice.
In fact, the suggested practices may not be in current use. Accounting bodies and standard setters like ASB (India), ASB (UK), FASB (USA), IASB etc. generally use a top-down approach to develop conceptual framework and to resolve accounting and reporting issues.