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Chapter 7. Written for the senior undergraduate accounting and postgraduate student, Financial Accounting Theory retains the same basic strengths that made its predecessor a market leader. It has a writing style that is easy to read and understand, includes critical evaluation and balanced discussion of different theories of accounting that will spark student interest. The book also develops analytical reasoning by challenging students to think about accounting issues at hand, and formulate opinions. The learning objectives of this chapter are to: (1) how a positive theory differs from a normative theory; (2) the origins of Positive Accounting Theory; (3) the perceived role of accounting in minimising the transaction costs of an organisation; (4) how accounting can be used to reduce the costs associated with various political processes; (5) how particular accounting-based agreements with parties such as debtholders and managers can provide incentives for managers to manipulate accounting numbers; and (6) some of the criticisms of Positive Accounting Theory.