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 deals with predicting how firms will react to proposed accounting standards and what accounting procedures a company will choose, given the firm’s present condition. Whereas normative theories are designed to tell us what we should do, not what we should expect. Normative theories can have predictive value. Theory of Investment deals with portfolio diversification and many people do diversify their portfolios. There are also normative theories that have no predictive value. Normative theories are not designed to have predictive values so this should not worry us.

Positive accounting theory is one of the basic financial accounting theories. This theory seeks to explain and predict accounting practice of the company. positive accounting theory include three mainstreams of empirical research: 1) three hypotheses (the bonus plan hypothesis, the financial leverage hypothesis and the size hypothesis) explaining accounting policy choice by the managers are tested; 2) earnings manipulation (earnings management, income smoothing, ‘taking the bath’) and creative accounting are analyzed; and 3) the reaction of capital market to reported accounting numbers and changes of policy methods are researched. Positive accounting theory is considered as a good economic theory, but it is criticized by some authors. Positive accounting theory do not gives prescriptions for accounting practice, it does not say something about good or bad accounting policy of the company. researchers do not take into account relations between managers and accountants in the companies in their empirical investigations. Hypotheses of positive accounting theory and results of many investigations are based on the accounting policy of large politically sensitive (for example, oil and gas) companies in well-developed countries, but results of hypotheses’ testing may differ analyzing accounting policy choices of small companies in the middle economy countries. Despite critics positive accounting theory stays mostly grounded accounting research paradigm during last decades.