Question

Positive account theory changes the ways of thinking in accounting theory, explain the effect of positive accounting theory with the main theories that effect in creating the positive theory? What are the main advantages and criticisms of positive accounting theory?

Answer 1

Positive Accounting Theory (PAT) tries to make good predictions of real world events and translate them into accounting transactions. While normative theories tend to recommend what should be done.

Positive Accounting Theory's overall intention is to understand and predict the choice of accounting policies across different firms. It recognizes the existing consequences exist. Under PAT firms want to maximize their prospectus for survival, so they organize themselfs efficiently.

The following are the three hypothesis of Positive Accounting Theory.

1) Bonus plan hypothesis.

2) Debt covenent hypothesis.

3) Political cost hypothesis.

​​​​​​How to achieve Positive Accounting Theory.

* Changing accounting policies.

* Managing discretionary accruals.

* Timing of adoption of new accounting standards

* Changing real variables - advertising, repairs, & maintenance.

* Capitalising operating expenses.

Advantages and Criticisms of PAT

To be convinient I am providing details in points.

Advantages

* Reconcile efficient securities market theory with economic consequences.

* It asserts that the contracts which firms enter into drive management's concern about accounting policies.

Criticisms

* Lack of prescription.

* Invalid assumptions.

* Stagnation - lack of development.

* Individual choices versus many choices.

* PAT is scientifically flawed.

* Lack of universality of conclusions.

* All actions are driven by self interest.