"Measurement in Accounting" 1965


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"Measurement in Accounting" 1965
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Chambers, R. J. (Raymond J.) 1917-
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University of Florida
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This paper an extiniton of earlier uark Ahich wa given
.ipzree INs Tmo 'aa .. of AcmR muu (1961) ad MR
~R~ntitui of S eip h~ms ii e(1 ). The feiner poper
ade only beift allselma to a gweral rle of swarur mnt. It appears
a the principle of unifotaity ef valuatimn neOly, the epeartiom of
addition, stracton and relation emzaMy tn may fars of ssmauriztion
can ely be perfavmrd validly if the mparat items are vauied an a
unifaor bess, At that tie the viaw me taebn that it is ueMwcry to
specify the de and things with aidd accoantit is concseoad before
acons tirn how they dhll be quaaatifid and Ahther any powibi
quantificMtioa ules wll constitute a mea~r mma t ystem
In this papr w- turn to the latter question It tranptires
that the eaaFUptin of adaptive bdhwviOr t a hdunging e mvroiart
necesitates a set of qxmntificatitn sles which Ahall be a eaurement
wsytem. It trnmpqiws alse that the straight applicatim of the principle
of aesura-, t entails a set of parledical mmaeries haich r eipressed
in mteapqary amatary temR The general cadus3onms of the earlier
pqpesp and theti lpiLed criticlat of traditiml prmcetrm, a thus
einfarced. The primpoels for the meaemw t of mace bemever differ in
sam eterial partleular from thee of the 1961 paper.

It way appear that at aM s poiat the argmaot is at variace with
the line of argm~ t In the earlier papwrs Per emapl, the term 'value'
and valuationn apper not infrequtly in the other papo#r, but it has
been fnd to be possible to d without thM exiept faw belef references,
In this >esoaitian. In part their elialantime it a dblibtirte attempt to
remo ward whiiL hae rpetedy iven ris to iant it sema
ailo that greater clarity of argont is possible if the dIattactoen is

* The first draft of this paper me written In Jamary 1963, and give a
smll cirul-atlmtn Itimogirap d fsme Sa emmacessay ~oplicatiLoa
have been elain'1sd anad mm variatis s in the Sw'int nd conclusion
hav been iatrbedmd.

ads between acts of vluatlon uidch alWwys hae reference to the fwtwr,
and acted of wausomiet dafich hae roferece to the past and parent. The
teum 'aranmt Goth qdva lnt' hasN beem used to this paper iAth the s-me
cogitaotaon as wa lu iandd by earier uses of presentt val*u or 'poRsent
echinge vsalm*. Agn, asa ma ttr of coastansy sa awvmmt, the Sis
of nplacmnt ost has been emdomad for Irpelssm t cost Ibfpeis
r splacmet d~esisn ta ch it is cntetded cas not be so until all
preset facts a~r broubt to attention. The idea zouuly conveyed by
*'plac ant cost to Ippro--aately the ~se as that now intended by the
use of present of curnt cash equivalent. There my be other such
deviataeml~ they have arleen throm mre rigors antlysls of watters
previotly treated briefly.
This paper tsaes un opraQ i gly the position that accowatng
is concmwd strictly with the past and present but so that it Is alwys
~levant to the fture.t To six ri with ~ apcttlas i to
caMfuse an alrdy complicated preesat. To asd rmw 1aur ts Is the
biniess of the acco mtat as medua to farm expectations Is the be si es
of actors. (nly If the two funct Sa ar'e cwetnly distingptad d will
actors be abl to psure their goals with lfftC~ d *kill.

Does accountia-g saire anything? Should occountiag oaMuxre
4aything? C00a acatag M, anything? If the ansawm to these
qmusti Ss we afflaativ, dsht dfes, what dhuld or what ca accotit rg
unsm8 r? If the am s arge n gate i o t othw uses is accomting
and chy e accomt nt s ca cenae d with d*flittlons of teams a dis-
cae-ors of Uw os f qM Btyiag thUasUl These and sOawtf q*estlone pose
thmeewlves hdt ne think of the promemes of accomtintg d the uses
that ar, r may bes mae of aaouottag Safoomsti.n Do lnvestoras
credit fratesOP analysts laqgiae that accouatlag gregaes or ratios
erivw fed r these mai wNue anything It Is sot ua~rsonabl to iPse
that they doe clearly they perfsme peratlons on the results of th

accowttng process dcb md asr sml to the qepmrtiem coia ly performed
Ib other f~ise1 drln e ther m estd*dliel mrNeBumet systmS.

2. The pmm ptal that accomatifg aiNesu s mething is aIapwrted
by roefacis to resurmmt of a aspect or mothr of bus nee S a
asidurdl e amber of toatiIoks ad rtitCls mn ame ting In xWce
years HoaMwr it wn nmet almys thu. Eay rl tthe prWesot cmtury
it ms far mus camme to spek of eaccoting aRd a6ouating ap-ratlms
in rather dlffermt tenm. Dicks- (1905s Sn) mote of a ~SvW
account M a dqa net proft at loss ad of a b l t I AMMa the
peoitimS of affairs DIebns (1924 31) wmete o the objctlw of
keping books a m nd pr staple s to eable the actml fineancal
condUtion to be M IMrMtlMd at any tme. EqI e (1914; 406) stated
that the bala e shwt jsU the btlc me of the ree accoott opm
a the beae after th el sdag of the naming accounts. Paton aa
StevMnsa (1917); 214) stated A th the acC cont t to
Ag" the status of the eoqpls conammc eqaips mt ed In psrodmcttcen
The italicievd woe e and MIds 11im thelm ue eema and have ooatimid
to be commonly used for example the Awrican Instltute dtfinitio of
acacmtla mes~e uwe of a variety of simlalr wds bI t lmkes as mrfefane
to m-arimwnat (A.I.C.P.A., 19593 32). Thfe sre early -efters to
accuracy and appraisaati a (*.g, D* idas, 1914) 32)4 torus WBih acr
proper to the tboory of a~easr~nt tbt it Usr wt until the third
decade of th century that eipli;dt eafergences !to marimm nt appMeaed La
any quantity. KeCter (1933; passWa) iUmB repeated reference to asuas'
ment abt without carsf"n nalysi~ of the ft~ctIn of mamure.ients. Cannia
(1929i 199-eO ) cane closet to lstsng an pdognst futationl ftr a theory
of asiurnrnt In c ttg in ts a in atpuuating the ditias mdr which
memres could be a rge, by simmstMa or atdates*. t he R ia not
precame to lply them canditlnas l na ws iter hba *etac taken the Metter
up on the basis of the Iead he gver. In spite of the increasing hefr icy
of meage of the tem mMMue and mNeouImm-t tbu has betn scarcely ny
xaitentlim, ln th literatur of asceaeating af dtet ithe a sm t
process Otae* and of its specific features is the field of acomfttag.

3. Actian me Ias amatted with a wide ad vried envirInst. Its
iancldnt are s a M-Pu ad hotragianssm that the slid Is unable to
eaair hnd thi all as tIdividuel at am tims t The snd is alo nable
to hold then *11 aimltneusly, as ladividuala ft the purpose
of aiskg sinC par ims t them or judgments wth a qct to them In
sek*Ig to .idob the diwrsity .of "tibages eqaurs src asr em d to
a*ng il ama resort froi a wry early gp to clasIfiastimat ad
to the foamatii oft gMeral SdUea dbat groma of things.
4. Events ad things thecotnt t of apeyrince ae ordered or
clasifled acceding to paportloe they pems Sa I moaa m and which ae
*inifict for sam purpose. The pumpoMs way be a goss p epose e*go
owe may wsh to 4iLtnafi bh hetma 'as and "tmalms in arder to hkow
dhat to expect in epmea s to qpech In dwhic casm the clu es msy be
distlnguidld en the best of amn or several brod ar vaoe properties.
Foa his a- itnfaatia am person May ae ar aset of properties hordas
another person asy in ti m -t matat tof potentail behaow use another
set of prpeprtleg ad both may beha qppxrpariatelyl both any eatie-
factortly dlsttlaitsh betasm 'm* an' 'nId emalo There e na tural
classes. Classitfiti is a pa&ppote nmt am ctianm Its 3eet is
to *coinLae futub e ngittitO It it uWstful it cceOsplids Its pA pose,
if it provide a* tifactory dhawrb-a in fuatm thiakitn Ay element
of amperlme amy, thaereroo be clasif ld In amy rys. o cording to the
nb of property e it is a M to pe m and ~eceed ag to the purposes
to be served by clamfictiem. But the effect of every claoevfiatile is
to I*mrate an 6ast ti. to conef trsto the attention on the specific
propertles recognaed by the cleasificatian mysta and to disregard all
other properties.

5, One may find it neesary to classify evnts and things aulti-
dimna~ m lly; that Is there my be aseeral paeprtles widch a popu-
latin of vents ad things has Ia om and It asy be us tl to set
up clamaes widch dmecrwi the papelati in a mebr of quit different
Iys. Bu t if each of thee wamy relates to an jidmad property

The Pan.e. eank Iatu of heuoasment

6. The taking of rSoasAod sotioa in ma situatieM s requires
orae than simply the knowlede that varie4 events ad thia~ have or
have not aertait ppero ties. So"M thiuap my peasese sa m ropertie
Ai greater o lss degee. In respect of auq property, besLd the
question, 'Whether or not?', the question may be aaked, 'if so, rmen
or le10s?'

b.g. col3ur, saoe m abhape) there 1. noS wy oe aaling oe pra rty in
teOmM of Oanther. MM purely paraIma behavior is iusolved and an
fo0al rprlsen.toti a variety of lnn property is neessry,
men find no itm upelr difficatitee nla aking choice, say, between
a amber of object of varied color *Ian and diMpe the dhie to
based on a direct pesnal alut or prefence whidc is inoontewtable
by ny ther party d the grounds for dhich e often not coliMr luet
to other pertios. But in a soctl oantex tis Ia id smh n poeran are
required to make qpa entatlona n respect of certain propeties of a
claw of objects for the information of others and this iso he situation
of accounting the general propotttlon stated ve holdI. There s no
way of eqaetf or relating property with property if j. and we indpan
dent properties. For my given prposa, thezefoMrO it is necessary
specifically to tipulate the property an the baeti of Wlich the claasiflo-
stien is or is to be, mde. That property wll be dictated by the use
which is expected to be made of the knuaedge wch the caifsi ication
yields of the claw of evets and things which poeeo it in camasn

The Prpose asd Iabt of caaurase nt

6. There ia a er of kLafI of anawar to this qapetSoU the awner
that can be given depends n the property by whch we re to dacee betwan
things and the aeoton of a Mcalnag or -~eawm t asyten n respect of
that property. A triangle can hae no more *"tringtarity than another
triangle e but one auy hw a greater or aoalter are the an other* Area
can b e urad and areas can be arroangd in odxr triangilewrity camnt
be so meamsd, Mew if there to a property uhtch a ertis ao objects
have in cai n but to a different dgee they can be rintd to oride. If
the accession for dch a ranking ooiur seldom it is mufficIsnt to ran
thie by trspectimon awn necessary. If ran*g It a current necessity,
and partiolarly if the ranking Is to be orm icated to other or done by
others for some mutia pupose, rvakg may be staandiar ed The several
"rank" ay be described and to each nay be assigned a sysidl from scom
ordered system of sypels asch as the alphabetical or amerwical systems
Such a scale is an agjNL3 scale.

7. Again it omy be poSIble in fc .ef ma prpottle to establlt
xsu* w clas- icdui hw .an Il class i" ttvel sl ng Me noses M ily
amnrical satle Mwthu g~ af g e est posseses mC or wles of a
paqrpey of this kid cm be indicate by ideRlfylag its clams Inaval,
Mwth r or net the *cl be has a -utng a e pobt. Such a scale Is an
J fL scabe. And gain it i. possiM In se pet of ma poapties
to r*k abjects according to an Inteuml sca in a dicidh me has a definit
umanang. The scaol ao nturl embevrs is sah a scale. Thw dimaIctristlc
ef my y su. scale is th at the rati of the nIsaer desi~-b tiag the cla-
in didch mny twe objects fall re aws seastat vdter thi stze of the
class interval or wit Ilected. Sudh a scale is *a gta seale*
8. Ratio Ocales hve partimlor dvantIgfe. If a wnit of convmniest
sie is selected, it is possible to lassify mptiquy all oktect~ possebi ng
the pwrpty in qsrtion. (If a wit of cenvwimt sIm does not giv the
discrtaintory posiblities desired the inclon of frfactios will aet
effect thi ganral dctacta1istias of the scales) As betwMm lna to
oatjcts# Judptats of the and "amMearms" may thn Re made with grwtr
prciiaste than by aebSg latrval wr dinal scales. It is AL possible
to add the adrs deipstingh the on of the property by my two or
myre Ibiests to obtaft tA3M 4" 1uid fpiats the p--- es of the
property by them aoble-t tadn tagoM 12 s llicte I it is posdbt, to
gottrapct, mad to relate in the fan of a ratt, the Maers derignating
the poe-sessIn of the paeprty by trw or msr abets. And it is possible,
if a d'ag in the wit beum sca -s y, to tfrarfeam the- -sn wr into
esrseqpnding mnbsae in a difftent seal by usano the tarmftamtian t lb e
shidc describes the re toaambI bbIp t the erigai aind thU eqr~rd mits.

9. Al thes prop aties of vtlio scales t n of La rtance in the
m 1 ~ n of a utry propeties abd ject It io M, ces ry fo soam
tpo"res to aI umIurs o wlt in others to obtain difteefo e in
other to obtain ratios of urwr of wits a d in i others, as wi dull
shu, to tramwfm abs f units in one scale to a mb1e of units in
autMhr cale. Ib dhall Ius "eataint ef the aseino nt of hZars

of amnuary units to pwr snt mmnotay proprtis. of ~object and ellectaas
f odfbjct.** It 1s by virtue f t w aselpmit of uch WrMd that it is
pasihbl to j, ud9e thesr a abject has "ao. r les of a certain msnwtry
prprty. And ka in a y pl ce thew is c-omly a comwtimal miay wuit,
the aMursamm t 1f amptty propertS Sn the s*eae of mmubr of s anetry
units emblems the rsnt t o be ud In a wi d versty of contadit at ny
given tiSm. (See Churchms 1961, 102)

10*. MEsurmnt ha been desicrbd as tlhe 'pmacm ofe assigi ag nAdAr
to rpresent quoalitle'" (Capbell, 1930 267). The gnsial A efIfitiem
perLmt the us of may gets of iules for the smalr t at of mBl s to
objects. CL, a s of objects poa g pg apiretlues whid ay aot be
maured in the scSl of positive, rational mMbs ay yet haew Nmb
oasIgaed to thUm acroaing to rules such that a ordbly eVeanru of
objects lhartg sm qualty nt commn re pzg ted by an oeder y *e mq o of
nuambrd -asses. Chats of accs Nts, riUWry and invntary catstogmr
mubers, ers em lwes. We shall int be caumeesd with asiganmt of
mdes to cla s of this kbnd. Nor ~sll Mw bo con.mrod wlth proprtles
fowr ddbh o s ale an be dvised. Tkr Is ano s.l for ameilng the
mrtlety of a perrfMc the bouquu t of a wifa, ar the flmr of as hdss.
Thse qdalitls wre resta ed not becam s ai Of thc owp nt pnrprtles
(IWmetssa- chepacrus udBtu -es, et*.) bht beorni of the gQLeat effect
of, or the ~ .rtas dp betmw tiBmes coa~ Its. Such Clases 9o
prapertles re mnttond sIqply to emphbasle that it is ely upwttheil
emdiavml t g to est blh amMr amm sales d r les In rea ct of
pripertles bIch m le dlgtflct individmtlly, properties ter whidc there
cam bhe established a n m-uint system dchid wi provide a, e iatmaatlo
then a qailtati" desartptioma

* Exteided trteamts of the comaitlam of m nem mnt ad f scales of
masMramnt are git In CabsItll, 1afa Cohm nsd NagblCi X3;t
aleg 1932L 1 H el, 19521t S W 1946 Actoff, 1962.

Definition of Accounting

11. With this general background we may turn to the question of
measurement in accounting. Accounting is defined as a method of monetary
calculation designed to provide a continuous source of financial information
as a guide to future action in markets.* Definitions are matters of choice.
Others may put forward definitions implying quite different purposes of
objects. It is necessary, therefore, to establish the proprelty of this
definition and to specify the context in which such an accounting is
supposed to function.

12. We postulate a community of actors (or entities) who are economically
interdependent; that is to say, the community has developed a degree of
specialisation of function so that each member has a specific role or set of
roles which determine the bounds of his relationships with others at any
time, but which may change at his discretion from time to time. The
community will be supposed to have a code of laws, understandings or rules
which govern interpersonal relationships, and which in particular establish
contractual and property rights. These will be assumed to be of the kind
common in societies which have modified capitalistic economies. The
aggregate supply of goods available to the community will be supposed to be
insufficient to satisfy all the wants of members. The specific demands of
members will be supposed to be satisfied by exchanges between them, the
process being facilitated by a medium of exchange, a money which is freely
acceptable in exchange for goods and services in their several markets.
To perform this function money itself will necessarily be a scarce, or economic,
good. We suppose that all individual behavior is purposive and adaptive and
that its objective is the relief of uneasiness or strain (see De#y, 1939: 33;
von Mises, 1949: 13). The goals of actors will vary from time to time as
changes in the environment and in their preferences give rise to changes in
their states of uneasiness. Adaptation in a fluid environment entails that
no actor shall be considered to be irrevocably committed to any past choice

* The definition and the postulates which follow were suggested in Chambers

wr decin.an* K-C f utua choleis m navrthelos Intfluwced by the
--yu-- es those dcis t ay be obarived that thme masempt-
ions ae MM y wFprse1 t the state of affarl" in the type of cmnmity with
whidh ue we fallia.

13. It is preposd to discon the acintag ftnmctaA, not the varied
task& 1dich acc st ,nto perfom Mny of utldh 1te Wutside the accouttig
functli, Actmae may thamelvye prepare their un acaoat. Butt for the
pumpo h t thhe tsdaU m ohtigh aidwilt the functedma
and its eecutim as the sme Mhether an actor prepare his ea accoats
or, accomuntat ppar ts thet for him. e uI postulate that the
fUnctlSa is prfotred by a parsm o w th than the actor himalf Not only
doe thli enaUb the dieaalen to cow the hbol ramge of pose blitiles
it alm =fonlRm with tihe aamnly alobyMvmel ituation It aset balas
of mdwrate or large seie

14*. No the delnttian mlshe s.eIa ie to the gtl ei n of future
acti n amerbeth s Se assert that acicat.tg has hi torical function
as ell as a fmetion in respect of rftwoa actiao m saomert that it
has a historical fuctim enly as a port an stemdhip a as a zport
an the di al of the entity's fads. These vUms are liting and eve
misleading. Infoamatio has no wasing other tham with wofera~ to future
actUams. In a wmld of senarce Imeoss It to pelntles to Iw~ r the costs
of collect armg tino unldIes the poeesillty of making wier dwsshine
In the future justifte it. The finamiU l statumeAt p lhed by coaitiem
to stoFhldf are not Gsqply z eprts of diet has tram~nprle4 the posts
thoy au the meoa by dddchl tod a duka' Jfdmnt either in the Oaret
for mnamgrial taltt or in the seoarities aieot, Iwt aided and nfotmed*
It is tzru that accomntsBg Inflanfest is not the only Snfp la tias 0n actar
1will mt or ill hav in making Ichols. s u t wt Ull be dsh that the
type of Inforaation anm acoutcing system cman s y to a namssry condition
of infamed dh ict in mawsets

15. NMxt, th deflition alludes to Msmetar calculatim ami finadal
infomatia., By them teas nmen monItay ctalaratton adi financial


Inmoatiao n a rpect of meets sich have trawnptied in the past. In
this xrmpeq t the definition dos not d~r t frt fm may ot defiiatteion
But It is nMe- ry to dtpqeae eof s poosei e bectt. It may b
aggsOted that aeOUntim g Uis m e with physical units. ut it is
saly W aoemined for th pupose of auingo c=Oset montary csleuations.
Te vry roam tafr the perelsta oe a accmtag as a peAltm i in
the fact that man is t he Midi of wedntg Pmeple do not ant may
for itself. They wt It becamis it is odteaiUly the n ad only good
Waidi cm be freely umd to acqsir other goods. "Mney is thr thing hidch
servs the grenrety accepted Mad cam y uwsd mdta.m eat emhangM This
ti its only tEuntionl (van Mime, 1494 398.) Its musaeOam as
nuflm of edhang is the only ream uy Indlvldmals,, hwlna" fiR t ,
govem nts a thr ndtiti es r or ac winta in tas of =moay.
Reanning in toam of amMy is tno dme because money is a Ic n dma~ter.
It is not a Ommn demBB tar emoqpt wteer Weverely limited striEc tdans
as -to tie ad place. The only carmuRtaa- in idbch roney is a comm
daminetr w are these in "ich the uigifieica f a the moastary wits
asigoMd to things they dmnm.stot is the sam far all such adismnte
aMney le good, lite any other gmod Its price in tes of goods varies
as des the price of goods in tea=s of mmay. This is lma n to aIl uses
of amwy* Hence it is not for the zeasm that nomy is ued as s tom
of vlue or a a camm dMiod'ana that it is the basis of reedamings it is
so used became, and anly as log a, it is k C to be comwsvrble with
greawte ease tbm others goods, sito the goods of an'a chief.
16. AM&tr type of bSjectUin *do ld be notieed. San say that
pasr pation with mnstoay calculatun is in fact a ditaortn of the gets
dlch mun saks that it is necesery slso to khm aea e f other aspects
ef en's goal ysotms Theo m ums of mmmoy teom as a bass of
calAcutim as m no asmption as to an*' goa"tl Money muits ar a device
only. one amggeote that i t taking a canW the iatheitim ore cmnmcaed
with mbsn nly. Mmy units wee catrs in the se mW Ns are m smvrs.
The i uM dfes nt ilply a concern with purly "athibertialiti alsiI eman
iastitbutions dih haw philanthr pic euitaral or hdaritahle releo, none
of which ar purely or mun partially mateliraltic find it uaoful and


anocesry for "BM pupiOs to rzchn In tom tef mmsY AAemuntta does
not cNaaGn Ittlf with specific prsonal ge90se, f ept to n t a that goals
mw vwriad ad vay sor my peswan ftam time to aie. Only an actor
hIaelf can state btatt his goals are at ay time and S ses the xtant to
hich my cours of action has attained or me y attai his goal's
17. The lititstim of acosmttg to calrult~ ta In szepect of the pest
asy gV rise to ufectiens. In asking dioee an aecte may mk cl clcattimm
with zeqect to fturbe ~r wts aBut cal h cAlca titms am hype awtiCe*
He ure his p paste t wnIFpaid asp golden tabat theae iuwE
In a s wr of iectatUos twe eMctd rote of and ySael ft.e petratiag
a n a esting ouse f action we m nMpa.rd with the e pe&tud costs of and
y4 fram altanaate courses with ow ithot dontiaaetnt at a hypothetical
rate none of ditch is at the tBi capable of vurifitatlion aRes ned
choice cannot be made othewise. But the eommity*or these malclaties
doe not make calculattoe relating to the past of no conmsqnce If
maything, calawlstimf s rating to evts In the pst, provided they reslt
in full amd coplte zreprf ntattan of the poeitim at the tfiu of choice,
ae the "mwo Siprtat for lwhtev a man's petStoIn i s at a po it of time
detercsi s end imlts his rage of chdies at that time. He may madl the
aoddlmet or the Mgt elaborate cae tiaBns abAwr tb tie tun that 1 his
preegatiwv for it is his resource that wa to be c i tted and his
qipectatians that rwe to be a adhied or diWa-ppaM tdy but if he is usinformid
or inasdqatety Infaeued about his pment postim only bl y dharn llW he
make decisan~s qtippriate to it. By 1thttg actcattsag to alc ltiams
in rx~o ct of the pmast th e is qpeittifd field of *wants d things all
of ahich we capable of eb-rvatt or testing with rgfeftnc to e msting
piesm of wevidmae. The zrsnlt* of thowe calstlaitms c han beobjettw
raesm ovMry caleuatlan about the futir cm be no better than *stbdetiv
ghat is mae, the results of sch a ccwmttng cal~ latims can be neutral
with reepqct to ftute atia@sI dies im Ym cdim l atlnt abiot the futwe
is lin*s in man ay to the actors personal fancier adnd prweanes .

18. New we mt ask, what are the objetoe of these meamtaq ealoulatiso?
What events ad things ae to be taken late aeoomt? Aseousting has
traditiemallry ea0so d itself with thinPs hih ee, oar ao capable of
belfg traded in markets, an with the loal or equitable rolatioahipo
between astrs which arioe tia tr ding In amaketa. F 'market' is ms at
saq pce tss i wih oiods or sevioe me trn wexee f i the oeMstOl of
om pross or etirt to the eootrel of auotbo. The limitatim of the objeut
of oseeoatiag to thing which are capable of being traded ia maets i
importat. Oaly inaofar as rights or preperti ame taosfeabl o ioseosatla
eooooerd with th w. The persoal qrlities of people are wot so tzsasterabloe
thqr omot be everoed, nor oan thg therefore be subjeoo to the momtq
oaleulus. Sut the services arising firo these qualities arm trafeirable,
atd aseomating ea and does eese o itself with smuh tranafes. Similarl
ae possession of as aetor whisk has a i tentiem of parting with trading )
oaa usefully be as object of aeonatiau The oaeoeting qsetem of any aetor
will thus be oomoermod with the steek of things b possesses, under legal or
equitable title, whioh ae epable of being traded in makots, with his and
other equities i that stook and with changes it that steok and those equities
tfen tim to tis.
19. If aeco ating io ooosezrd with memtary aspoto of marketable
things it s sooeessm to idaenti the events whioh bear a them. Chms
ia the empooities of aa aeteo s otoek m take plane isa tw m- s
first io by a tamas tioe, to wrhih we a sow exmanb of pgo or sWervie
to whioh the parties are the ataer himlf and em oa meo other partiOe.
Suah o transtion involve the oonseeis ohlesos of two or arso perewao at
least oe of whm has net the -m watso ad peaat of view as the aeter.
Tho price at wheiosk sh as sa mbmo take plao expresses the wiUn uese
of m part~ to foego the peeoie of *des, a the wilninassc of tho
other pety or parties to trees the pIoe eois= of meT. It does oet express
the valusti pl pled ea te gpos or the mns it implies that the vender
prefers ema to oed without Implying the aduiam meat of a s he would
be willing to aoeept) ad t it mplie that the purehasmo prefers gods to
omsr without itplJyia toh ~m.-m aoemot of msW he would be prepared to pq.
Only i this aos n y it be aid that the pie represeats the 'vale' of the
p*do to both parties.

20. ire seoond way in which a ohaa in tiho oepositioa of a aster's
stoek my take place is by ooavenra of things he already bld, t1r
oebrentra things equ~ edL y v rtt e of tvaomtiostm. Conreai em m at th
diaeretlm of the aoter or his ageato the espraos th expectaties that
the rmalt will prxedue mere senrt an sal than the things crKia Sll
sequid. & 1 traemasetiee world predsie e resale. Tnhy do ut aseerrr T
ppre the expotatiea tht tha e result will predmo mae mrsa n s ales
them Us moWr orltlaallr laid out a a twir prehaue. A purebase traumt
ead a -enria are not eo ar13l linked; they involve distinct
dieoimas separzat iL time sad theref em in a difiteret oestewt.
21. beth typ o of ehgnp have boeaig ma thM monetary aspect of a
tsteras etokl for the onaverstm of relw late goedt, sad of goods of
one kind iato gods of another kind, iaLuf ase the availability to the otor
of means of exhage. There Is also a third olass of event which aiflamooe
this. Those ar oheange which oooa duo to the atiss of perseas o
ozrgusations other than the astero ad ina rspet of which ho h ao o hoioe.
A moe comon and iportant ezampleo s a hap lai the *eoaomid or teeh-
aologloal emviro e t whleh falls ae the aeter, for good or 111, withoat
wm obholoe e his part. If goods of a given elam held by the astor fall is
proie, so that his oemad evr res arees fallos the event hua a bearing a
hi finaaoial poeitieo sad he aMeds to knw the effect. If the offtets a
dtirprded a~ the peodap that omaly ae'seth bagai betwrm ma ter
and mother ane appropRate objets of eoematig. th* eeinqtae c-amR
oan3 be to odpriv aotems of lafowMtiem oooessry to Ltafumid hoioo*

22. Itherto w have spekdm oaly In a pgesrl way, as is the eoast
in most deftnatiens of eoounattg of 'amotary aepets* ed 'finMmal
positlte* at t it lo neeoso to discover what partloular snomtayr aspot
of evwts udA thing is the soneern of meeouatin. T o do thi we mt
examin the kitnd of lafeMtioa which people reqaulr as a basis for
doolesnem having eenmsquMemo which Involve mon or m~SeW' worth. The
followlan list is nt exhaustive bat it covers the greater part of the day

to iy busiaeas of eatite egged in oeomerieal activities. Such
entities over a wide range of separate transations than individual satorms
deisate of the latter and of a-- sonmaial eatitie illU therefore fall
within the range to be esomidered.

23. It is nsosssar to kimo or to b able to disoeoer at saq time
the aMnot of aMaW (i) an head, (il) which would beome immediately
available if ar asset or Ma oollotion of assets were to be diposed of
because a sitoh in holding is desired (iii) whloh will have to be paid to
discharge aq liability which is duo imediatelr or the existene of which
ecastrains in an inoonvenient way the immediate ohoiee of actions. As we
havo supposed as ohoioe to be ireovesable, it is also neoessar to know the
present measure of the residual equity, based on present measures of assets
aad liabilities, so that ohoieo as between the existing investment and aq
alternative Sg be ex ereied, and as knowledge of the equity on which
relationships with creditors are based. To be relmeant to the spending of
amsey, the alternative investmet of sen=, the borrowing of maney and the
disehareg of debts at ay time, all these measures will necessarily be
coatemporazy gaeuees.

24. We will dessibe this oOatemporaey propOtJr of all assets aad
oeqitiee, the U am t of MM r for whio h e eoan b e netly mehmanvd, as
the eopept eh eauvalt, oe other aeastazq propete of may asset or
obligtioe is relevant to the elasses of aetioa indeated aad thee elasses
embeoe all possible aetioe in the rmket plaoe. The inateetion referred
to is not the oal iMfoetieea relevant to eobhite soi additional useOal
or neessa imfeomtern will be treated presently but thor e o be as
question that at loaet the iafometion iMnioated above is naeeseoa. The
several asots and equities of am entity with their eumst eash equivalents
my b so arrangd as to give a balasoe ahot; s a all assets e subject to
the equities of oeam party, the amgroete measeres of the assets end equitie
will be equal. This balame shot would represent the financiall position' of
an entit, its position with reapeot to the wide rageo of possible ohoioso
dealt with. This position indicate the limits of all possible nation

Ia the market place, whore it will be reealld the media of eshanps is
amqo. It is rlevrat to all actions.

25. Oloarly, s all ites ar's amemnato ia tem ofa s oMesr ait
at a give poait of tim. the addition, sbtaeetios a nlatiso of O
mase of AYay itM is valid. The possibility of ag atie at least is
of iportasewe. For a give alternative to his peset oDwre of action, am
aster my wish to add the mo ay uaites sign4 to a eSoletios of thin
short of all thins is powMsioa to eash, to heldiag of sms eoioditt
stookl, and to holdings of seen its of durable predours' gods. Thids oa
ely be doe with eas if all things axm eprmated is 0eus teorm neither
the aotor aNr his soo aktat oa know whioh s eh oolleetioa of all possible
eolletiMs to a&rpeto nal81 s all item in eash elaos of things are set
dow in a way so that substitatioe of ona ito for ianther i ay oelas
or as between olases of thias oea be omoaidsred in making up toh olleotioas
Agaia for romans to be given i pars. 3 it is n sooasa to have sea way
of disooveriag the a geate of the aoaes osu assigned to all things ia

26. 8ao ooasioeratios should be given at this poiat to the aeod of
astioa of the setor or tetities uader eosiodratiea. We have azmoy
postlated that the goalo of aay astor mr va ftre tim to tim. It
is a atter of oxperitee that maS people have oh loss of the soanait '*
aeasex resomces thaa they aneed# that wa other have moeh lo than thy
weat sad that evae these who oms to other to have s a abunmda eas always
find ways of using mt N then thel have. The soeraliuaties sma wannuted
that all actors pretfr to have mre rather thaa loe of the oesamity'
sooea wrl emsoes. Bat Whiod sears reseoue? It is impossible to obtain
sa answ to this qsotioa whioh has may oelow e ia aouttia.

27. For. in the first plaoe, althebgh it is undoieable that the
direst personal evaluations of things bp asotev ifn ae their oholloes
the eovaluatio m vamj fro tim to time as the goals of eoah aotor vwa

sad a the dogres of attisratiesl of eash mat vai Thew is no msue
thifg as an inhuaet or iatri nio valueI podA have vales to perems in
pooifte states at spewife tiMes. Valuation Is a set of pnefrlrg.
A poera y at me tim prefer to possess A rathe thi *, and quite
seadobly at weather tis prefer to posses 3 xth than A. Taluations
invar ably have sfereme to prwmat xpeetatlom of the fMtore. The
aoe subjetivw, ad there is a invariaat sealia nwhih the value of
eesR as aetor ag be ezxpeseod. Further, the valuations of a Sivw
thing tr difevat pesnoas differ if this ere not so thee would be no
exhangs. So theeo is ao *al of valuatioas whi te ry be considered to
be equally elevaat to a eemmalt of actors end whiU h y therefore be
sed as a meus of "oodetemina purpoive dAoisia e". (Chuohma, 19611
102) We ~y amy that a givae person prefer A to 2 and daM e as evidence
the fact that he possess A, set l, or the f ot that he has Just eaohsand
3 for A. Bat w have no mesuse of his direst puesea valeutions of A or
S. he my in fet prefer 0 to A but La the abtsme of 0 io obliged to mako
do with A. Aa ezehango rsulto in pat fro a valuation, but a prieo does
not present a valuatloa.

28. In th second please, the ohoieso of otors as betwoee alterntiVes
ae Ieztrioably bomd up with the eots of those alternatives. Ts west of
am alternative is the searifiE e or the value forgo by the aster whioh
its shoiLe details; where reixees arn mse thee are lieit to the
oesto whioh my reasonable cter will lar for a speaifit ena. (See
Dnsgr 1939; 40 i.) The eas he chooses a thoe in part detemis- tr
the expected oosts of attainita the. Per both the above reason therefore
it is only possible to speak in a general way of the goals of motors, of
their preferase for mome rather than les.

29. Not only is it impossible to obtain a speoifie answer to the question,
Swhioh seaoe wreourM ar preferrd by a aotor at a poiat of time?' it
is nnemossay in a market eoaom having a menotary mediua of exohagn.
All soare resource have a market prioe. Itf ha aore of som goods
than he wants, he may dispose of the surplus at the sawket prie aad


acquire at the market prioe other goods for whieh his want i greater.
The expression of market prices in term of unit of nomea perits the
oxpoessoan of all goods in possassaio in te am of units of meoa. The
pretereaoe for ore rather thaa lose ie then translatable into the
general fore, more rather than laess o-mad1 over reoeuroe goneally, more
rather than less purchasing power. Insofar as ay part of a oolleetioa
of oods in psaase ioa io not mea, it is neaessar to discover what oeay
it omads-a, for oely in this war oan the extent of ee's ooaind over an
alteartive eollootion be aosertaned, and only thus aea the objects of
easo' futue actions be ohobsea

30. The iamdiately preeeding dieousaion has been earned out in
teanm of peroas haviag pnrferasne and acting on their own behalf. The
iga business oonaern has some features whioh aqy make the predminant
rolo of msmetary ealeulatios Olearor. A batanoa oeonoeer as aeuh has a
wants like those of persons. For obvious reasoas therefore the goods in
its possession have so intriasio value their significanao subsiste ona3
in their expected power to generate oas, for the satiefaetion of equity
holders, Junior and senior* If an existing oollotion is expected to
generate less eash than an alternative oollaotioa (after allorase for
time disoouting), the alternative oolleation will be chose. It is of
no sonsaqueme that ortaia goods often deseribad as "fIesd" assets, wer
initially purchased with the intention that they would b hold and moed
over a more or lose deterdiante future period The iaweatmat in thase
gods may be less readily convertible to eaah, so long a the intention
poesists but the intention may be abandoned in the light of the position
as indicated in the accounts sad the state of the market at a~agp noet
of asesemmat. *Moh the e a eon aidratioa aplj to the possesaiooa of
individuals, except thoee irrevoeably emeitted to aenuaptien.

31. The judgeat aoe or los' entails knowledge of how mah mea
has nao. Pr eash this is simply a matter of somating. But for other items
this knowledge is not readily available. It involves the assignmat of
number of mmasr units to non-aomntary things and the addition of the amber

of nme umits as assipud. This is a process of ersurWeC t. The
proposal that the rule for assiaaing number of moy umits shall be the
mrter of moea units euznetay ohaenable ftr )ilaOemmO taq things msts
the general principle of manremat that all items hall be wpreseateA
by mbwer Ladiesting the degree to whaih eaoh ites possesses on ~aed
JaMar It also mets the aquiremat of selevear e, for the units as
assigned are those appropriate to appraisal and shoiee at the uomet of

ieam\m aad elVmane of a.iuryrmats

32. The argumet so far suggest a ftom of aeounating whioh is
relevant to every possible fatue action is markets and which confomr with
the ohamoteuisties of a system of -me us nt. But it say be said that
the current eash equivalent of mar thin4p is indeteminatte and that for
MaW other purposes than those disasseed it is irrelevant. These objections
ust be aanwereo

33. The ourret oash equivalent of many things my not be doetminable
with the degree of aseorma which some would like to expect of aeoouating.
But those who have nach expectations are surely overlooking the i pereotions
inherent in every kind of aoaounting. The smoeros variety of methods of
assigin manager of monetary units to inventor and durable goods under
traditional aooountig methods mast surely mean that sooaur has no meaning
when it oaoms to comparisons between firms such as those that oreditox
and investors mak*e If in a given industry ome fir uses LI.P.O. principles
and another F.IF,O, principles for short tera inventorie, it matters not how
oa efully these principles are applied, ao external party my usefully oompare
the measures of the two inventories or wa aggregate or ratio which includes
them. Suoh a ooomptrison would be equivalent to usiaa different sales of
a zaarr- t sad expecting the results to be oomparabloe But the challenge
of seeourm myr be take up more direotly. Thoee who raise this objection
appear generally to have in mind the type of aeoMurM they imagine the so-
ealled exeet eoienaes to possess. The presumption that the eaot soiaeoes


provide ma-aeemnts which are parmage of acueacy is falts (me, e.g.,
Sd ddingor. 1931), Even the eart sciences aw not coceuned with
accuracy as an abse te They are concerned with damg of accuracy, and
the degree of accuracy is always a fiction of the quality and precision
of the lastru (nu th e he nd th e eye eand the braln) ued. (Adoff,
1962; 05-414.) aNt enly that; the degree of accuracy sugt is the
degree nMeesary for practical purpsas "The problem of ccwacy is the
problem of definR g the allomble ltadts in the construct n o am urem ]
Thlwes aimnb limits Int be died in prt in t ters of the uses to Itic
the m-mrImt is to be put" (Charbcm 1I961 127.) In essec then
th problem of accuracy of imealr mit in accoamting is siply the pzrblem
of finding a degree of accuracy which is use*f for practical purposes for
making choices This is not peztips Simpl* of solution in all cases# but
for practical purpose given the property to be smeured ad a scale of
eaImurmwat the process of a msars t to Oy required degree of acaacy
is a technical ne enly.

34. The charge that the current cash *ivalent of the vared objects
of accounting is Irnlotr nt is comeoly basd on the ground that in a going
concern there is no intention to dipose nditly of anny assets or to
met imnaditely any se igations. In the firrt place thU seumes that
scouantats can toa the specific tabtitons of the actor to hdao they
provide Informatloe and s haw already concluded that this buoLedge is
not available. In the second place a system a ofm enr t is quite
Iuncmcezrnd with the intentions of themes it serves Its pupoma Is to
enable people to fmn -intentlons". In the light of the variability of
roles and specific goale it is improper to sesame that past intentions
will peristt Inenetions are irrelevant and the objection cma not be

35. One final objectin may be raised. The suggested basis places
emphasis an the short run the position from which action in the immediate
future will be taen. But it may be sed, busiresmen concern themselves
with the interaedite and the long run as rwll Do they not require to
Imow values n the long run? Lneg ru considerations certainly entwr into

the foaruftm of eapectatiaan and hba-e of dsecidi But they ae entirely
hypothetical and ubjective and wre capdbe of being changed to large or
l measure as tm pawes ad what was once the long ru bemoae the
shogt runz Thee dhages will rise in part frnm the fiaaial position
as it delaps e w time. So that whether plamiag con~crs it.llf with
the hdmt or the long rm knowledge of the Iamdiate financial position
is asoMs relwmt to ectimo. The defsition given of aounting refers
to a contlaums soumre of infom Itmn fior this very reason Financial
position may nat be frmally asses with each ducng in It, but the ms
of assessing it at ay cesary time lwmer In the type of accomett g here

Further Fanti AIpoets of Chotoi

6. We turn to sae other kiide of information dhich awe squired a a
basis for uikag choices which imvle amney or the maney equvalent of
g ods and equitiesa The nde and the pemtiary capacity for lne)i the
eda of individual mod other entities change fran tia to tttla It is
thefore useful to toi the U e rate of change in the mean r of the
resiadal eqAity. This is the periedilst M of the entity. It is the
m about of iddtc individuals mame canaetin and other eiieitue and
aot of which trading Vntur e amr divisions ama g heldere of the residaal
equity and enditues an new iam oa tamts Its mignitude a discoered
fra tiO e to the aidicates whether d to wat eteant levis of e n Oqptim
or distribtion to equity holder ayo be raised a suet be lto ed it
enables estimates to be ade of the t3me which met elapse beore a deised
project beyond preast mean may be undertden ad as it indicates the
outcom of a given past ore of action, u buindge of it say he used in
estimating the epested consequence of pmurlag the sae course for
compariena with the expected aenseqaene of aitemstive co es of action.
37. The change in the reaid6l eqity far a selected nterval may be
acertained by taking the difference betamn the residual eqities at
opening aend closing dates, as shoa by the tataaonts of financial position
at those dates, provided both statements are In units of the aea dimnsimn.
Alternatively if aunequiocal ammaes of revoms and costs an be obtained

thierw- the amemM e of Inmaeo ay be obtalrd fraz the diffemmn. The
=salts fom pr-.d ain in both ys will necessaily be Idmwtlel. In
fact in mst ass it s eessary to discover aoe of the costs of a period
by lafrnmo from aem as of asset at openig and closing dates. The
measure of d prci siatt io one such cost. The camn proamss of cantimally
relying on an icatita decision tdim nM an a asset is first seqitted
relies o osimates u"mpazrt1e by ubsqunbtly discowerable facts of the
mEreot) in no ay is it a process designed to masue a cost or to give
thse currt cash eqivialnt of the aset from tiSe to times. On fitrther
point worth mking is tat pure windfall elements of ifnOl lzqure to be
separately idMtified if the ostitatisn of the probable fstwure consqam e
of pursuing past crse of actim is to be baed on past InB mes

38. If dhaice pdicated o the preofearce for m rather than
ltss for a given sacrifice, und if the opportiuty exists for actions which
involve Iarger or s er socrifies and lWrgr or salloe caomatmats of
Ome's zroures, it is iwosMay to kIo the 0 seltiaihip boetian the outcam
of discretmlnary eparatiou in a giuen period and the mn omitted to
obtai this oateom. Far my past period this relatr1 dp on be conmutd,
provided thte eamrsmu.ats of saMr es ployd Md of the wtois Mae
sapimeeoa i units bhaing the sae igifleanee. For twhe imnB tely past
period this "rate of ret W will provide an lndletion af that may be
expected from the am Caples of actiUs in the SlBdiately futue period,
provided it can be som d that other thima WiU mnain omnstdt. This
may b eiomred (aiject to edjmsmn-t, if t1he asm ptin of cnstarnc
romot be mad) with tih probable rates of rseta tro alternative complms
of action, sulct to qappririte daiattteg for. tia. This frte of
turn is also a asmes of effic~tmy Which ay be chased with rates of
return of other fkrizafns dr daeoag bhetm n tmswstmints in alternative
f1imas if a11 firm adpt twh soie msiiur it pr ncples.
39. It is matter of eqparitn that other tpes of wfoamatimn are
used in making sePainnts, cadpnries nd acalutioans with raaspct to
maony mgnituds. In ailtien to having masem whic relate to the
qapratitn of an t ity as a whjls, qpecifiC facts of those qperattins

thrw ligt on the amLability and adsilabity of futh coures of action.
ThuA, fomr sae pupoees a on aoe occasians it is nacossay to caompte euch
ratios as the current ratio, the leW age ratbl, maMhandmis turnover rates
AM-wo On such Anfomatien relatiag to the past on may base calculatlU s
idicattiv of efficieny of operation ad dectaion relating to qpecifi
future eprastifens. In dcaoositg futame courses of action one aer alm wi*i
to act in mud a way that ratios of a pa fnrd stIe remlt Thea ratios
lIbe rates of retum, may only be validiy computed if the wilts mployd in
nmaertoar and dM inatoas haew the ase sidnlffiae,

^oinem-t in Aouanting

40. It will b ubsefI at this point to naueris the types of inhn#
atten dealt with and to indicate the types of uana.aomnt they anti
The initial reaow g of a transaction is a recodig of a omeeas mnt of
the mber of moey units traded against a good er a claft. It ropr-Oesnt
the current cash e~hatiet of the good or clat. It does not empress the
valuation placed on the thing giwvn or th thlan received by either party
excpt in the aboew Mpeal urn. It Implies tUht, in the position of
the parties at the taim both wm willing to and did participte in an
MOhmagm, Tih troaa~m on has no am sigaifiAnsac the this. FrTa that
time both parties met a e the bast of it, and makig the bet of it may
ean usiag ty the he good aeqaidrd in the way tented at the tie of
the transctiEn or ao sooe entirely d iffraent w
41l, Measremints b cones m obuviae ly necessary hen o wishes to
compare to a e thtinge or to obtain aggregates a differences betiaen
things fea the prmpoae of co paritee Thu one asy wish to W qpare an
aomBt of cash an head with te amount dumdad by the vendor of a good one
wanta. one am y wh to discover a coinatia of goods in po-a-eson
bichd if preiently sod will enable me to pay offa debt. The asistaoc
it rends in aking dches te the future is wte Iustfication fo
a uwrnat, but it is an operation dich can be appled only to things
which are now accesaeibl for cuperiesn with the sme scale o a es related
scale. Now f&n the stSplatiUon that the future actions with hitch


actmountg it concearnd are actions n ato as ta in dhich the neme of
hn is moy, it f o tht f o t the nait of amemumnat is the arnetry
unit of the tIae ad place in which te uamuring is done. Every
amontay ystea has a unit of currency, so that the scale of meajur st
is the ecale of naim s of monetary munts corzsapoadng to the cale of
natural a bers From the stipiatia t t hat future actions are oaly
de traiadble in tihe it of present amend ver ras w res, t he roul
maegss for assignng oamers of monday amts to the financial aqects
of vnts and things such numfirs all be assignd a the bels that
they r prasnt present moond ovr reorcos generally, et current eaeh
qaivalents. If amers are eassned accoindag to this rule it will be
possible to add ad a sueact nuimers prousting this comana property of
assets and doligatias so that the aggregate or differaca aw the sas
sgnificence as the elnificame. of the mtubers signed to each ita
42. The range of events ad thing with hicdh an entity is aonarned
may extend beyond the aras in Ahch a given oetary unit is the n dian of
exchange But diffaent adia of aehang as theaamevia o chan Vabl at
market prices. As it is tqpososble to ad and aubract arabes of
different monetary units, trinmem-ties of the measare of forsig events
and things into mamaras in term of the domatic a*mmtaey unit re
eessry if aggsogattan rSpreamting all oparatioms of the entity wr
rseaqizd. The domestic m tnary mnit s in gnral the unit of the ar
in ahich the entity is domiiled. Thr trmaf nation rule will b the rate
of achengo prevailing at the dat* at whh any aggregation far the purposes
of ampaarism is to be made. SbMilarly, an entity may adrak wver a
period of tiam in uhich a given netary unit he changing tgnaificance as
a seama of ac haage As a mhe teo wber of mnetay units which
MepeasW ta current thraVh oa h a period 11 change. If at ay time it bnea.I necessary to
aggregat or eopare the mnetary aspects of u caotary goads in taor
zrlevwnt at that tiae, it is necessary to transffim earlier mosare to the
n b of current a otts having the same signifcan in toms of eaaeuad


owr resources the rasber of nits currently amssgnd will thus be the
=uaber of units assigned earlier aduetd by the change in the purchaeang
pamer of the anetary unit.

43. We have qcifld the property to be measured the unit of
neawmunu0nt and the scale of aMMsuramant. It may be asted, what is the
dbaunslan to be mneoued by this scale? The d iasiona of the monetary
unit is its purchdasag pMar at any time. All aparstians in mharet arm
based, an the maonetry idt, an the adeqascy of a buyer's pool of monetary
urlts to met the nmbRl of m netary mnits dIndd by a seller. Similarly
all peetatSnI e+Oxcept those D which are belrod thed maret awe feaed as the
basir of isometay aggegates the cawconants of whidh ares M iad to be or wr
adjusted to be of eqatvalnt significane. Like Is being related to Ik1e -
a-iatary units to mInetary units and the test s only am or less -
maetary units. But the control of momntary mlts Is swoght only because
it gives control oer other things in gmnral. Control of more or les
notary units is soungt according as nae or los such uits ar required
to ammnd other things in geral. If e resort to use of the term
'value' and 'valuattaon, I* do so oly as a oonvnl t vy of saying w
repair tMhe arketl' as essment of cvwmut oanatary equivalents. ,We do
not Satend to i ply that the sca e of o mmeasr t srsoares vawls or that
w- are concerned ith direct vtuatiens by the parsna or eatity for bdch
the acons we bgpt. A ran's aon direct v~atutiem -aw fleeting. ub&ect
to change, even airasical and this ti so whether he is Oamidted as an
individual or as an agmnt of a oeaporatian or otue Wtity.
44. The ere ttpulation of a ait of rimis.rmit may give the
prs-ion that it is a unit in the sme enme as the nits of masuarment
of the physical sciances. In theme fields mite are generally understood
to be tfvariant untl, whr s eas e hav ggested that the unit we hIe
adapted is not of this kind. Howver, physical unlts of measnresven onty
have a fied practical sigaefigance if the conditions etpulated or Squlied
in their definittion ae satistled. Just as it is poeibtse and neAemawy
to make coreetions for ateepheris pressure and tepirature when using
measvesI of mass and length under aconditsns which differ fra= those stated


in defnitions of the standard units, as it is possible nd necessary to
make adustmwnts frzm point of time to point of time in the significance
attributed to onetary units. Meaur nt at a paint of t.ae reqatre
only that the unit daull be the sao in gnificance for all items
measured There is no stable monetay unit through time in any sene
which is zxwevant in market places This being the case, the only way of
solving the praobla of comparison ad of measuring dchangs through time
is by finding a basis fr perfanming trannsf nations an meases taken
under different conditions.

45. Within the abso system all ms e zmaant dawitd from any set of
financial statements will be m thaatieally valid iaeeu ta slaply
because their constituent naerators and doominator a e measured in units
having the esan significance thr.ughut the messarig process But Uhat is
the mienng of the nusrt derived by relating one amwre to a~wthar Of
thmu lve ratioe and rates mean nothing. They derive their raninags
from compaian either with expected ratios, or ratio* of the saae f ir
at differet tiea, or ratio* of different fias at the sam time. Epocted
ratios ae the product of anticipatory calculatims, and they are theretwfo
addertive. Each d ur of actually darled ratios may make dhat he widhas
of deviations fra his espcted ratios Dwitimons ay eaggest in a
general ay saI change in the uWses acura of actions bply bacaue
actual remits or parefmemx- did not match epectations. tt eapacted
ratios ae in no amm a noaa whic is nvariat through trew
46* Inter-terporal couparson of argianal Ianlaa euts of the m itary
oquvalSnt of particular things are auainglae if the nit of -wrumant
has a variant dimansiam and if the period o dates which are cmpard hold
different potentials for action In vime of the s ifting goals of actors,
the shilfing character of the enviraoimt. and the change in financial
portion as inv-stats ae pitched and the anePgte reaorcs controlled
increa-oar decreases vwry period I unis ae in reqapet of the potential for
action. Cmpacrison of cash heldiags Inetey holding or durable goods
holdings as betuMaw two or mao date ad camp taari of amounts of not
income as beteaan too or moe ptared ar of thea alves pointles and


potentially aAtlediSng The only emaroes aich may be wtidly related
ae either (a) ratios of suceos- s dates, the numerteors and dmainaters
of dtch ae asMseand I units of equal significance, or (b) pairs of
absolute meamurents one of which is a tranrsfmation of an original
asmaurment. But coQparisons of pairs of the latter kind (say sales
revue for two periods) may be cmonfthaing because the co se e of a
transftmat1iwn is to dsow a different magnrtle than the magnitude
pr4vios ly rwp:otod. On the other hand coBpsiaons of ratios of the kind
mentioned need not give rise to this kind of confusion. Ratios or rates
are pure rsiberse having no dimsneimd Uatovr the dimnsion of the
unit in consecutive periods, ratios for each separate period are comparable
as between periods. It follow that tables of comparative figures dwold
give far less preatnence if any at all to absolute oermem nt made at
antecedent points of time, and far mowI if not exclusive proaitence to

easmrements as Language

47. Hitherto vw hve conoarned oumbves primarily with one actor in
the c anoity of actors initially postuated. It is cesary no to
consider a aactr Wose affairs ame InteInum e with toee of others.
Caieder the cse of a carparatltna a tor thraai ts aigen a managu r
The caporatian dapund for its initial and ghblaent financing and
operation on the c ntriutins of investors, creditors, cataorsw upplih
and auployes. Each inividal in emch of thise classes is an aster in his
own right; each will be assumed to act acceding to his judXM nt of what
will yield him re rather than loe. As before we dhall not be coasr ed
with ore or less of zhat; for every actor has sae daands on the ~a.aimnty*'
supply of scarce resraces dich he can only satisfy by having media of
exchang.~ In his relations with the comporatlon he 1il mant to kow
whether continuation of his connection with it ppeers to prMaise aor than
an association with se other entity. One of the tests of this is
whether the corporation is sufficiently profitale to met the demand, as
they change frame tUi to tiie of the several clsnse of contrhibtor -

wether theosm d n take the fewm at higr divikdnds, botte prXOdcts
ar better iages and woeig condition they all depd an the caperatian
hwing ple netro of* er the ability to acquire aple eantrol of,
eoures. Another test ia dsther the corporationa's latianhips with
its creditsan am h that it t will be dal to continue to offer eum
projects ao atiap the dmmds of ongther e dtribMaMt oTe ~t features,
paofitability Wad Iealva are critical and infoMatmon dMAut thea can ely
be obtanaed form acc*meatg statmnit.

48. We ar tlws conamtfntd with a situations n nhich te toemlts and
poeatian of a acter realize to be appraaised by othS actar dme may be
technically inapeqant to rpect of accounting But I de a need f InfaJre
at&Ln is n mon the tlo lgitiate. Strictly the aporatlan itself has
a ends amh the Cn aMstiafactims f iAdividla it exists
solely to prom to tmo rnd of thke dho participate I in qts Aertimmon
Nto are theas p -arti pamt to Judge haw ell ttoey Ware srvd a that in
dchoosng their aeoetatia they my compare their paresot ameciatn with
altarnatiws Tthy do as by the, cm ai tsn of rates ad rates for
different firs, but only if all comparttona aopt the am principle of
mawmreant ad paritiag.

49. Th wt J~-t ings a ystm a of imauiat has beon daS~mtated
- at lett for the varied poeibl actions of a giav actor. Bat itf as
we btve ppoed, actor does not beIp his acmants parnamlly hot angags
a accountant to do so, the vsyst is slo a 0Iangmage Cmooat g inf r-
atit to the actor For obviouety iester raomens if o er partS i need
or use milar Infeamitoia to L hd e th In ttir rlaatlodalpe with a
gi n atctor tmhe stel a of aeaenmIt reqlSzed is ee d ldi n* I maIt, -
Iat1n1aten to an oetmnmi rang of peteatial uers. This is in fact the
feature a aUt widely used .em- t estema. The umits of length of
mesa of tims, are units which awe net peliar mt certain ua eges. They
mean the som thing to alt parade In toe comaum ty which adtpts tham It
is of ga OCuIw- o that one usr aIgp res a meramant of length fo
emaaon different from those of another. The mait of length Infam thnm
all, it matts ret how varied their anda or hw Intimate and sple their
relations It ia astral with repaect to the puroaaa for sich

SaMivialIs ay ut it its notralty is a esmntlal iamnat to Sts
w0. The ame qrpli to accautiag. If a poperty of Iacom or
asts tis lrYsmtod by units having a umt Isrpiftanm in tans of
their pmrcha~ng pe each ur of ddstatsmt dleh catain ,mswm in
tems of those unite wuIll o equally wUel iafoemd far ech *aur has
kblmlf the rmen of humistl iet the m ret aSpitisanee of thUe uits Is.
tUndr tradtimlon *easmnt ng ne ur me peobslhy hnow hat th sigificmreo
of sported lacam or mssets is* for beth N Ipresmntd n aoiL d units
havSng no cinm d sdpdfainc. ft 1i not ORWuM ltO to *ppoe that
o~adrs of aeoatg etatmmte mw smm that the 0.isfloene of the
nits is the pmemnut sltricace of smey uaito at least soamnm ts t
sater ano colvt In this sWe ettS d if the -IppotlO 5t vaimd vn i
ryect of mme irst they we bing eoarlt y swtded, partiodorly if they
n gage Sn opSarsms of the rmolts ad posittla of diffrtm nt msoprmtions.
51. Thwes o sum wo clet that diffnstmt pmrtle havSng seatwlo
with a given s*etu ad In particula rwth a capureatmal MaiP diffemnt
Infamstian as guid to their actirms If tbis wly mins tfoemuatiM
differing In dtUll mn odetila cma be tdak~ Bet it meis to be iSalsd
that the lanematin s teld differ in qolity. This poeltSm is takn
,plcltly far nMle. In AXCPA AcM"a -Remar st e2
Dqprmiartlo o opparcatimn, pnrs 2 ad 8 Ta this W as cluerly the
possibility of aseuofttg being the luange of flame i nan to d for it
mental that the sm events wad states ca be peemntatd by qit. diff~erat
yaoes. Maw time cot of dsv.leplo a imenmmt qstm or a Inmpnge
ste is cmsidarae as, in0 8de 1 a i th e st of ,de epltag the bads
of qecific msmgps to b cCanweyod by eitbor wyeto.. Ina world of secrce
reem~ai it sems rNmrabd to pct tat st b sh ystms u~Sld be 9s
desig ad that they ervm the grsett posibtMo sWr of nsew or petital
uers. This suggmets that systems d hld ySajl iafOmtln idatd is of
the me qu lity ddich sers equaly *11 umers (See els hne 195~ .)

5s. Ftrthst r sggstians uch as tht tcrtd in the poewlaus pWsagrl
iqply that the prrclpt-mconptatio zrlatia1rhip is bipgartIte andy"


in other wwe, t it A iqplUe that ach class of participd t tae s B
neopidal of the rletiamIps of eter classes of participant with the
eeaperatlan This is an eve-eiplifi etiem. Thew relattanhip are
all dltivpartte. The emsr t tn of e~mplint is that oe roup of
partcipents is dontg better the motOMi (hataww that mame), no
refinari being sad t tot cop etioan wiih it the fomW of attention of
Oll qpeciflc iB^ar It is ily pemsNbl for ma class of pwrticdpnt
to Jiadg e ohis ponWepts if he has the eans of knoaing the positlea iad
remalts of thU eapemties and hasw eth classes of participant re firing
As crees oapartl sat of th yields to diffi nt classes r* potentially
amii-om ad as y pi n y b e irnlttnmeot y ao mei of ewva
classmem it flies that a qyste in uwhJi the selboel have a om eining
to all parties i a eemaltia of inttligmnt particlpation For the Mme
resem aely each a sten will be A ove upAclWa In =dor that an
accamntg st "aP be em W dl as a m .a nIM-t ySta u ad as a
liamgue systs it Ib noasi y that its prndct deeribe ia aity as
usda ad me not wt pd t th demand of my particular paty. If this
caOditia n is ftfulie eah party Is fre to ase his a" Sageiats ilth
repet to his em u If this canditiea s net fulfilled the .tion
of an ptaty mW umittingly be alh as to demast his am ard The
present estian su stre, t Is d1ot, that amc ting iafeumtio n dhaud be
of th nature of pudbib kmoei ge~ s ifd asscrtaieatbs arimLanb ly
by other prams thn the peoasears of it or the actors 10b peblSh it.
Valiutilos md fealrngs ar private boapaa ge enly closed to the inspaectia
of others. Qne cmatt eper othUe to act epM ane's m est of valtions.
Valuetims of sseta othbemwr thin by zefamo to iarkitsue, fIehed
to chooe as hbetwn ari t dacm Oatlag p0a0ares, adH traditimaal
accorumbing hedgft pos of private valutioft aB private facts. Only a
matictin My stAM id a grease public fects facts .hich oth
parties cod toot and to hich they would gi e ass t as facts Cma sMev
to produe~ the latemplay of infgamd actions aidh is the semene of am
efficient aerbet meunhbs.

Inl-entataion ProbQlea

53. The argment has been carried foard In ters of a current
monetary depression of the command over resources. It has therefore
disregarded so far some of the difficulties of finding ways of obtaining
such an expression These difficult will be exposed in an attopt
to produce a method and a rationale for it, of obtaining the numbers of
monetary units to be assigned to specific classes of things.

54. For monetary balances (cadi, receivables and payables) the tak
is ey. ror cadh, mere counting will suiffce. For receivables and
payables the monetary aaount of these claims and obligations discounted
to the date of the wasary statement at current bank interest rate, or
the contractual interest rate (where this is applicable) will suffice.
The traditional procedure of making provision against doubtful receivables
dhuld be abandoned instead, debts judged to be bad will be written off
as they are s judged. Oe reason for this s the view taken that only
past events and present knledge are capable of being subjected to the
test of supportig evidence. A second reason is that such proisions are
formal and subjective, and are therefore liable to be used to equaliae
reported profits, by augnnting or drawing pan the/ as profits, otherwise
determine, appear high or l~. This possibility deprives uors of
financial statements of fair qrpreentations of annual profits and of
trends in profit rates.

55. The nosnminetary item create greater pr-blebs. Current cash
equivalent has been regarded as the ue of money itich would be currently
available if a switch fro investment in one combination of assets to
investment n another we to be considered. This entails nauaring
command over resources in terms of what the market would presently pay
for no-m-snetary assts as they are. For fijnidsd goods inv etories this
would ean selling price. It does not men hower, the sling price of
one unit multiplied by the uuSaber of units In stock, unless the good in
question can be sold in any quantity at the one price (e.g. gold, v*re
the price is determined otherwise than by the play of the market). Except
in auch cases the selling price would be the price for the full parcel at
the time. This would be less than the selling price per unit tmultplied


by the aber of iuits for several reasons If th full parcel could be
sold to another fis, the latter wuld aoame the risks of carrying the
inventory until sale to users and would therefore pay lees than the full
proceeds of sale to users. If the full parcel could be sold to uersp its
release ulad tend to force down the price per unit, to an extent which is
ndetemBinable otherwise than by actual sale. Again as the sale of the
whole parcel is likely to be spread ovr an wanown future period in which
the operations of coopettors may influence prices in either diretimn, it
is ibpeostbl to kovr, even by discounting prices for possible future
selling dates, what the present cash vale of the nentory is. Work in
progress inntories pose a problem of a different kind. It it often aid
that the market price of wrk in progr s may wall be very amnat even mero
and per pp a negative eme. To aei n money units on this basis may give
as aerriou an understatem nt as using selling price Mnltiplied by units on
hand n.y give an ovmrstautemnt for inihed goods inventory.

56. In view of thdo difficultais in take Mn alternative position,
but holding nevertheless to the sawm principle. We may swposo that the
meaasrerset of moaned over forces will be given by the ams of money
which wold currently have to be paid to obtain poeasamman of the goods
at present on hand. Tis any appear to have sme ailarity to replauem nt
price as it is generaly understood But this aparence at be diqsspled)
replacement price is avoided for a nuaer of reaans.a First, it is net
intended to give replac=mant price status as alternative; the provision
of alternatives tends to remove clarity and preciiain fra all rules.
Secod, although replaceaent price of specific goods is a factor dhich
enters into choice so does the price of all altena~tiven the use of
replaea~nt price presxpposs a choice yet to be made a td tlas ntrodnces
circularity to the process of choice. For action* replemat price is an
et ante consindration, haeress the position taban here is that accounting
deals with events and things eal Third, the very nature of things
precludes the detrminat on of replacement price in ay but a slbective
Manner. For ea t work in progress there is no mredet in wlich ich a
price is mode; the sne applies to finished goods thich wae in ay way
differentiated frm subBstitutes.


57. By contrast, the proposal Indicated hs none of these defects.
Its use would result in the representation of stocks of finished and
unfinished goods by the s~ of money thich the entity would presently
have if it had not thee inventories in posssesion. In determining this
current cash eq ivalant, present market prices of the materials and
services adbodied in inventories ~aid be used) insofar as these are prices
for undifferentiated goods or services, market prices are ore a readily
available. Consegently rises and falls in the buying prices of materials
ad labour service will be reflected in the sans assigned and these sams
will therefore mzoe closely approximate the capacity to generate cash than
sans assigned on the basis of original unadjusted buying prices which have
varied historical significance but no contemporary significance. The
current price proposal is not without some defects. If all markets for
the goods which appear in financial statwmants were perfect, that is to
say, if there ere many buyers and nany sellers for all goods including
those partly used and those partly processed, market prices wuld be
obtatiable. In fact, of course, not all such markets are perfect so
that a variety of quotations may be obtained. It is for the reason that
markets for undiffera tiated goods and services are more nearly perfect
that their use in determining the present cash oWivalent of iS~entories
nas suggested above. Even then recourse to averaging may be necessary.
An alternative would be to adjust original money cost of the inventories
by the change in the level of prices appropriate to the inventory. It
may be noted that these are alternative methods of approximating the sae
quantity, not alternative principles such as market price and ?rplaceamat
price are. :or both methods the necessary roney costs and market prices
are ascertainable they are past or present facts at the tim of
calculation. No hypothetical future elements enter into the calculation.
The possible error in calculation is no greater than the possible error in
every set of facts relating to the market upon which action may be based;
the process will therefore yield aeasuaraents which are as accurate as
they can or need be for practical purposes

58. Further difficulties arise in the cae of such potentially long-
team inventories as plant and equipment which are subject to mar, tear
and obsolescence. Wear, tear and obsolescence are incidents of a technical


nature. They ae not financial facts. There is ano my of mauring
technical facts on a monetary scale. Neverthalm these tednical facts
bear on the monetary eqvalent of things sAu ct to them. It is coaon
to consider that the use of duale goods entails a flow of services from
these goods to the products of their usea and that the effect is a
dimition of the service potential of those goods Now by ou
definition, acconting des not measure aeat* or their services or
service potentialsp it meoases the mnetary aspects of them. In the
present contest therefore this flow is to be understood as a chnge in the
monetary epivatent of assts. Now the only way of measring an regular
f ow is to take readings before ad after it oceir. The only way there-
fore of asmaring a change in the monetary equivalent of thee assets is
by taking the differmne between market prices at successive points of tise.
But this is caplicatad by two factors.

59. The first is obsolescence. The conventianal method of providing
for depreciation are strictly methods of providing for the element of wear
and tear. They postulate a useful life a scrap value and tho validity of
a selected plan of amortization. The rate of future obsolescence is
unknorable; estimates of it, if they ae made, are ntirely subjective.
Not uncaomly it is ignored Yet, as time passes the effect of obslescence
on financial position is coapondd. There is thus good reason for recog.
nizing it in the accounting system. The only ay in which this asy be done
is by taking the aggregate effect of war and tear and obseolecence as it
is repressntd by differences in market prices. For financial accounting
this does no damage to the facts Any attempt to separate the tw effects
would involve an arbitrary distinction which it is umecessaty to make;
for there is no probability that rates of usage o rates of obsolescence of
the past can be estrzpolated into the fture in the process of forming
60. The second implicating factor is the possibility of continued
use of a durable god over periods in which the purchasing por of money
varies. It is possible that the effects of weaer tear ad obsolescence an
the monetary equivalent of a asse f may be completely offset, more than


offset or samated by shifts in the level of prices. The difwereee
betmen mabret vales at msccessive dates thus ill include the effect
of the shift in the level of prices. Although the market price at the
latest date of amsessmat includes this effect- and it is proper that
it should do so in ord to represent financial position the effect
require s to be iaolated in umssMuig periodic Icnme. h robleh is
ta en up in Pa .

61. In the dsetemnation of the acum nt ceas eGuivalent of a stock
of durable the treatu nt P parallels that give far h*Art teza invmnt-
ores. But here, as there, the problem of finding a contporary marzr
prizlc preferably a reale price, aries. Now each item of doubles is
in a mra or less vundibe condition. If we posit periodical or
proagramd rocsfeaido att n of xisttng kSavestants in plat and e may
do so. on the ass- tian of adaptive bhuwarer a mmwr will frum time to
timo have to obtain ose estimate of resale price. IWwr the e is sae
used goods market it is thus possible by insurly to obtain an estimates
or a series of appr0mtstlaen zedacible to an estimate, of current cash
eqiivalent. For goods not capable of treatment in this ay because of
grater imperfections of the market, the current cash equ aiva t at
closing date may be qppimsted thmss
(a) Apply to the opening cash equivalent a price index of the
class of diuable goods in qustiom lot the result of the
operation be A.
(b) Obtain a rrent estiaete of the apecqted reaaning life
of the aoet (ns, sy, years) in the lisit of scmrent
economic and technical i ba ledge suppose this is n years
(c) The depreciation charge for the past year ay be regarded
as A/(n+rt and the i stian to toe current cash
equivalent of the asset as n AAl)
Repeated estimation of the remarting aesected asevie life prevents the
cumlatiaP of error uhich occurs en an initial e pectatie is persistently
applied aend the attempt to bring the measure of the currant cash
equivalent to contraporary tems has a like effect. The intsodoctin of
epectati2ns at all ould be avlded if possible; the aggested sol3ti


a forced by the iqirfection of the marLet and the conse kt Spwerfection
of the Waila abe badge of cmren cash equivalent bas aed an tual
earakt prices.

62. We hav dealt vith dhort tor iwantaries and durabl*s. There
reaiin the resida*l eity account and the not monetary assets (or cash
and x4ecivab1es loss payables). The monetary asset ae always s sparesd
In c~rrc t caSh "Fqivalanti But holdings of net monetary assets glh
rise to diang~ in the anrnt cais spiwtlent of residue l equity if the
dlmnisian of the montary unit thanks throui time If opening balance
of namonsrtary asate ave in currant cash eqplvalent of the opanti g date
the residual equity will then be expressed i tean s of unit of the
dimnsmon then prevailing. The maintenace of cpaing capital at the
closing date will be affected if the measure of the openaig residual e.pty
is tramaforaed by a general iadob of pieces (I.e. of the purdaching power
of money) to its equsval et in units of the dimnsian prevailing at the
closing date. The difference in the rmher of units is neither profit
or lss; it is slply a re tatenat -in tects of a different unit The
opantg balance (the actual nmber f units of opn ing dirmnszton) is
augmM1ted by the asmmat of this diffesna~ (which may be styled a capital
maat e ance awjUstmant), the result beong the aponing balance in uats of
closing dRmension.

63. Now if the closing balances of the noWAnuwtwry assets amre aaessie
in muite of closing d eansi en by whatevn methods are necessary to appro-
iiate their current cash oitvalents; if the opening resdual equity is
restated in units of closing dimnsimn; and as net onatary assets am
alay eupmssed in units of ceteaqoaeary dimension then the difteface
between the massre of total asste less liabilities and the nasua of
residual equity wll rqapeamnt the s ont, in units of closing dialialm,
by Ihich the fim is better off. This will be the amount of profit or
intoaa of the past period in units of closing dimensions The f Inncial
umsasries, balance *ahet and incae accoart will then consist of a sries
of partiaeer statements in units of closing diaonsia, All =ritthmtical
oparatsns may be logtimately performed on the renaltl and all nfarnesa
frkm the reslt will be c ntporaWily x levant


64. It will be of interest to indicate the method of deriving an
income statement which will yield the sme result as the taking of the
difference between opening and closing residual equities. As contemp-
orary prices alene, of all past and present prices, are relevant to
choices at any time, inventories and durables accounts will be continually
adjusted to present prices. The adjustments, both for short-term and
durables inventories, will be carried to an inventory price adjustment
account, a credit entry being made for each debit entry in the Inventory
account itself. To the income account will be credited all sales at
actual prices; it will be debited the direct costs of all goods sold at
the contemporary cost at time of sale, i.e., the latest price shon in
the inventory account. All costs other than direct costs will be debited
at actual prices paid, except depreciation Which will be calculated in the
light of all available information Indicative o0 th change in the cash
equivalent of durables. The inventory price adjustment account will be
closed by transfer of its balance to the income account (a credit entry
if prices have risen); and the amount of the capital maintenance
adjustment will be debited. A corresponding credit balance of the same
amont will appear separately among the residual equity accounts in the
balance sheet. The balance of the income account after the above
operations will be the income of the period. NIte that the inventory
price adjustments include the effects of changes in the general level
of prices and of relative changes in prices. The entity is better off
by upward movements in relative prices but worse off by tupwrds
moveents of the general level of prices, cetara Paribus in both cases.
The general effect of the latter an holdings of monetary assets and the
elimination of its effect on the inventory price adjustments are brought
into account by way of the capital maintenance adjustment. Note also
that insofar as price indexes are used, specific Index are used for
inventory price adjustments and a general index (e.g. a canawms goods
index) is used for the capital maintenance adjustment *

The argument for and a fuller description of the process here outlined
is given at length in the writer's forthcoming book Accountin
vlurtion amd EcnWRic bhavi


65, (a) The accouting0 Wytem of adagpti enItite can m anaam with the
hdra ctcistics of a maauremt yVstera only if they so daform
is it postblee to make valid coMparions and inferences froe the
infoaatien they produce
(b) The unit of masremmsr is the unit of crrmncy of stipulated
d 1nminatlon bet of no fixed diamsian. A unit of fland
dimensan is inconsistent with the characteristiCs of mey s a
medium of exchange in a flud ecanammc enviromanot.

(c) Original e, aa rmsents have a tle di enasatn dich is gaaaally
iaplicit. 9Suh amasrweants se relevant at that tism only.

(d) Marmu ents dNidch represent cumrr t coash equvaleR t yield
statements aidch press fe anc al capacity to ngae in market
epwattmon asht statmBnts are a neceasay conditim of
reasoned action. They predict, atr aurss the noaaical la
4did foa the basis of, the limits of fturte opeatlonse
(e) Derived m saainmnts which mr rates or ratios eliminate the
tim- bd dimend of the monetary unit d are thus comparable
as of different latervals or dates fer a given entity.
(f) Drived imemft1arents a e compa abe as beten entities only if
the sme asoawnt rules ae generally adapted by all mntitlei

(g) Derived asurmInts are, for the reason Implied in (e) and (f),
the owst guenmal and mOst useful type of ift matioans, pressed
of trends and indicativ of spectatolamn yielded by an accunting

66. The properties of an accountblg system, it appeared, dsaold be these
of m mareent systas generally. Motwithstamndla that the unit of
slarunment has not an Invariat diamansin, mep aswe available for making
the necesay traansfmations which constitute the rea" ting set of specific
stt- ntas a hbongng wus set at any ttmee The products of asc a system


would have the qualitle of relWevace neutrality, correpmondnce,
canmmicablity and dobjctivitya and have dai, elsed~nre (Chmbembs
1961) that possession of thee qualities by accounting foatmatlan is an
esWttal condition, though not the only condition, of adaptive econami

67. A eaerament system is the product of deliberate design as to
the property to be measured, the specification of the unit to be used and
the rules for assignng mobers of units to things posseasag the me rdable
property. The literate of accounting is at best vage and in general
contradlctory on these poihts. Traditional mrles for assigning monsy ass
to assets and abligations allow auch wide latitude that they perit gross
violation of the princples of asuraamt and oammnication. Traditional
accounting is, thuas in no sense a mea ua ent system People ho -ee
its results in the foam of ratios, percentages and other caparlsons, aaataa
that it is a msau~went m systeA But in this they are aiaguded, for
traditional methods hav not baen delfbrately selected with the properties
of such a system as constraints

66. The abow analysis strips the eaot-evlawe e controv@wy and the
pric-level probl of m ch of their mystery and mapty vaeursity. In the
market place there is no invariant standard of value eo that no transaction
in it ae~ares a seammetr nt a hich is standard for ay length of tiae, long
or short. There is only a mediuB of exmhnge with a variable value in
exchange. This fact aost be taken into accent by every actor in deciding
every course of action. Initial aoney cost mean literally nothing to his*
He Is the stemrd of diet he has, not of What he spent to eatquie dhat he has.
The only ay in dhich he can maage the things he has to asit his ends is by
making bargains uhich give him mare of the sene for serving those ends.
And the only ay in dilic he can make aad bargain is on the basis of
knowledge of his present position

69. There has been a tendency in recent years to pay greater attention
to the analysts of past resite for the pmupose of assessing the propriety
of past decis If behaior is adaptive uc analysis can enly give a
general dea of the efficacy of the decisiaoneaking function as a whole.
No specific decision can coe oe t r close scrutiy for its effects are

inevitably itertwind with the effects of others. In fact to epect light
to be thow an n the propriety of specific decisions is to expect dat is
logically sapoessile. Faveslgt is not a quality tich is capable of
precise m-sse-mnt by 1 hindsight specific anticipations we bedevilled by
the vaarie of a changing orld. Nevertheless it is possible to test the
efficacy of the adaptive processes as a hfleot as m ay m mak specific
eraEs in spite of foresPl th but over a rang of problem situations ad
adjutbmnts to them it is reaanable to aspect acuity of vision and
pzrision to reveal itself But only if the eamesument systea is equal to
the task.

70. There has also been a tendency in rent years to give a ford-
looking phasis to accounting, and to agget the inclusion in accouting
stataoants of al knds of future estimates. The view advanced here my
see to be rtrogressive by compartisn with this tendency. Such a
conclion however would be mIistakean. Thegreatest service accounting cam
give in relation to future actions is knwedge of present financial
positions, for this is universally necessary knomedge. Calculations
relating to the fe r involve host of evaluatios and upealative ati-
cipations which are not knowledge in the sense of ascertainble and
verifiable facts; they are calculations purely and slaply, not memremmnts
We have no objection to people trained as accountants making euch coalclat
ions; but the product is not accounting There is no sch thing as
accounting for the future. It is the very confusion of past present and
future which has given rise to inconsistent, self-contradictory rles One
of the principal purposes of this study has been to distingusqa dsarply the
characteristic differences between aaauremnt and forms of anticipatory
calculation, so that accounting may be sen as essentially a meaaI ent
and communication systera If it is seen in this way its rule may be freed
of the varied discrettinary eleonts which defeat analysis and comparison
on the part of those for hose benefit accounting it done.

The dates given in the teat wre date of woigina publication.
Intamediate sources used e indicated elmow.
Ackoff Russell L., SciAtific M~ad (NHm Yorks John Wiley & Son, Inc., 1962)
american Institute of Certified Public Accuntwts. (A.I.C.P.A.),
gYsffinM W l B.m1a BNo. 5, Depreciatin on oJ Appreciation

A.I.C.PJ.A A. oulrntfina Techolot BMujl n. NHo.1, (Mew York, 1953)
Casbe.l, Noiman R .,R a (C~ *idgae, Englan, 1920).
Refrances to repront (Mer Yarks Dover
Publications, Ine,197 W,

Cannng John ~gcmmcffa Anrrmm (New Yorks The Ronald Press
Cammeiy, 1929).
Cha ,ers, R.J., (SyiWsys
The Low B or.of Amstra3sU Pty. Ltd., 1955. Patt
Chambers, RoJ., anrmd^ a ..Ganealharn .f Accoatyita (Adelaides The
Au:tralita Solety of Acco nt*, Im. 1961 printed 1962).
Chambers, WJ Th' sl l S aa a in2., A "Wunt ('i4oeoe 19621
printed, University of British Colaia, 1963).
Churchmn, C. Pnae~t, ntina a an tdD l (iglwod Cliffae, .J.2
PxsntiHe-ill, ZIncc, 1961).
Cobwha Mris R.. nd Nagel, Ernest, s 9 W 2 a q 2mU
MtON (Loa;nd Rowtledge & Kegu Paul Ltd, 1934). RIferwcio to
1957 z~rpdt.
Dey, John, Tha f Vauati. Vol. II, No.4, Intenational Enyclropedia
of Unified Scienc (Chqiago The University of Chicago Prees, 199).
References to 1960 rqprint.
Dickinuon, Arthur Lowmeo, Sfig Mt ,rrctCt (Mew Yatrk The
Ronald Pres COrapany, 1914.
OidclMs Lamrence R., A3ancaccift Ir ed. (Londoi n FPe & Co., 1905).
Eaqurr*, Paub-Josph, The Alcgled Theory of AcMcOt (NMm Yoark The Ronald
Proes Capany, 1914).
Hempel, Carl G., FdUIMT&I of CiMgcM Fw ti EAOl
Vol. IIt Mo?, h rmiratim al Encyclpeda Of ifted Science
(Chicagor The University of Chicago Press* 1952). References
to 1962 reprint.


KsteAr, Roy B., Ah&U d AccoNtSan, a3d revived, ad. (New Yorsi The
Ronald Prass Ci|anyp 19933).
Nagie EZnt rtpMelsuti e ent#, WaMnti 11- (<1930) Refr mnces to reprtnt
In Duato and a wrgnsswr, v (Ctevelands
The Wold Publieshin Caoany, It

Patn, Willa ta A., and Stevwnso n Ruael1 A., PIaecl of AcoNUn
(Amn Afrbeor Goarge Wahr, 1917).
SducdInae gr, Ezwiln Indrtesmnias in Physics (1931). Printed ts
Theyvi atd lan (ew Yoarks Dowr Publicatians, IncI, 19?7).

Stwrvs, S.S., On the Theory of Scales of tiasrement, -- eIt Vol. 103,

von tMies, Ludig, H umn Action (Londoan William Hodge and Capan Laited,