What is positive theory of accounting?

What is positive theory of accounting?

Positive accounting theory tries to understand and predict a company’s accounting policy choices. In general, the assessment of accounting policies to be chosen is aimed at minimizing the cost of capital and other contract costs.

Who is the founder of positive accounting theory?

It was organized as an academic school of thought of discipline by the work of Ross Watts and Jerold Zimmerman (in 1978 and 1986) at the William E. Simon School of Business Administration at the University of Rochester, and by the founding of the Journal of Accounting and Economics in 1979.

What are the hypothesis of positive accounting theory?

The three hypotheses of positive accounting theory are the bonus plan hypothesis, the debt covenant hypothesis, and the political cost hypothesis.

What is the central assumption of positive accounting theory?

Under Positive Accounting Theory, the assumption is that a manager will exhibit opportunistic behaviour and choose accounting policies that are in her/his best interests.

Why Positive accounting theory is important?

Watts and Zimmerman’s Positive Accounting Theory provides a refreshing, controversial and important contribution to accounting thought. It is important because of its vigorous emphasis on the entity’s actual choice of financial accounting technique (or, more broadly, financial reporting activity).

What is the difference between positive and normative accounting theory?

Positive accounting attempts to describe accounting as it is actually done. By contrast, normative accounting attempts to describe accounting as it should be done. It aims to describe what a company or investor should do, often using subjective morality derived from some theory.

Why positive accounting theory is important?

What are the two different types of theories in accounting?

Two common and influential theories are positive accounting and normative accounting.

What is the objective of Accounting Theory watts and Zimmerman?

This point of view seems contradictory because one of the premises of PAT – agency theory – is heavily reliant on the value judgement that people are self-interested. Watts and Zimmerman also claim “The objective of accounting theory is to explain and predict accounting practice” (1986).

What is positive accounting theory in accounting?

Positive accounting theory Positive accounting theory (PAT) is a general term for any theory that provides descriptive information regarding the behavior of accountants. The title has been used by Watts and Zimmerman and this is largely an expansion of previous studies carried out firstly by Fama and later by Ball & Brown in the 1960’s.

How did Watts and Zimmerman use their research in developing Pat?

Watts and Zimmerman used this research in developing PAT to illustrate that because there was a reaction in capital markets when accounting information showing abnormal results was released this information was useful and those who wanted to change the present system of measurement failed to appreciate the incumbents usefulness.

What are the theoretical developments in the accounting profession?

Theoretical developments lead to positive theory (descriptive). This is accompanied by longer focused on postulate. normative and positive terms. Watts and and how the accounting will be presented. So financial information is and why it occurs. (from cause to effect an d deductive).