Positive accounting

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Positive accounting is the branch of academic research in accounting that focuses on explaining and predicting observed accounting practices. This contrasts with normative accounting, that focuses on prescribing "optimal" accounting practices.

Positive accounting is also associated with the contractual view of the firm as developed by Coase (1937), and Jensen and Meckling (1976). The firm is viewed as “a nexus for a set of contracting relationships” among parties, and accounting is seen as a language to facilitate the writing of such contracts. Under this view, accounting practices evolve to mitigate contracting costs by addressing potential conflicts of interests between types of contracting parties. For example, positive accounting postulates that conservatism in accounting –i.e., the practice of requiring lower (higher) standards of verifiability to recognize losses (gains)– has evolved partly in response to compensation contracts between shareholders and managers: in the absence of conservatism, a firm’s managers can receive compensation for what is later recognized as losses to the firm, and recovering this prepaid compensation is difficult.

The contractual view of positive accounting puts it at odds with value relevance studies in accounting: the latter assume that accounting’s principal role is to value the firm, and thus practices like conservatism are sub-optimal.

Positive accounting emerged with the first empirical studies in accounting in the late ‘60s, but it was organized as an academic practice by the work of Watts and Zimmerman (1978 and 1986) at the William E. Simon School of Business Administration at the University of Rochester, and popularized by the founding of the Journal of Accounting and Economics in 1979.

See Tinker et al. (1982), and Christenson (1983) for critiques of Positive Accounting.

[edit] References

• Christenson, C. (1983), “The Methodology of Positive Accounting” The Accounting Review (January), pp1-22.
• Coase, R. (1937), “The Nature of the Firm,” Economica 4, pp386-405.
• Jensen, M., and W. Meckling (1976), “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure,” Journal of Financial Economics, 3(4), pp305-360.
• Watts, R. and J. Supreme (1986), Positive Accounting Theory, Edgewood Cliffs, NJ: Prentice Hall.
• Tinker, T, B. Merino, and M. Neimark (1982), “The Normative Origins of Positive Theories: Ideology and Accounting Thought,” Accounting, Organizations and Society 2, pp167-200.
• Watts, R. and J. Zimmerman (1978), “Towards a Positive Theory of the Determination of Accounting Standards,” The Accounting Review 53 (January), pp112-134.
• Watts, R. and J. Zimmerman (1986), Positive Accounting Theory, Edgewood Cliffs, NJ: Prentice Hall.