Approaches and criticisms of positive accounting theory and its economic consequences

Abstract

This paper describes early on positive accounting of theory, where is the theory to help explain and predict the accounting practice. The explanation is also complemented by research that supports and also underlies positive accounting theory that was carried out before and after an article in 1990 by Watts and Zimmerman. Positive accounting theory trying to understand how accounting practices are used by accountants in different situations and by different companies. To answer the origin of the concept of economic consequences, it is introduced a theory that is positive accounting theory. 1. Introduction The motivation of responsible managers' performance is as important for financial accounting as it is for providing information to investors. Therefore, accountants need to understand and appreciate the interests of management in preparing financial statements. When a new thought emerges which, when viewed in detail, can be seen the difference with investor decision-based theory and efficient market-oriented. Watts and Zimmermen 1978 [13] through their paper entitled toward a positive accounting standard published by the accounting of review which is introduced PAT which has shifted the paradigm of accounting research from normative to positive. Then in 1990 they expressed the hypotheses positive accounting of theory in which there was an explanation of bonus plans, breaches of debt covenants and political costs which became the basis of benchmarks in current accounting research. Accounting of Theory sometimes gives confusion with the existence of normative or positive notions such as the theory described by Watts and Zimmerman in 1986 [14] about normative of theory in which attempted to explained which is information must to be communicate to the entire user accounting of information and such the accounting would be present to the user. The normative of theory will try explains information about what is accountant must be do on the process of presented financial of information to all user, and not explain what the financial of information actually contains and why that was happened. According to Nelson in Anis and Imam (2003) [1] normative of theory sometimes also called with a priori of theory (the cause of thing for effect something). A normative of theory not produced from the empirical research then it is produced in research on activities. Instead the purpose of the approach positive of theory trying to define how a financial information will be present and to communicate to all user accounting of information, with another explanation the approach of positive theory does not to providing give directives on proper accounting practices done, but to explained why the accounting practices reach its present form. In addition, empirical research needs to be emphasized in a positive theory approach to test whether in the literature accounting theory can explain the applicable accounting practice has been stated (Arif, 1999) [3]. Watt and Zimmerman (1986) [14] reveal that there are three basic reasons for a shift in the normative to positive approach, such as 1) in empirically testing the theory there is an inability of a normative approach, because based on a false assumption cannot be valid tested with empirical, 2) the normative approach will focused on the more prosperity individual of investors rather than of prosperity society in general, 3) suboptimal allocation of economic resources through a normative approach. Considering economic in system based on market orientation mechanism, the accounting of information can be a controlling tool to allocate economic of resources with efficient, then according to watt and Zimmerman which describe the normative approach is so simple and it is not provide strong a theoretical basis to analyzing accounting of theory. Then they develop a positive approach that applies in the specific scientific period (1970-present) to cover the weaknesses of this normative theory.