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Financial Accounting Theory

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We examined a number of normative theories of accounting. In doing so we examined conceptual framework projects which prescribe guidelines for how accounting should be done. We then examined a number of normative theories relating to how profit and the elements of our financial statements should be measured. This week we abandon our normative theories and begin looking at positive theories. In particular we examine a positive theory that we have made mention of a number of times, Positive Accounting Theory or PAT.
Upon completion of this module you should have:
A clear understanding of how a positive theory differs from a normative theory,
The origins of Positive Accounting Theory (PAT)
The perceived role of accounting in minimizing the transaction costs of an organisation
You should understand:
How accounting can be used to reduce the costs associated with various political processes
How particular accounting-based agreements with parties such as debtholders and managers can provide incentives for managers to manipulate accounting numbers
And some of the criticisms of PAT
Before we begin our discussion of specific positive theories we should recap on what a positive theory is and how it differs from the normative theories we have examined in the previous two modules. You will recall from module one and the previous two modules that normative theories prescribe how a particular practice should be undertaken. As was evident in our study of current cost accounting and general price level accounting, that prescription might depart from existing practices. In contrast to normative theories positive theories are those theories that seek to explain and predict particular phenomena. Positive theories DO NOT prescribe what should be done but help explain to us why a particular phenomena occurred or when a particular phenomena will occur under certain conditions. Before we begin our discussion of specific positive theories we should recap on what a positive theory is and how it differs from the normative theories we have examined in the previous two modules. You will recall from module one and the previous two modules that normative theories prescribe how a particular practice should be undertaken. As was evident in our study of current cost accounting and general price level accounting, that prescription might depart from existing practices. In contrast to normative theories positive theories are those theories that seek to explain and predict particular phenomena. Positive theories DO NOT prescribe what should be done but help explain to us why a particular phenomena occurred or when a particular phenomena will occur under certain conditions. Hence, from an accounting viewpoint normative theories will tell accountants what they should be doing (prescribe) and positive theories will explain why accountants did what they did or when accountants will do something under particular circumstances

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