Accounting Theory and Practice

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According to Wacker (2008), a theory as “an explained set of conceptual relationship” which able to explain the frequently asked questions in the order who, what, when, where, how and followed by what, would, should, or could question. Indeed, both of theory would be considered to be working from different “paradigms”. Positive theory is based on observations which seek to predict and explain particular phenomena (description). However, normative theory is based on researcher’s opinion about what should happen in particular circumstance (prescription). Although there are some argument for and against for each theory, in my point of view, both theories are contributing to the accounting theory development. For the positive theory views, it has been discussing some areas in term of accounting choices and disclosure decisions. There were two theories which are positive accounting theory (PAT) and institutional theory (IT) explained accounting choices (Collin et al., 2009). First, PAT as a theory that seeks to explain why managers within the organization will select to adopt particular accounting method in preference to other. A set of firm-specific characteristics (earning-based bonus plans, debt and political process) linked to Costly Contracting Theory that explains management’s choice of accounting policies. The income increasing/decreasing techniques will applied by the managers. The assumption of PAT is underlying that all individuals’ action is driven by self-interest and they will act in an opportunities manner for the purpose to increase their wealth. This had affecting the wealth of stakeholder and also creates the existence of agency problem. In the agency theory literature, the firm itself is considered to be a nexus of contracts to ensure that all parties acting in their own self-interest, at the same time motivated towards maximizing the value of company.

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