Types of Positive Accounting Theory and Examples
In the bonus plan hypothesis, the managers of the firm are more likely to choose the accounting procedures that are used to shift the reported earnings from the future period to the current period. This process can be used to increase the bonus received by the employees. The debt covenant process enables the firm to violate the accounting based debt covenant. This more likely causes the firm manager to select their accounting procedures to be shifted from the reported earnings to the current period. By the process of increasing the current earning, the company can reduce the probability of violating the debt covenant. The political cost hypothesis is used to choose the accounting procedures to defer the reported earnings from the current to future periods (Godfrey et al., 2010). A high profitability in this process and this can lead to the causing of the increased political heat. To achieve political theory, it is imperative to implement a change in the accounting policies, management of the discretionary accruals and changing the real variables. Increased capitalization of the costs has been observed in this process.
It can be summarized that the modern firms use a number of self-motivated utility for the wealth generation process (Godfrey et al., 2010). These mean that the owners of the firm must align their goals with the drivers to reduce the costs of separation of the ownership and resource management. Ultimately, the individual companies need to adhere to the tenets of accurate measurement and transparency. If they are not transparent or make accurate assumptions, it can be alluded that the capital markets would exemplify the flaws of the system. The optimistic outlook needs to be a measured approach to meet the needs of the situation.
Nevertheless, it can be inferred that certain fundamental flaws in the system that needs to be considered. They have been explored in the following section.