A Literature Review: Positive Accounting Theory (PAT)

Abstract

This paper reviews the positive accounting theory. The article also discusses development in accounting theory and research. The philosophical objective of positive accounting theory is to explain and predict current accounting practice. Positive accounting theory seeks to understand why accounting practices are employed by accountants in different circumstances and by different firms. Three hypotheses in positive accounting theory: bonus plan, debt covenant and political cost. Criticisms of positive accounting theory (1) methodology, philosophy and economics approach.

This study will discuss PAT as seen from several perspectives, including the history of the rise of PAT, the shift from normative to positive approaches, then the development of PAT, research on PAT and criticism of PAT. The paper also describes the economic consequences related to the emergence of new accounting standards which of course will affect the selection of the method of accounting by management.

Keywords: Positive Accounting Theory, PAT, Normative Accounting Theory, Accounting Research, Accounting Economic Consequences