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 be able to 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 years of the Balance Sheets? What about the time-dimensions (past and future) of the component parts of the Balance Sheet?
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).
The Balance Sheet statement and analysis would ignore the governmental units of accounting required by tax laws. Taxes would be prepared and submitted as required, but they would be presented in the gold gram Balance Sheet as an adjustment Appendix or footnote. 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.