What Is the Positive Accounting Theory?

By Lyle Daly – Updated Apr 3, 2025 at 12:09 PM

Key Points

Positive accounting theory explains real-world accounting choices influenced by management's financial goals.
It generates hypotheses like managers aligning accounting methods to secure bonuses or avoid debt penalties.
Understanding these practices aids investors in critically analyzing company financials beyond face value.

The positive accounting theory is a framework that attempts to explain the reasoning behind accounting practices and predict future accounting decisions. In addition to being an important part of accounting research, it can also help stock investors gain deeper insights into business accounting practices.

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An accounting ledger book. — Image source: Getty Images.

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There have been a few common criticisms of positive accounting theory. It revolves around the idea that self-interest on management’s part plays a key role in a company’s accounting practices. Unlike normative accounting, positive accounting doesn’t give any thought to what firms should do, only what they might do.

Still, for investors, positive accounting theory provides a new and more critical way of looking at balance sheets. Instead of taking all of a company’s numbers at face value, you might consider the potential incentives and financial benefits behind those numbers.

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About the Author

Lyle Daly is a contributing Motley Fool stock market analyst covering information technology and cryptocurrency. Lyle has been a contributor at the financial services company since 2018. His work has been featured on USA Today, Yahoo Finance, MSN, Fox Business, and Nasdaq. Before joining The Motley Fool, he wrote for financial brands including Intuit.

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