"Continuously Contemporary Accounting" 1970


Material Information

"Continuously Contemporary Accounting" 1970
Physical Description:
Chambers, R. J. (Raymond J.) 1917-
Publication Date:
Physical Location:
Box: 1
Folder: "Continuously Contemporary Accounting" 1970

Record Information

Source Institution:
University of Florida
Rights Management:
All applicable rights reserved by the source institution and holding location.
Resource Identifier:
sobekcm - AA00006044_00001
System ID:

Full Text

Methods of Aocountin Sizth of a Seari .

Po fflffMibr 77ffpoma177 &MUMf

The "varieties" of accounting w have considered are all based
on one or two reasonable or plausible grounds. Historical ooet
accounting is held to give an aooount of what has been done with the
funds which became available to a firm or its managers. !rice level
adjusted aooounting, it is claimed, takes account of the necessity, if
money sumi are to be added, of expressing all those aums in units of
similar purchasing power. Replacement price aooounting, it is claimed,
takes account of current prices and of the desirability of calculating
income by reference to the maintenance of capital in some sense.
present (or discounted) value accounting, it is said, is forward-
looking, and for that reason is closely related to decision-making.

These olaims, as we said, are all plausible. But if we accept
them all as plausible, then none of the varieties of accounting meets
all the criteria. Historical cost accounting, for example, entails
the addition of sums of money paid or received at different times when
the purchasing power of the pound was not the am e Replacement price
accounting does not give stewardship amounts in the ame sense as
historical cost accounting; neither does present value counting.
The reader may aske other such contrasts.

It would be valuable to have a variety of accounting which is
both baokward-looking and forward-looking; which yields a basis both
for judgments of stewardship (and generally of peat performance), and
for judgments about future prospects; which avoids, or somehow copes
with, the problems both of changing prices and changes in the
purchasing power of money; which represents results and financial
position in a way which is fair to all reader of financial statements.
We claim that a variety of accounting which we have called continuously

contemporary accounting meets all these requirements as far as they
can be met.

Feature of the Syatem

Monetary amounts. Over a very large range of accounting entries
this system is no different from conventional accounting. All
transactions of which at least one half of the double entry relates to
cash, amounts payable or amounts receivable, will be recorded initially
in the same my. This covers all usual transactions between the firm
as such and the outside world. All operations on cash aooountas
debtors' accounts and creditors' aooounts (long or short tero) will be
exactly the same an they are now. The propriety of this will be
obvious for in relation to outsiders the firm is bound to the monetary
amounts* payable or receivable, for which it has contracted. Whether
prices or price-levels subsequently go up or downt the money amount of
a debt or claim is fixed in the ordinary course of events.

Inventories. For inventory or goods aooounts the initial entries
will be the prices paid. These entries will be the "other" halves of
entries in cash book or creditors' accounts. Now, whenever the price
of a good or service used IV a firm rises or falls, its management mast
do its reckoning in terms of the new price* It mast do so whether
riaes in selling prices, switches in factor inputs, changes in product
composition or any other possibility is being considered. And it mast
do so because it cannot know how soon its competitors will respond to
the same change in input prices which it has experienced. If~firm's
management ast do its reckoning in this way its accounts should
contain figures which are appropriate to this reckoning. To bring about
this effect, the recorded unit price of any goods on hand will be
changed whenever a change ooours in the purchase price. The value of
the balance of the goods account will be increased if the unit price
has risen; there will be a corresponding credit to a price variation

account. Downwards movements in prices will give rise to similar but
opposite kinds of entries.

The entries may be illustrated. Suppose the balance of a certain
material in stock consists of 100 units at 1 eaoh, and that the firm
buys another 50 units at 22s. each. The value of the 100 units in
stock will be raised to 22s. per unit. The balance of the materials
aooount will be 150 units at 22s. per unit. And the credit to the
price variation account will be 10 (100 units at 2s. each). Notice
that all units of stock are then at the same price, an actual current
price; and that this is more sensible than carrying the materials at
two different prices when they are the same materials.

At the end of the year we want to know how the fire stands
financially in relation to the rest of the com nity. How a firm stands
is given by the equivalent in money of what it holds, that is the
selling prices of its assets separately. We mast therefore find the
selling prices of its stock of goods. For those goods which can be
sold the firm already has a price list. Some may be unsalable,
particularly some work in progress; but for any goods for which a
market price can be found that price will be the present money
equivalent per unit. A schedule of all goods on hand giving their
resale prices in their present condition will be compiled. If the sam
of these prices exceeds the total book value of the stock at current
purchase prices (see previous paragraph) the excess will be credited
to the price variation asoount, and the amount .shown in the schedule
at resale prices will be shown as the amount of the assets. If the
book value exceeds the amount of the resale price schedule, the latter
will still be shown as the amount of the assets, but the price variation
oaoeunt will be debited the difference.

A refinement of the process is possible. An account styled

purchase price variation sooount may be used to carry the adjustments
due to changes in purchase prices. The closing adjustment mentioned
in the previous paragraph may be shown in a resale price valuation
aoount. The refinement identifies the two kinds of adjustment. It
may be useful, for the two adjustments arie from quite different
kinds of oanae*

Profit and lo aoMount. During the year the goods account will
have been credited with the current recorded cost of the goods sold;
the profit and lose aooount will have been debited like amounts. The
profit and loss aooount will have been credited the amounts charged
to customers or the cash received from sales. The balances of the
price variation aooount or accounts will also be brought into the
profit and lose aooeunt. The balance of the aooount at this stage we
will simply call "Increment".

One other thing will have been happening during the year. The
purchasing power of the pound will have been changing. We cannot take
aooount of this from day to day, or even monthly. And as daily
business is done in terms of prices as they are quoted, it is not
necessary to take aooount of changes in purohaing power very often.
But at the end of the year soocunt should be taken of it. Otherwise
we maW suppose that the fire has become better off, in terms of what
can be bought generally, than in fact it has become.

We can make allowance for the change in purchasing power very
easily, provided that the opening and closing prices used in valuing
assets (other than monetary assets) are prices ruling at opening and
closing dates. Suppose a general price index stood at 100 on
1 January (t0) and 110 on 31 December (t,). very pound ((1)
represented in the balance sheet at 1 January is equal in purchasing
power to 1.10 of the pounds used in the balance sheet at 31 December.

Using the notation we introduced in the first paper of this series,
L01 11.10. The profit of a year is the amount ty which the firm
is better off at the end than it Mes at the beginning of the year.
But we cannot discover this if the opening and closing amounts of the
owners' equity are expressed in pounds of different purchasing power.
Suppose we express the opening equity in pounds of the closing date;
that is to say, we add, to the original number, 10 per oent of it in
the present case. Deducting the amount of this 10 per oent from the
balance of the profit and lose account (the increment) so far calculated,
we will obtain the net income in 1. And crediting the same amount
to a capital maintenance adjustment, which will be part of the ownerst
equity aooounta, we will have an amount for owners' equity, expressed
in ,i which is equal in purchasing power to the original owner'*
equity expressed in Lo., The balance of net income and all other
balances in the balance sheet will be in 1, and it is therefore quite
proper to add, subtract or calculate ratios or percentages for ani -

Symbolic Demntrationt
We may represent the system symbolically as follows:
Let 0 and I represent pounds of the purchasing power of the pound
at the dates t 0 and t1 respectively, the opening and closing
dates of an accounting period.
Let OMO and 1M1 represent the amounts of the net monetary assets
of the firm at the two dates. Net monetary assets are cash
balances and accounts receivable, net of accounts payable.
N and M1 are two different numbers in the usual case.
Let rM and LN, represent the amounts of the now monetary assets
at the two dates. They are the suma of the resale prices of
all assets other than monetary assets.
Let LORQ and 1R1 be the amounts of the owners' or shareholders*
equity in the net assets of the firm at the two dates.

Now, the balance sheets of the firm at the two dates may be shorn

at to 1 M1 + N1 1fRo

The amounts on the left hand sides of these equations are derived
1y actually checking the quantities of assets and liabilities, and
using the resale prices of non-aonetary awrets. They are factual
statements at the dates to which they relate. We want to find what
the profit of the year is.

Let p be the proportionate change in the general level of price@
during the year, ezpreased as a decimal fraction (such as
*10, where the price index has risen ly 10 per cent).

We ma- then write 01 (1I + p).

At the end of the year the only pounds in circulation and the
only pounds in which prices are then expressed e 1" We can write
the balance sheet at to in terms of 1 1y using the relationship
01 1(1 + p), thuas
at to ciO(1 + p) + 1)0(1 + p) C10(1 + p)

And aa we have said above
at t1 II + iN R 1
These two equations are all in terms of Li. We can therefore mabtraot
the right hand ideal at t0 from t1, to obtain the net profit, thus:
Net profit 1R1 1 o0(I + p)

I (R1 n0
And we can represent the owners' equity at t1 thus:

Opening balance
Capital maintenance adjustment op ) + p)
Profit of the year (R )

Total closing owners' equity L R

Now what should happen if we accumlate entries of transactions
in the books of account during a year, if we incorporate the price
variations in the manner described earlier, and if changes in the
parhasing power of the are occurring slowly during the year? We
cannot keep track of Le with a whole series of different purchasing
powers. We keep the daily records only in terms of mnubers of ts
regardless of their purchasing power. We could keep the whole year's
records in the same way as they are now kept, if we wished, provided
only that the opening and closing balances were correct in terms both
of quantities and the unit prices then prevailing. Bat in this case the
account balances would not be continuously consistent with current
prices during the year. We mention the possibility, however, simply
to show that, if we know the kinds of figures we need at the yea'sr
end, and if we obtain them from observations independently of the book
balances (correcting the book balances where necessary), no major
ohange need be made in day to day bookkeeping. The critical differences
between this system and traditional accounting are the unit selling
prices used at balance dates and the simple calculation of the capital
maintenance adjustment.

Durables and depreciation
We have spoken of "goods" throughout asking no reference to
durable goods such as plant which depreciates. In essence, depreciation
is just another kind of price variation. If the resale price of a
machine falls in a period through its use and obsolescenoe, the amount
of the fall is the depreciation. It meem to aome people that this is

a curious idea of depreciation; especially to those who think
depreciation ooours in some regular fashion such as may be represented
Iay a straight line or a curve. Bat depreciation does not ooour in
regular fashion; the most obvious evidence is the frequency with which
"book" surpluses or deficits ooour on the sale of plant, and the
frequency with which assets survive long after the asset has been
written off according to a "regular" pattern. Some may object, on
the other hand, on the ground that prices are not available for all
assets in all conditions. But there are many more sources of
information on second hand prices than those people imagine. And if
a good is not salable, it has no present financial characteristio,
even though it is expected to assist in the earning of future income.

There may be some difficulties in respect of some assets. Pat if
the system meets many of the tests which an accounting system is
required to meet, we do have a clear idea of the k of figures which
it must yield. Accountants may then quite properly use their judgments
in approximating resale prices from other price information. To
attempt to do what yields a useful and usable result is far better than
prodnoing, by routine, figures which are nothing like what is useful
and usable.

Some ob-ections answered
Some object to the system on the ground that, to use current
resale prices in respect of durable assets, implies that it is intended
to sell them. Of course it does not. A shareholder can look at the
buyer's quotation for his shares day after day without any intention
of selling them on a particular day. He simply wants to know how his
investment stands. A car owner or home owner may do likewise for the
same reason. If any of these persons concludes at some time that he
will be better off by taking the price offered and doing something else
with it, he will do so then. But watching one's position, like watching

the financial position of a firm, is preparing oneself for what one
might do when better opportunities arise. No other kind of information
is equally serviceable for this purpose.

Others may object on the ground that the mere discovery of a
resale price does not guarantee that that price will be obtained if
the good is sold at the time. It is not the intention of the saytem
to predict with a high degree of accuracy what would be obtained if
any good were sold. The intended function of the balance sheet is to
provide an indication of the current financial relationship of the
firm with the rest of the world. Quoted prices, or the best
approximations to the, are used because they are the prices which
indicate the extent of the firm's claims against all other goods and
services. Resale prices are not the opinions of the firm or its officers
alone, as many figures in traditional balance sheets are admitted to be.
They are prices or approximations to prices which others in the
community are prepared to pay or are currently paying.

This quality of the system is particularly important as far as
outsiders are concerned. If the management of a firm or its
aoeountant, reports in its financial statements what is thought, inside
the firm, to be the values of its assets, there can be no assurance
that the resulting statements of position and results fairly represent
the firds real situation. Insiders may be pessimistic or optimistic;
in either case the reported figures may diverge materially from the
judgments which outsiders would make of their components. Because
traditional accounting is not firmly tied to currently quoted prices,
there are many cases in which glowing impressions have been given of
failing companies, and modest impressions have been given of companies
which really control far greater asset values than those reported.
This puts outsiders at the meaoy of insiders, unless outsiders have
the money, time, patience and ingenuity to find out the facts for


We may now give a slightly more complex example of the method
used in Case 11 of the first paper in this series, for that oase gave
an example of continuously contemporary accounting. The full details
of the positions and transactions of a firm are given in tabular form
in the work sheet hereunder. The key letters in the "Transaotions
and events" column are given to aid the tracing of the double entries.
It is assumed that in the year the index of changes in the general
level of prices rose by 10 per cent.

Work Sheet for year ended 31 -eoembr 19X1

At 1 Jan 19x1 and Events At 31 Dec 19x1
Dr Cr Dr Cr Dr Cr
Cash 20 390D 230B 125
Debtors 40 400A 390D 50
Goods 120 250B 260? 140
Ilant 80 20H 60
Land 40 10J 50

Creditors 50 23DE 250B 70
paid in 150 150
capital maintenance
adjusatent 30 18K 48
undistributed profit 70 7L 77
profit of year 80M 80
Profit and Losa Aooount
Sales 400A
Cost of goods sold (adjusted
to cost at time of sale) 260F
Price variation adjustment
goods 300
plant (depreciation) 20E
land 10J
Running expenses 550
Capital maintenance
- on opening balance 18K
- on undistributed profit 7L
Net profit 80M

300 300 1750 1750 425 425

The cash, debtors and creditors balances and movements need no
explanation; they are obtained in the same way as under present forms
of accounting.

The goods, plant and land will have been valued at resale prices
at I January 19x1. The balances of goods, plant and land at
31 December 19zx1 will have been obtained in the same way ty evidence
of possession and quantity and by the use of resale prices. The price
variation adjustment for goods (C) will be the sum of adjustments made
during the year, as goods held were repriced consequent upon price
movements, and of adjustments at the end of the year for variations
between book and actual quantities and repricing at resale prices* The
cost of goods sold (P) is the adjusted cost at the time of sale; that
is the original price paid plus any variations due to changes in the
particular prices of the goods between purchase and selling dates.
Running expenses (0) are net cash outlays for all annual costs of
operation. The price variation adjustments for plant (H) and land (J)
are obtained by inference from opening and closing values.

The opening balance of the capital maintenance adjustment is the
accumulated adjustment, for changes in the general level of prices (or
the purchasing power of monqe), in respect of the amount paid in by
owners some time previously. The Smu (180) of the amount paid in and
the capital maintenance adjustment is the equivalent in purchasing
power at 1 January 19x1 of the amounts previously paid in. The
adjustment (K) of 18 during the year is to take account of the rise
of 10 per cent in the general level of prices during 19t1, in respect
of this opening balance of 180. There is a similar adjustment (L)
in respect of the opening balance of undistributed profit. Both
adjustments are necessary because the total amount of the opening net
owners* equity (or net assets) is subject to the fall in the purchasing
power of money in the year.

Although, in the formal demonstration we identified the different
pounds bt different subscripts, there is no need to complicate the
accounts in this wy. At the end of the years as we have said, all
the sums expressed in ts are in L of the then prevailing purchasing
power. No one can possibly interpret them at the time in any other
way. And the devices we have used have the effect of representing them
all in Ls of the same kind. A profit and loss account and balance
sheet can easily be drawn up from the work sheet.

We will appraise the system by reference to the points mentioned
at the beginning of this article, and held to be the grounds for
adopting one or other of the methods discussed in previous articles in
this series.

First, the accounts contain the original entries of transactions
exactly as they occurred. The final financial summaries do not contain
the unmodified results of mainpulating those entries; for the events
of the year will have necessitated modification of many of them. But
the accounting system does contain them, and they may be checked in
their original form in the course of any audit of the accounts.
Auditors are able to give assurance that no unanthorised or improper
usage of the firm's funds has occurred, to give a warrant of good
stewardship in that sense. Historical oost accounting is justified on
all thesee grounds. The proposed system satisfies them.

Second, price level adjusted accounting is justified on the
grounds that it avoids the addition of quantities of unlike L, and
that it takes account of the effects on income of changes in the
purhobasing power of money. The proposed system also satisfies both of
these specifications. In the course of deriving the final figures
there are additions and subtractions of different La. But the overall

corrections, the price variation adjustments and the capital maintenance
adjustment, and the use of current prices at the close of the year,
have the effect of making the final statements into statements in
homogeneous pounds.

Third, price level adjusted accounting does not give final
statements in toras of current prices; for original prices are merely
corrected by an overall price index. The use of current prices is
one of the advantages claimed for replacement price accounting. The
system proposed also uses current prices in making the price variation
adjustments and in deriving the financial position at the years end
Vy reference to current prioes. Though the proposed system usea
different current prices (selling prices) from those of the replacement
price proposal, it does use current prices.

Fourth, present (discounted) value aoounting is said to be
necessary for forward-looking estimation. But it preaupposse that
the reported present values are reliable. The system here proposed
requires no auch assumption, on the ground that no future estimates
are free of the biases and guesswork of those who sake them. The
syste goes as far as it is possible to go, ly seeking to give the
best indication that can be given of the actual state of a firm as it
faces the future at each reporting date. It therefore oaeto the
principle that the information be useful for forward looking
estimation, without committing readers of financial statements to the
optimistic or pessimistic outlook, as the case may beg of managers or
aoosuntants of firms

In meeting all these tests in its own special way the system
has other important practical oonsequenoes. One can proceed to
analyse the financial statements of a firm at any date without
committing the soleolem of relating figures in unlike pounds. The

figures in the balance sheet and the net income figure are all in
pounds of the closing date. If all firms used the ame system, as
they would if it were generally adopted, interfirm comparisons of
ratios and relationships would be realistic and mathematically valid.
They are not under present accounting. Interperiod comparisons of
ratios would also be valid; for although suooeasive financial
statements are in different a, the ratios of any particular year are
pure numbers or percentages and are thus comparable with like numbers
or peroentages of other years. Above all, the figures would be
readily interpretable because they are all in reasonably up to date
purchasing power unite, year by year.

We have sketched only briefly the reasons for and the characteristics
of he system. These are developed more fully in the writer
Accounting. alumtion and onamio Iha r (Prentice Hall). But, in
concluding this series, we may simply observe that continuously
contemporary accounting meets most, if not all, of tthe requirements
of users and the general tests of logic and mathematical propriety,
whereas other proposals meet few of them. The number of criteria met
1W any system is a test used in appraising all kinds of prodmot and
device. On this ground, the system proposed has marked superiority
over all others.