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View Of Positive Accounting Theory

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View from PAT
Positive accounting is to set some hypothesis which could affect accounting practice based on economic theory, using scientific methodology to do research and test those hypothesis. Simply speaking, it applied empirical research to accounting field.
Positive Accounting focus on questions like “what is”, different from Normative Accounting which focus on questions like “what should be ”. Compare those two accounting theory, positive accounting theory is more scientific. Watts and Zimmerman(1986) asserts that: “The objective of positive accounting theory is to explain and predict accounting choices.” It does not like normative accounting which is to describe accounting practices. Generally, the methodology of positive accounting has three steps, firstly, put forward propositions, then create hypothesis, finally test the hypothesis. The propositions could be correct or incorrect. Here are three main hypothesis from positive accounting theory which put forward by Watts and Zimmerman(1986) , “Bonus plan hypothesis, Debt covenant hypothesis and Political cost hypothesis”. Taking Political cost hypothesis as an example, according to the Watts and Zimmerman (1979), “The political cost hypothesis predicts that large firms rather than small firms are more likely to use accounting choices that reduce reported profits”(p.9), then they test the hypothesis by variety of studies, they got that “ The largest firms tend to use income decreasing accounting methods”(p.9). Finally they had tested that “the relationship between size of firm and accounting choices is consistency ”(p.9). The methodology of the positive accounting research is scientific because it combined quantitative analysis with qualitative analysis, when analyzing data, logic analysis was based on qualitative research while testing hypothesis, it based on quantitative research, so the results is more accurate and scientific. Positive accounting theory regard firms as an coalition of types of contracts, and it analyzed many cases on attitudes towards accounting standards when protecting self-interests, so it obtained lots of conclusions which normative accounting research could not do.
However, Positive accounting theory has some limitations. First of all, the facts and phenomenon which used by positive research have their limitations, so the results of the research may have certain possibility and contingency. Secondly, positive accounting focuses on quantification and modelling, some subordinate factors were ignored, so it caused systematic insufficient of research. Thirdly, positive accounting theory attempts to support some accounting theory by lots of repeatable test materials. It set model when sample data are sufficient, only after some empirical analysis, it could be tested, so it has hysteresis quality.
My understanding to positive accounting theory. PAT is a very important part of accounting field, positive accounting has a significant meaning to accounting study. By understanding the nature, objectives, and research contents of positive accounting, we could figure out the advantages and disadvantages of positive accounting. What’s more, we could know the differences between positive accounting and normative accounting. All in all, positive accounting research as a new research method, it enriched the system of accounting research, and had a huge effect on traditional accounting research method.

Reference
Zimmerman. J. L. (1979). The costs and benefits of cost allocations. The Accounting Review. (July): 504-521.
Watts, R. L. (1986). Positive accounting theory. Prentice-Hall.
Watts, R. L., & Zimmerman, J. L. (1990). Positive Accounting Theory: A Ten Year Perspective. The Accounting Review, (1). 131.

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