The Epistemology of Accounting

I am a philosopher who used to be an economist before discovering the central problem in all economic (and accounting system) models. Let me explain my terms.

The Unit of Accounting

Accounting is all about numbers. The math elements are essential for the concepts of accountants. Positive and negative numbers are all using the Units.

It is a curious thing, but the unit(s) of accounting are not included among the Systeme International d’Unites.

We in the United States use the Federal Reserve Accounting Units, Dollars. The Internal Revenue Service also mandated by Congress requires each of us to use our “functional currency,” and I use F.R.A.U.D’s for my income tax. Those Units are not fixed in value, and they are not fixed over time. Nobody can predict what a million dollars will buy in 30 years.

How many Big Mac hamburgers?
Probably fewer than a million dollars today. Money “melts in your hand, not in your mouth”
(credits to an old M&M commercial).

Balance Sheet Accounting

The Balance Sheet is a cornerstone of valuation for any on-going venture, as well as the Income Statement and cash flow analysis. All of the accounting habits and practices are logical and create useful information. Accountants are in the “information creating” business. They count the actual results.

Unfortunately “historical cost = basis” is a treacherous foundation. How is this important number measured? Has anything noteworthy been also happening to the Unit of Accounting between the closing dates of each Balance Sheet? What about the time-dimensions (past and future) of the component parts of the Balance Sheet? Measurements of the basis of an asset is foundational. How is it stated? What Units of Accounting?

Local taxation rates calculated from “gains” are misleading if the context is worldwide (transnational business with deployed-diversified assets). Cross border comparisons are also made impermanent by exchange rate changes. If taxes are measured in such units, they ought to be indexed for unit-valuation changes.

My Advocacy

I think accountants, and I want to be among you, should move for, push, advocate in favor of making a Unit of Accounting an element in the Systeme International d’Unites.

I would nominate “the gram of Gold (.9999)” as the Unit for international Balance Sheets (historical data, in government currencies if needed, but presented as an exchange rate on the closing date of the Balance Sheet in the SI Unit, gram of gold).

The Balance Sheet statement and analysis would not show the governmental units of accounting required by tax laws. Payment of taxes would be an expense as before, returns prepared and submitted as required, but the balance sheet and income statement would be presented to stockholders and investors in the SI units, with appended tables of currency exchange values. Multiple appendices could use the Euro, Dollar, Pound, Yen, or Yuan for local presentations.

The world is One Economic System.
Accounting should recognize this.

Keeping basic documents denominated in variable Units of Accounting is not something you and I support. We want to create information that is valid and correct now and in the future.

See also:
Modest Proposal for US Gold Bonds in Kilo of Gold.