Positive Accounting Theory - Research Paper Example

?Running head: Accounting Theory Accounting Theory Insert Insert Insert 07 October Outline Introduction Positive Accounting Theory Political Cost Hypothesis Small Businesses Role of Banks in Development of Small Businesses Federal Governments and Small Businesses Conclusion Accounting Theory \Introduction The theory of Positive Accounting seeks to make relevant accounting transactions based on the predictions of real world situations and occurrences. The predictions of real world situations help small businesses in choosing the appropriate accounting policies that would help them in advancing. The predictions of positive accounting theory with regards to the real world situation go a long way in assisting firms to react positively to new standards of accounting introduced by the legal bodies. Moreover, the overall objective of the positive accounting theory is to enable firms to predict and understand their accounting policies choices. The theory also puts into consideration, the economic consequences of the policies on the firms and the economy in general. Positive Accounting Theory Small businesses organize their operations in an efficient manner using the positive accounting theory, which helps firms in maximizing economic opportunities for growth and survival in the business world. Due to the need for business operations efficiency, firms will need to minimize contract related costs. Ordinarily, contract related costs include negotiation costs, monitoring and renegotiation costs with regards to accounting variables in terms of financial ratios and net income accounting information. Minimization of contract related costs fully relies on the mandate of a firm in choosing the most appropriate accounting policies with regards to its operations. However, the choice of accounting policies must be in consideration of variations in the business environment, according to positive accounting theory (Schroeder, Clark, and Cathey. 2010, P.123). These aspects should be acted upon by the firm’s managers who at times focus in their own selfish interest, rather than the general interest of the firm. With regards to the positive accounting theory, the three aspects of flexibility to the ever-changing business environment, appropriate accounting policies and contract related costs minimization may be comprised by the opportunistic interests of the company’s management. Political cost hypothesis The political environment is proved to interfere in business operations in many cases, thus affecting managerial decisions with regards to accounting policies. The more a company faces political costs, the greater the chances that managers of a particular firm will choose accounting policies that alter current reported earnings to future expected earnings. This is mainly because current reported earnings that depict high levels of profits will certainly lead to political interferences that may influence incorporation of new government regulations and tax charges. These interferences are relevant to both small and large businesses though growth and stability of small businesses may be greatly hampered as compared to large entities that are stable. Small Businesses Positive accounting theory applications help managers in spearheading growth and development of small businesses, which play an important role of creating employment and growth of Gross Domestic Product. Governments such as the United Kingdom federal government have enacted policies and programs that assist small businesses to develop. Strategies have been outlined by governments of developing countries and trade organizations to facilitate growth of small businesses. Banks have also played a big role in growth and development of enterprises through loans and involvement in policy formulation and innovations. Moreover, best accounting policies that have been practically efficient in spearheading corporate development have been implemented. The existing variations in different economies directly impact on the differences emphasis and application of accounting policies, thus varying development levels. Small business and the general corporate sector can be regarded as the biggest employer due to its huge accommodation of labor force. The federal governments have therefore put efforts in ensuring appropriate policy implementation in small businesses, since the businesses have an impact in the overall employment levels. In addition to creation of employment, the corporate sector adds value to the gross domestic product of a particular country significantly. Moreover, financing has for a long period been considered as the major problem, since the sector is over-dependent on financial institutions for loans and policy assistance. However, financial constraints cannot be considered to have adverse effects on the corporate sector as political interferences. In fact, many corporations have collapsed due to political interference with regards to regulations, tax charges, and policy implementation. Persons holding managerial positions of corporations have undertaken measures of avoiding political interference that arise with regards to the companies financial reporting strategies. The managers have undertaken the use of accounting policies that do not expose the firm’s financial strength and profitability to the political class. Moreover, positive accounting theory has helped small business in avoiding barriers of growth and development through application of suitable accounting practices. Role of Banks in Development of Small Business Small and large businesses constitute the larger economy of a particular country, which calls for a more conducive market environment for growth and development. Establishment of commercial banks in the economic market is a necessity in a particular market, since economic growth and development thrives in markets where banking services exist. Corporate competition exists in economies that are healthy, and thus small enterprises that exist in the economy benefit from services such as bank credit and other services that are valuable to their operations. In addition, small businesses that have been successful in such economies have received valuable services, as well as the best policy and managerial advices from banks. Banks have continued to attract small business through their new services and advanced products. In cases where small businesses attain a certain stage of operation in their bid to development, they are regarded by banks to have qualified for services such as bank credit. The managers in these cases should begin to ascertain the most suitable and appropriate services for their operations and needs. In addition, managers should come up with a schedule for interaction and selection with banks for credits and other services. Through banks’ interactions, managers of small businesses should be able to introduce their businesses in relation to the policies and services of the banks and their own accounting practices. Nevertheless, the managers play the role of matching their businesses’ accounting policies with the services and policies of the bank. Many bank services can be of importance, depending on the specific needs of a business. Small businesses’ needs may range from night deposits, customized deposits, investment services, payroll services, debit and credit cards, operation consultations, and business financing services. Employees of large corporations and even small businesses may also benefit from unique bank services that are tailor made to fit their needs. Banks may also offer banking services such as loans at lower rates to senior employees of small businesses that are in close relation to the banks. Federal Governments and Small Businesses Development agencies have encouraged federal governments to play a vital role in supporting small businesses for economic growth and development. Federal government’s assistance to small businesses is mainly based on financial and policy implementation assistance. Primarily, policy implementation assistance is based and dependent on the extent of deregulation of small businesses operations. The process of promotion and supporting small businesses is the main objective of most federal governments that have undertaken to come up with particular strategies. In addition, federal government strategies to support small businesses include the tourism sector strategies, supporting small and emerging enterprises, and encouraging entrepreneurial diversification. Governments have also empowered the education and training sectors to come up with programs to support small and emerging businesses. In addition to empowering the education and training sector, the government has supported small businesses through parastatals. Government parastatals in African States include among others, the Centre for Science and Industrial Research, Independent Development Corporation and South African Bureau of Standards. The parastatals focus on venture capital, schemes for emerging entrepreneurs, low interest assistance, quality, and product awareness and assistance. More to the above stated assistance programs, the institutions also provide a variety of small business management assistance services, such as, business plans development, market research, marketing, small business management, Legal requirements, and government tender advices. Conclusion Small businesses depend on the government’s policies for survival and development since they have no influential power to their own advantage. Government legislations directly impact on the existence and growth of small businesses within the economies in which they govern. More so, small businesses depend on government protection from large and established businesses, which may hinder emergence of small businesses. The UK government serves as the best of example for government legislation that has helped small businesses to thrive. On the other hand, unfavorable government legislation may hinder growth and development of small businesses in cases where legislation is done on the basis of political interest. Small businesses may however apply positive accounting to protect themselves against unfavorable legislations. References Schroeder R.G., Clark, M.W. and Cathey J.M. (2010). Financial Accounting Theory and Analysis: Text and Case. NJ: John Wiley and Sons. http://books.google.co.ke/books?id=HTXzc5VjT4QC&pg=PA123&dq=positive+accounting+theory&hl=sw&ei=eO6OTq75D4uQ4gSL3oCIAQ&sa=X&oi=book_result&ct=result&resnum=6&ved=0CD8Q6AEwBQ#v=onepage&q=positive%20accounting%20theory&f=false. Read More