Understanding Positive Accounting Theory And Its Practical Application In An Essay. (70 Characters)

Background and History of Positive Accounting Theory

Question:

Discuss about the Accounting Theory and Current Issue Related Watt and Zimmerman.

Positive accounting theory is a new approach in the field of accounting research which aims to highlight and discover the actual accounting practices. It became one of the basic financial accounting theory. Positive accounting theory attempts to translate the real accounting practices into accounting transactions. It emphasis on to predict and explain the real approaches of accounting. Normative accounting theory recommends the practices which should be done. This paper is a good attempt to explain the actual, meaning of positive accounting. It highlights the conceptual application of positive accounting with the real human behaviour. Cause and effect relationship behind the human behaviour is difficult to explore in large organisations and thus, positive accounting theory helps to mould the interpersonal skills and behaviour to achieve the organisational goals. This paper helps to understand the complexity of accounting practices within the organisations. Many approaches and theories are used to give a broader prospect about the application of positive accounting. This paper discloses the real status of positive accounting with explaining its background and history in detail. It’s a well versed and illustrated paper which gives deep knowledge about the theory (Griff, 2014). Positive accounting theory helps the firms to maximise the survival prospects and work efficiently. This theory helps to understand the behaviour of accountants and their approaches while recording the transitions.  Watt and Zimmerman have first used the term of positive accounting and carried out a deep study and research to process the right application of this theory. This report consists the critical analysis of the paper and highlights the useful application of the positive accounting theory. The theoretical framework has been also explained in this report. In addition to this, significance along with the limitations of the paper have been also stated. At the end of the report, a conclusion has been drawn.

Watts and Zimmerman first introduced the concept of positive accounting. Their strong conceptual explanation gave wide importance to this theory and made it very popular among the researchers. Firms are also adopting this theory to enhance the performance of their accountants and maximising their profits. Positive accounting theory has been trademarked by the Watts and Zimmerman. This paper is well versed with the ontology and epistemology of the positive research theory and explains its practical application to successfully operate the research. As per this theory, there are three main components of empirical research theory. There are three hypotheses of positive accounting theory namely Bonus plan, Debt covenant and Political cost hypothesis. Bonus plan hypothesis helps managers to shift their accounting policies in a more profitable way so that they can increase current year bonus and maximise their wealth. Debt Covenant hypothesis eliminants the accounting-based debt covenant which increase the future earnings. Whereas, political cost hypothesis leads to high profitability by injecting political cost.  Positive accounting is equally good as an economic theory as it does not provide any suggestions for good accounting practices but predicts and analyse the current behaviour of an accountant. Many examples which support the importance of this theory have been quoted in this paper (Mattessich, 2017). 

Conceptual Application of Positive Accounting Theory with Real Human Behaviour

Beyond all criticism, positive accounting theory has been the most grounded paradigm for accounting research in the last decade. Furthermore, the author has included critical evaluation of the positive accounting theory. The weakness of research hypothesis has been also explained by the author which proves that this paper is not biased. Effects of positive research programme the have been also highlighted in this paper. This paper is very rich in contents and contains informative as well as analytical prospects of positive accounting theory concept.

In the process to understand the various aspects of the positive accounting, there is effective requirement to identify solutions to the following questions which can elaborate and help in the research.

• Identify the role of positive accounting theory in the changing environment of accounting and its effectiveness?
• Evaluate the role of the adoption of the new accounting standards in the process of positive accounting?
• Evaluate the effects of the adoption of the positive accounting on the overall accounting process and its results?
• Define and analyse different types of positive accounting theory and their characteristics and impacts?

In the field of accounting, there are two types of theories which are adopted having different characteristics and impacts on accounting. Positive accounting is driven by events of the real world and has been translated to accounting transactions. These theories are different from normative theories as in there is the existence of prediction. There are included selection and adoption of new accounting standards in the overall accounting process (Griff, 2014).

PAT is emerging accounting theory which is providing wide and expended platform to the organisations in which they can relate the accounting process to the real world and take advantage of long-term stability. By becoming more real to the world while adopting accounting policies and standards there can be reduced chances of consequences and there will be a reduction in the cost of the contracts in any firm or organisation. This theory creates liquidity and flexibility in the adoption of the accounting policies by which there can be taken benefits of various opportunities that can lead the accounting to a new level.

PAT is a scientific and empirically based theory which makes it different and better in a different manner in respective to the normative theory. Watts and Zimmerman have studied and discussed various aspects which are proving this theory as more scientific and empirical in nature.

In the process to understand positive accounting theory, there are some hypotheses which help in understanding this theory which is as follows.

Perfect market hypothesis-

This theory of positive accounting is based on the hypothesis of that there is perfect market position in which there are included different information and their transaction costs. There is an effective role of the regulation and political costs while calculating the perfect market as defined by the Watts and Zimmerman. This theory is ineffective as in there is the role of proper allocation of resources which make an impact on the removal of regulations.

Efficient market hypothesis-

The efficient market hypothesis is assumed as the perfect market which is based on economic principles in which there is no cost of the transactions and information. This is strong market as in all the information of this market are publicly available and can be used effectively.

Managers of firms select various bonus plans which are defined as the bonus plan hypothesis in which they analyse various accounting theories and procedures that can provide benefit for the long term.

Practical Application of Positive Accounting Theory in Research

In every organisation, there is an effective requirement of the various accounting policies and procedures to manage the debt of the organisation. Every organisation is required to adopt debt covenant accounting standards by which the future earnings can be transmitted to the present period. This can help in managing the impact and effect of the debt on the overall organisation (Mourik and Walton, 2013).

Political heat is due to the increased profitability of the organisation which can lead to increased taxes and regulations. For this, there should be adopted effective accounting policies and procedure to manage the current earnings to future earnings.

There are following ways to adopt and achieve Positive Accounting Theory-

• In this process, there is a requirement to change accounting policies which are more related to the real world.
• There is a requirement of adoption of new and more related accounting standards which can make more effective accounting results.
• Adoption of the Capital Asset Pricing Model (CAPM) method for effective measurement capital market.
• Effective change in the real variables like R&D, advertising and maintenance etc.
• Adopting various techniques and SPE (Enron), Capitalise operating expenses (WorldCom).
• Selection of related and effective hypothesis after analysis of their characteristics and relevance.

Every research has its own significance in its respective field. Positive accounting theory is a Morden approach which supports innovative and behaviour approach in accounting. In the current era of competition, it becomes difficult for the firms to survive in the market by following traditional approaches. New and dynamic approaches of accounting help the managers to convert financial transactions into profitable transactions which help them to achieve both their personal along with organisational goals. Positive accounting theory is very useful in predicting real world events into profitable accounting transactions (Hoque, 2006). This paper is very useful for the accounting precautionary to understand the concept of positive accounting theory. It differentiates the popular and profitable accounting theories from the traditional once which do not contribute much to the achievement of personal goals. This paper also plays an essential part in explaining the limitations and falsification of this theory. This paper contains many real-time illustrations which help to understand the theories in a more precise way. In addition to this, history of the theory is also explained in this paper which provide the need to develop this theory. Components of successful positive research programme have also been explained in this paper. This paper also helps in evaluating the effects of the positive accounting theory. Beyond all criticism, positive accounting theory has been the most grounded paradigm for accounting research in the last decade (Mourik and Walton, 2013).

It is not easy to understand the whole concept with the one paper. In order to gain a complete insight and understanding about the positive accounting theory more research is required. This paper contains scientific terms and experiments which are not easy to understand by every reader. Authors should have included some diagrams to make the reading more interesting. The language of the paper is academic and contains lots of scientific terms. Positive accounting theory is a new concept and hence available research paper is not sufficient to understand and practice this theory in real. Data collection methods have not been defined by the writers. A detailed explanation of each component is missing in the paper. Mathematical and scientific formulas are used in this report which is not easy to understand by all the users (Whittington, 2007).

Conclusion

Watt and Zimmerman have first used the term of positive accounting and carried out a deep study and research to process the right application of this theory. Positive accounting theory attempts to translate the real accounting practices into accounting transactions. Its emphasis on to predict and explain the real approaches of accounting. Normative accounting theory recommends the practices which should be done. This report consists the critical analysis of the paper and highlights the useful application of the positive accounting theory. The theoretical framework has been also explained in this report. This paper is well versed with the concept and terminologies of positive accounting theory. Practical application of this theory can be understanding with the help of this paper. The positive theory is a Morden approach which helps the accounts manager to apply behavioural science into accounts and maximise the profit of the firm. This approach is also very helpful for the firms to attain sustainable development in the long run. In every organisation, there is an effective requirement of the various accounting policies and procedures to manage the debt of the organisation. On the basis of above discussion, this can be concluded that this paper is a good source to examine the epistemology of positive research. In addition to this, the present need and requirements in the felid of accounting research have been also highlighted. There is a need of better theoretical model which will help in testing the subject in detail and give more accurate results. Positive accounting theory has provided a better understanding of the human behaviour and application of theories to achieve set goals.

References

Wolk, H. I., and Dodd. J. L., and Rozycki, J. J. (2012). Accounting Theory: Conceptual Issues in. Los Angeles: SAGE.

Whittington, G. (2007). Profitability, Accounting Theory and Methodology: The Selected Essays of Geoffrey Whittington. Oxon: Routledge.

Griff, M. (2014). Professional Accounting Essays and Assignments. Lulu Press.

Mourik, C.V., Walton, P. (2013). The Routledge Companion to Accounting, Reporting and Regulation. London: Routledge.

Hoque, Z. (2006). Methodological Issues in Accounting Research: Theories, Methods and Issues. Spiramus Press Ltd.

Mattessich, R. (2017). Two Hundred Years of Accounting Research. Oxon: Routledge.