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This work is the result of many years cf stud^'' and 
reflection J and acknowledgment is due to those scholars 
and teachers wliose ideas I have used v«7ithcat stint, in- 
cluding some with whom I have had occasion to differ, 

I am particularly grateful to Dr. R. U. Elodgetc, 
who not only was kind enough to act as ChairiT^an oi r.y 
Supervisory Cor.u,-LX htee , but also has been a repeated bource 
of enlightenment, enccurageiiient and helpful criticism. I 
am al!?o grateful to Dr. S, C. 'iu for his advice and asr-isc- 
atice, and to Dr. C ., H. Donovan and Dr. C, A. Matthev/i;. for 
their support, and to all of these for a::> -ac. reT.bers 
of my Superv.i. ="ory Coirnii ttee . 

Finally, I would like to ackno'.";lt:dcr= a moral debt 
to Dr. Williard S. Stone, without v;hose guidance, friend- 
ship and support this work could not have b.een completed, 
and an intellectual debt to Dr, l^lorasa Mey, Emeritus 
Professor of Business Economics j.n the University of 
Amsterdam, without \/hcse exam.ple and precept, it would not 
XI a. v e been undertake n. . 




T "1 


* Vx 

ABSTRJlCT , ^^^^ 




Accounting Methodology 18 

Definition of the Field . . . , IS 

Aoccunting Distinguished fr-om 

Statistics ,,,,., 22 

The Uses of Aaoounting 24 

Economists ' Uses of Accounting ....,..,,., 30 

Macro-economics = . . . 31 

Mici'o-econoTnics 35 


Somhart and the Rise of Cavitulism ....... 48 

The Origins of Capitalis;n 43 

The Business as Accounting Entity 51 

Yamev and the Sombart Provositicns 53 

The Sombart Hypothes is Brought 

Up-to-date / 63 

Sombar-t's Assumptions Criticized 53 

An Alternative Hypothesis 69 

AooouYiting^ Planning ancL Coritrol 75 


The Economic Theory Model of the Firm .... 84 

The Financial Model of the Firm 103 

The Cybernetics Model of the Firm 114 

Conclusion 121 

J. 11 


Chapter Page 


Th.e Organization and Processes of 

Production . . , . 130 

Iy%vestment and Capital - 130 

EquiTpynent y or Investment in 

Capaciti/ 135 

i'iyiance and Workino Capttal- » . . 138 

Operations J or Costs and Production. ..,. 141 

Sales Revenue^ or Distribution 146 

The Production Process Accounting 

Model of the Firm 150 

The Accounting Model Applied to the 

Nonprofit Firm - • • 156 

Valuation and Government Revenue ....... 156 

The Nature of "Money" and 

"Valuation" 164 

Coyiclusion 1*57 

1 '\ 


History of Social Accoy-tnting 173 

The Soviet System 179 

The U. S. System 1B3 

So c io.l A-Coountina Cv i tico, 1 1 y 

Appraised 187 

Conclusion 198 


History and Organization 207 

The Period 1947-62 213 

p-yogress Since 1962 215 

The Psychological and. Technical 

Problems 219 

Psychological Problems 219 

Technical Problems 222 

Conclusion 226 


A New Theory of Accounting 231 

Value and Addi tivi ty 234 

The Importance of Accounting in 

National Planning 240 

Concliision = . . . 243 


TABLE OF COWl:EirXS~<:ontinued 


APPENDIX . ,.,.....,... 247 





Figure Page 

1. Ricardlan Model of the Firm . 88 

2. Static Price Theory Model cf the Film 90 

3. Managerial Decision Model of the Fiim ....... 91 

4. Model of the Firiri 105 

5. Model of the Firm « 106 

6 , Cash Flow Statement 110 

7 . Information System . , . c ...... , 117 

8. Organization cf a Business in Relation to 

Its Requirements , , 147 

9. The Accounting Model of the Firm 151 

10. A National System of Social Accounts 183 

11. Proposed Model of the Social Product 

Account . o ............ 197 


Abstract of Dissertatior. Presented to the Graduate Couiici]. 
in Partial Fulfillment of the Requirements for the 
Degree of Doctor of Philosophy 




Kenneth Samuel Most 

June, 1970 

Chairman: Ralph H. Blodgett 
Dexjartment: Economics 

The aixn of this study is to determine why, how aiid 
to what extent the methodology of accounting has a part to 
play in the eccncrdc development of the modern state. It 
is argued that accounting is more usefully seen as a plan- 
ning methodology f che control function being derived from 
the planning function. 

The importance of abandoning unnecessary assumptions 
is emphasized, in particular, the assumption of profit- 
laaxim.Lzing behavior which underlines tradi.tional work in 
accounting theory. A new accounting theory i5 based on 
the account and the identification of an acceptable set of 
beliefs concerning the real v/orld to which it must be 
related. Criticism.s of accounting emanating from accountants 


and economists are stated in ordar to specify the objections 
which a new theory of accounting must overcome. 

The "Somtjart Propositions" are critically exam.ined, 
particularly in the light of Yamey ' s attacks on them. An 
alternative hypothesis to Sornbart's view of the rise of 
capitalism is put forv/ard, which permits the restatement 
of the Sombart propositions in support of a theory of ac- 
counting as a planning and control methodology. A trans- 
lation of the relevant passages from Sornbart's Dsr Modarne 
Kavital-isnus forms an appendix to the study. 

The foundations of c;.ccounting theory are shown to 
rest upon the assumption of price theorists that investment 
and prodiaction can be studied from the consumer pole. Many 
theorists assume that behavioral factors relevant for a con- 
sumer model of the economy are equally relevant for a pro- 
ducer model, in spite of the observation that Say's law no 
longer applies. The waakness v/hich results from this error 
is the absence of a usable model of a production ecGncm>y, 
in particular, of acceptable beliefs about the organization 
and processes of the firm. An alternative model derived 
from corporation finance is examined; this is shov/n to be 
based on the assumipcion of a nonexistent physical "flow" 
of liquidity. The cybernetics models of the firm are like- 
wise rejected, on the grounds that the only beliefs about 
reality v/hich they incorporate are, in fact, images of the 


An accounting model of the firm is presented. This 
model is shown to have great generality, and to be appli- 
cable to nonprofit firms, such as government agencies, in 
both the planning and control phases. 

The two principal approaches to social accounting 
are examined in the contexts of the U. S. and Soviet systems; 
these are seen to display the sam.e defects as are found in 
business accounting theories. The accounting model of the 
firm is shown to be adaptable to the production economy of 
a nation, leading to the conclusion that national prcduct 
and national income are distinct concepts. 

The French experim.ent in using accounting explicitly 
as a social planning and control instrument xs described 
and evaluated. It is shown that: the model underlying the 
French experiment is essentially the same r.s the accounting 
model presented in this study. 

In conclusion, conventional criticisms of accounting 
are refuted. The error involved in viewing valuation as 
measurement, akin to those measurements used in the physical 
sciences; is discussed in relation to the additivity of 
values, and it is asserted that, since all values are sub- 
jective, objectivity lies in interpersonal agreement and 
not in existential phenomena. The study points the 
direction in which a developing modern state would be able 
to move with the aid of accounting miethcdology , 



The aim of this study is to determine why, how and 
to what extent the methodology of accounting has a part to 
play in the economic developm-ent of the modern state. It 
will not be necessary to assume for this purpose that ac- 
counting methodology plays a principal part in such develop- 
ment, or a major one, nor need we devote attention to those. 
other methodologies which have a claim to be considered in 
this context, such as the Domar-Harrod growth models, the 
econoraetric rfiOdels of Klein and Tinbergeo , or the models of 
"optimum theorists" such as Von Neumann, Samuelson and 
Morishima. * It is not even necessary to exclude the rele- 
vance of simple m.acro-ecc>noraic models of the so-called 
"classical" and "Keynesian"' types. Each of these method- 
ologies is potentially useful to the analyst and planner, 
who will nresum.ablY consider all available mathematical 
iTiodels, including those of linear and nonlinear programming, 
simulation and probabilistic strategies, 3.nd a variety of 
others both heuristic and stochastic, to assist in the 
processe:; of planning and control. None of these v/ili be 
examined hare, and we shall be concerned exclusively with 

- ? - 

It is coi-nriion knowledge that accounting has flourished 
in those states we categorize as prosperous, and that, as 
their prosperity declined, so did their accounting. Typical 
was the situation of the pre-Christian Chaldeans and Greeks, 
who left many records of their wealth and economic trans- 
actions in a form which can be recognized as accounting, 
together with descriptions of their accounting and auditing 
methods. The post-Christian dark ages, which began when 
Goths and Vandals disrupted established patterns of inter- 
national trade, drove this tradition underground; it emerged 
only after the Crusades reopened the old trade routes to the 
East. Modern accounting dates from the Renaissance wnich 
the Crusades made possible. 

Students of the history of accounting have tended 
to see its role in ancient and medieval tiiiies primarily in 
terms of the stewardship of wealth. According to this 
hypothesis, the creation or accumulation of v/ealth leads 
to the formation of institutions for its preservation, and 
with them goes a responsibility to account for the prcccesses 
whereby the wealth is administered. This hypothesis under- 
lies the various "investor" theories of accoiintina — t.he 
proprietary theory, the entity theory, the fund theory, and 
so on. As a hypothesis, it purports to explain the develop- 
ment of accounting at the level of the institution within 
the stats, the state itself, and even internationally as, 
for exaraple,. in balance of payments accounting. 

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There are, however, a number of modern instances of 
political recognition that accounting may have a significant 
role to play in the process of economic development. Per- 
haps the most striking is the French National Accounting 
Plan follov/ing the second World War. Prior to that v/ar the 
French people had enjoyed what was in some ways the highest 
standard of living in Europe, but they ended it with their 
economy at a standstill, and much of their capital destroyed, 
It v;as evident that any postv;ar government would stand or 
fal]. on its ability to restore per capita income and con- 
sumption to their prewar .levels, in a fairly short space of 
time. One of the first legislative acts of the postwar 
French government was to a llation^l Office of 
Accounting in the Ministry of Finances, v-hich proceeded to 
regulate the practice of the profession of accounting and 
to lay down a framework for accounting at the macro- and 
micro-economic levels, with the aim of strengthening its 
functioning in government, industry and trade. Similar 
tendencies, albeit less marked, can be seen in Holland, 
Greece and Japan and other countries attempting rapid 
economic development; it is also noteworthy that some 
former British colonial and ether territories are travel- 
ling the same road,- for example, Singapore and Malaysia. 

It appears that the stewardship roJe may play a 
considerably less important part in these phenomena than 

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the traditional theory v;ould imply, and that accounting as 
a tool of planning and decision-making, which historians 
suppose to be a relatively modern development, should be 
given precedence in any theory of accounting. David F. 
Linowes recently commented^ on his experiences during visits 
to three developing nations . He found that leaders in those 
countries envisaged a more extensive role for accounting than 
would be recogni-'::ed in the United States. In particular, he 
drew attention to the viev; that accounting should be part of 
the central planning process which such nations find essen- 
tial to rapid expansion of industry end agriculture, a viev? 
which can also be identified in the unified budgetary systems 
of the centrally planned economies' of Eastern Europe. Linowe; 
referred to his ov;a participation, under the auspices of the 
U. S. State Department or the United Nations, in missions to 
Turkey, Iran and Pakistan, aimed a': establishing accounting 
professions in those countries. 

It was brought home to him in this work that the 
scope of accounting had to be broadened to include the meas- 
urement of available resources and control of their use. 
In developing countries, the problem of providing planners 
with adequate information became critical, and could be 
resolved by the use of accounting data; hence the urgency 
and importance of creating an accounting profession. A 
similar conclusion was reached bv Enthoven as a result of 

- 5 

his experiences with the Investment Department of the 
International Finance Corporation betv/een 1964 and 1967." 
Enthoven starts from the investor theory of accounting and 
ascribes the grov/th of accounting in modern times tc its 
usefulness for showing the effects of changes in wealth. 
Ke sees cost accounting as a separate and recent development 
which culminates in "management accounting," and the second 
of the articles cited describes the many ways in which 
management accounting can be used as "economic development 
accountancy . " 

We see from this the paradoxical situation that 
greater importance is placed on accoxinting for poor and 
developing states than for vjealthy, es tablislied ones, and 
this observation throv;s doubt lapon the validity ot those 
theories which treat accounting as primarily a record- 
keeping and reporting function. We shal'i therefore advance 
an alternative hypothesis, namely, that the methodology of 
accounting constitutes a conceptual framework, of the nature 
of a nonexplicit behavioral model of a closed system, designed 
purposely for planning and control functions rather than in 
the light of ca-allactic or custodial needs. 

In Chapter II we shall attempt tc delineate the 
field of accounting and establish its links with economic 
science; in doing this we shall draw attention to con- 
flicting views concerning the usefulness of accounting. 

6 - 

Chapter III will be devoted to a critical evaluation of the 
Sombart proposition, that accounting was a necessary factor 
in t?ie rise of capitalism following the European Renaissance 
in the thirteenth and fourteenth centuries, which has ob- 
viuus ielevctiiuu Lo our hypoLhesis. In Chapter IV we shall 
identify the assumptions which underlie som.e of the more 
significant contributions to accounting theory, and the 
reasons why it has proved impossible to build a consistent 
theoretical structure upon them; in Chapter V we shall exam- 
ine another model, which is capable of reconciliation v;d th 
accounting theory and practice, which is consistent with 
the relevant parts of economic theory, and which supports 
the planning hypothesis. This chapter will also show hov/ 
the model can be applied in the important area of control 
of public expenditure. In Chapter VI we shall discuss the 
implications of the model for social accounting and the 
representation of the national income. Chapter VII will 
describe the French experience v;ith a uniform chart of 
accounts,- and in Chapter VIII we shall state the conclusions 
we derive from this study which may be of interest for the 
economic development of the modern state. 

We shall endeavor to make clear our assumptions at 
appropriate places throughout, but a preliminary word on 
the general nature of the problem involved may be apposite 
here. The contemporary taste for an axiomatic approach to 

/ - 

the development of theories in the behavioral sciences has 
had several unfortunate results. In the first place, we 
see a tendency to assume that the required axioms are 
relatively few in number; this assumption seems to have 
made its way into accounting theoi'V from ef^onomic theory, 
and into economic theory from the physical sciences. Quite 
apart from the question of scientism, this assum.ption does 
not appear necessary for the conduct of our inquiry, and we 
shall not rely upon it. 

In the second place, we may note the rise of 
"methodological non-.inalism, " a term coined by Karl R. Popper 
to designate the assumption that usefulness in prediction 
is the criterion by which to evaluate an assumption.** This 
viewpoint has been adopted by Milton Friedman,^ who argues 
that an assumptiovi is admissible if it leads to conclusicns 
which predict succitsfully better than 50'a of the observa- 
tions for which it. is used. Friedman provides an illus- 
tration of the use of such an assumption in the statement. 
that "the distance travelled by a falling body is equal to 
one-half the gravitational constant multiplied by the square 
of the time the body falls," -which depends upon the unreal- 
istic assumption that the object is falling in a complete 

We shall distinguish between methodological 
assumptions of this type, resembling the oetevis parih-us 

- 8 - 

assumption used so successfully in economic theory and the 
"going concern" assumption of accounting theory, and 
behavioral assumptions, particularly those which involve 
attributing behavior to concepts. The former are intrin- 
sically equal, and choice between them can only be made on 
the basis of usefulness; scientific progress is a continuous 
abandonment of assumptions which have outlived their use- 
fulness. Behavioral assumptions, on the other hand, are 
always true in the sense that corresponding behavior can 
be observed in people, yet their usefulness can never be 
demonstrated.^ To say that businessiaen are motivated to 
maximize profits, or wealth, d.s dem.onstrably correct, no 
matter how these concepts are defined, yet this is quite 
inadequate for explaining actual decisions unless reduced 
to a tautology. To say that consumers attempt to m.aximize 
utility leads to a comparable impasse. To speak of public 
expenditures or business costs "behaving" in certain ways, 
by contrast, is pure anthropomorphism. 

We shall adopt the viewpoint that behavioral 
assumptions are not intrinsically equal; some assumptions 
are better than otners. Not only must they be empirically 
demonstrable, but it must also be shown exactly how they 
affect any result obtained. We shall therefore not start 
with assumptions of utility- or prof it-m.aximization j the 
specific reason for the latter v/ill be explained later in 

- 9 

this chapter. Nor shall we make all the other assumptions 
economic theorists consciously incorporate in their prj.ce 
theory, v/hich underlies most formal work in economics and 
on which accounting theorists, often unconsciously, base 
their systems of ideas. We shall assume the fundam.enta-l 
institutions of private property, a degree of freedom of 
enterprise, and the relatively unrestricted operation of 
a raonetary system. We shall also assume a scarcity of means 
relative to ends, as this lies at the base of all value 
theory, and take as given the distribution of capital and 
income and a large measure of econom.ic stability. All of 
these can be readily identified as features of the modern 
"mixed economy" state, and, indeed , we shall attempt to 
show that some of the problems which arise when conmaunist 
states turn to accounting methodology can be atLributed to 
the absence of one of these features. 

We shall not assume certainty, pure competition, 
full employment, homogeneous functions, discrete time periods 
or products or factors of production, or diminishing returns 
to factors or to scale, nor shall we require assumptions of 
constant prices, resources, incomes, tastes, products, 
, capacity, technology, taxes or subsidies. In particular, 
we shall have to discard the assumption that everything 
happens instantaneously, for time, as a mental construct, 
enters directly into our field of observation and affects 

- 10 - 

our results. We shall make an assumption of rationality, 
in that ws shall require actions to conform to the physical 
and institutional constraints perceived by us, and to any 
postulated objectives of the businessman, civil servant or 
other decision maker. It is hoped that this will not lead 
to the teleological assumption of rationality which Veblen 
criticized so severely, and which the foregoing discussion 
v/as designed to avoid. 

It may be argued that the failure to base our study 
on more rigorous lines lays us open to the charge of over- 
generalization. This issue has been faced before by the 
French economist J. Marchal: 

In attempting thus to reconstruct price theory on a 
more realistic basis, by taking into account all the 
complexities of human nature, by classifying according 
to the form and structure of markets, by introducing a 
real time element instead of an abstraction, one runs 
the indisputable risk of producing a less rigorous 
construction, on less pure lines, and one which may 
disappoint all those who have been seduced by the 
simplicity and perfect3.on of the classical analysis. 
But one can hope, at the same time, to produce a theory 
which connects better, not only with the theory cf 
general equilibrium and the theory of business cycles, 
but with all that we know of systems and of structures.' 

Abandoning a profit-maximization assumption will 

be particularly distressing to American (and Australian) 

accounting theorists. With the possible exception of one 

or two works on economic accounting, ail of tlie v;ritings 

of these theorists assume that the centerpiece of their 

theory must be the corporate financial statem.ents, and that 


the pi-incipal aim of accountants is the measurement of 
business income. We do not share their view of the im.por- 
tance of the corporate financial statements; just as regular 
political journalism in England began in the Civil Wars, 
when King and Parliament competed with one another in 
writing, so the financial statement, as we know it, originated 
in the struggle of the nineteenth century industrialist to 
finance his manufacturing plants. His need for. publicity 
in this connection was hardly less acute than that served 
by the political journalist in the other. But a newspaper 
is not literature, and a balance sheet, even with a profit 
and loss account attached, is not accounting, and any attempt 
to formulate a theory of accouncirg which requires such an 
assumption is virtually certain to fail. The manner in 
which this failure has so far manifested itself will be 
described in due course; at this point v7e shall restrict 
ourselves to identifying the underlying cause. 

The logical error m.ade by both accounting and 
economic theorists is to confuse the problems of production 
with the problems of consumption. A preliminary observation 
establishes these two poles of economic activity, which 
have noneconornic foundations and to which all actions must 
be traced if economic phenomena are to be analyzed for 
purposes of prediction and planning," The typical image 
of an economy looks like this: 

~ 12 - 

Factor Markets 



Product Markets 

Having taken this first step, the theorist proceeds 
to conduct his analysis from the standpoint of one of the 
poles, namely, consumption, and the motivations of producers 
and consumers are found to manifest themselves in essentially 
consumption terras — maximize income for the former, satis- 
factions for the latter. There is no reason, however, why 
the motivations of these two classes of activity must be 
expressed in terms relevant to one of them; otherwise put, 
there is no social mechanism, at the present time at least, 
which can ensure that production and consumption are 
simultaneously determined. Say's law does not apply. 
That they may, and even must, be brought into some kind of 
a relationship through time and, in a long enough time 
period, can be brought to equality, is admissible, but the 
essentially distinct decisions involved must be treated 
separately in any formal analysis. 

- 13 - 

If we were to concern ourselves with behavioral 
assumptions, we should be obliged to postulate that the psy- 
chological forces underlying production decisions are dif- 
ferent from the psychological forces underlying consumption 
decisions, because the producer seeks to cater for the 
satisfactions of others, while the consumer seeks only the 
satisfaction of self. This would permit the sam.e individual 
to behave differently according as he was acting in his 
role of producer or consumer;^ it would also help to underpin 
the argument which is conducted in Chapter VI in favor of 
a restructuring of the national income accounts. The dif- 
ferent functions of money, which tend to confuse the mone- 
tary theorist who thinks in consumptj-on term.s , can be 
readily fitted into a conceptual framework v/hich sses some 
of them as producers' functions and others as consumers'. 
We shall not pursue this line of inquiry tiere, as v/e find 
it unnecessary to rely on behavioral assum.ptions of this 
kind; we simply observe that some individuals undertake to 
produce goods and services to be consumed or otherwise 
utilized by others. Nevertheless, v/e cannot resist the 
temptation to draw attention to a similar statement which 
has recently been made by a noted behavioral scientist. 

UrwiCiC has reconsidered the basi.s of Douglas 
McGregor's contrasting theories of human behavior, known 
as Theory X and Thevory Y, X assumes that man is resiscant 

- 14 - 

to changes, and that he will only implement managerial 
decisions if rewarded or punished for refusal, Y assumes 
that man is basically goal-oriented, and that he v;ill 
support changes if they can be seen by him to help him to 
achieve his goals. Urv/ick points out that as a. 
is not eillergic to changes, but as a producer he is more 
cautious, because of a fear of losing the source from which 
his consumption flows. The trend of modern life is to 
separate the functions, not. only in production terms, but 
also in social situations — ^men and unmarried females pioduce, 
wives and children consume. The whole economic process con- 
sists in relating the behavior of the individual consumer 
to the behavior of the same individual as a producer or 
distributor. This he calls Theory Z, and he demonstrates 
by means of a diagram the points aL which a lai-^k of coui- 
munication may make itself felt.^° 

It is easy to see how the income (= profit) 
maximization assumption, v;hich was found necessary in 
order to explain production in terms of consumption, led 
accounting theorists to seize on income determination as 
the prime objective of accounting; the observation that 
the bulk of accounting work lay in the comriiercial area of 
production and distribution provided an additional support 
for this hypothesis, and the inconvenient fact that ac- 
counting had its origins in the public sector was suppressed, 

- 15 - 

or treated as an oddity. The choice of income determination 
as a prime objective was particularly unfortunate since 
business net income (in this context, profit) is a residual, 
the result of offsetting value movements in two opposite 
"^ir^cticns and as such inherently jnca^~'able of analvsis. 
In this study we shall substitute the production concept 
of profit for the consumption concept of income wherever 
the context calls for its mention, and refrain from a 
profit-maximization assumption, not because of the demon- 
strated difficulty of making such a construct operational,^^ 
but simply because it is unnecessary for explaining the 
role of accounting in economic development . ■^ ^ 

The philosophy of this study has been expressed in 
the follovzing words: 

An accounting system is not a failure if it does not 
present data in a way that will most please everyone, 
but it is a failure if its accounts do not enable the 
greater part of persons interested in them to glean 
facts for a variety of problems.''^ 

It is one of the main objects of this study to show 

that it is possible to formulate a theory of accounting 

which is equally relevant to financial accounting, managerial 

accounting, tax accounting, social accounting and. corporate 

accounting, and v;hich is equally applicable to all types of 

institutions, public or private, to human individuals and 

to households. In this v/ay, the complexity of modern 

economic life can be seen to be manageable with the help 

of the accountant. 


1. J. R. Hicks, Capital and Growth (New York and Oxford, 
1965); reviev7s and compares these models. 

2. "The Role of Accounting in Emerging Nations," The 
Journal of Aceountanay , Vol. CII (January, 1969) , 
p. 18. 

3. Adolf J. H. Enthoven, "Finance and Development," 
International Monetary Fund, Vol. 6, No. 2 (June, 
1969), pp. 16-23 and Vol. 6, No. 3 (September, 1969), 
pp. 24-29. 

4. The Open Society and Its Enemies (Princeton, 1950). 

5. The Methodology of Positive Economics (Chicago, 1953). 

6. For a discussion on this point, see Gunnar Myrdal, The 
Political Element in the Development of Economic Theory 
(Harvard, 1955), pp. 200--201. 

7. J. Marchal, he Meaanisme des Prix (Paris: Librairie 
des Medicis, 1948), p. 15 (our transl.). 

8. J. A. Schumpeter, The Theory of Economic Development 

(New York: Oxford University Press, 1961), pp. 4-5. 
(First pub. 1934. ) 

9. In private conversations with the author, a psychiatrist 
has observed that one of the common features in serious 
marital disputes is the presence of two fundamentally 
distinct attitudes to money. The v/ife sees in money a 
means of payment, the use of which is to acquire con- 
sumption goods and services; the husband sees it as a 
unit of measure which is useful in planning the pro- 
duction of goods and services for future consumption, 
often by the wife. 

10. L. F. Urv/ick, "Theory 2," Advanced Management Journal, 
Vol. 35, No. 1 (January, 1970), pp. 14-21. 

11. R. N. Anthony, "The Trouble with Profit Maximization," 
Harvard Business Review, Vol. 38 (Nov. -Dec, 1960), 
pp. 126-134. 

- 16 - 

17 - 

12. It is interesting to note that Chanibers.- with whora we 
shall find ourselves in marked disagreement, identified 
this problem without addressing himself to its solution. 
He wrote, in Accounting ^ Evaluation and Economic Bt-:~ 
havior (New Jersey: Prentice-Hall, Inc., 1956), at 

p. 66: "The goals of production and consumption are 
different in kind, and entirely different modes of 
behavior may be observed as a man's calculations shift 
from one role to the other. . . . Entities engaged in 
trading, manufacturing, and ancillary operations m.ay 
thus be deemed to have no consumer role." 

13. John P. Fov/elson, Eoonomia Accouming (New York: 
McGraw-Hill, Inc., 1955), p. 10. 


Adoounting Methodology 

Definition of the Field 

For the purpose of this study 3t is not necessary 
to define "accounting" narrowly. In accounting, as in 
other fields of empirical inquiry, we analyze the relations 
between observable data,^ and we shall assur.e that in this 
field we find a number of problems thro/zn together for 
convenient reference, the cormaon feature being the use of 
a particular methodology to solve them. In particular, 
we do not assume that "double-entry" is a necessary element 
of accounting, since v;e postulate the fact, that accountants 
make as many entries as are required by the purposes of 
their analysis; the x^op^l^r preoccupation with double-entry 
bookkeeping is a mere historical survival.^ It also leads 
to unfortunate metaphysical speculations, such as Mattessich's 
treatment of the "duality principle."- No one, apparently, 
disputes the inclusion of single-entry accounting in the 

A method may be defined as a family of models, and 
a model as a construction in which selected elements of a 
state or process which we desire to investigate are combined 

- 13 - 

- 19 - 

in order to study their interrelations and interactions.'* 
The account is a model in this sense, being a construction 
in which movements of values are combined; the concept of 
"value" will be examined in more detail subsequently, and 
here it v^ill suffice to say that we mean by this term a 
representation in money. The bilateral form which we are 
accustomed to think of as an account, since it is invariably 
used for illustrative purposes, is no m.ore essential to the 
model than the wheel to transportation, but it is useful 
for didactic and expository reasons. 

The characteristic features of the account are: 
the name of the value, the description and dimensions of 
a two-way flovc' (in and out, or from and to) and the dates 
of the components of this flov:. By arranging thoce elements 
in a significjint fcrin v/e can see L:he result of the flov/ 
th rough time. 

Name of the account 

Date Flow in (frorrO Jimount ] Date Flow out (to) Amount 

The quantitative representation of the result of 
the flow is called the halapoe; it may be < 0. There is 
no particular significance to the fact that inward flows 
are shown on the left-hand (debit) side and outward flows 
on the right-hand (credit) side, except that consistency 
calls for a rule, and the one in use appears to offer 
practical advantages. 

- 20 - 

The model has the virtue of ubiquity; it can be used 
at ail levels of aggregation. Just as we can imagine an 
account for a particular economic value, so we can imagine 
an account for the totality of values of a selected kind, 
or even for all values moving within ^n i dpntif i abl p 
economy. This feature permits both aggregation and disag- 
gregation to be performed within a logically consistent 
framework . 

In order to construct an account we require a 
written language, a model of time, a currency of account, 
the technique of addition and one or more valuation models. 
The first four present no special problem; we can use any 
language, the universal calendar and any currency, even 
an artificial measure like the Egyptian shat which had no 
circulation. The ciioice of valuation model it; more dif- 
ficult, since it brings us face to face with the problem 
of value. The Aristotelian concept of an equivalence of 
V7hat a man gives and receives is clearly attractive in this 
context, and we shall see that accounting theorists and 
practitioners have relied on it to a great extent. It has 
long been realized, however, that since "both parties to 
an act of barter or sale must necessarily gain by it . . . 
there can be no equivalence between the 'subjective' or 
utility values of the goods exchanged or between the good 
and the money paid or received for it."^ We can agree with 

- 21 

Schumpeter that "metaphysical speculations about objective 
or absolute value" can be dispensed with. A valuation 
model is defined here simply as a construction which per- 
mits quantitative representation in money, that is, the 
assignment of currency units to an object; thus, the ob- 
jective value of a good or service is "the magnitude defined 
and nothing else."^ 

We should note at this point, however, the cost 
theory of value attributed to Duns Scotus and St, Thomas 
Aquinas, under which the "just" price of a thing is equated 
with its competitive common value and called its "cost." 
The term, "cost" has at least three different meanings in 
accounting; it. may mean depending on. tne context, value in 
exchange, value in use, or necessary sacrifice. The same 
situation has arisen in ecoiiomic theory; the "jur^t price" 
becomes variously a qi^antity of labor (the labor theories 
of value) , opportunity cosr (value in the next best use) 
and replacement cost (sacrifice involved for the possessor 
if he were deprived of a gcjod cr service and wished to 
recover it) . It is easily assumed that some of these con- 
cepts are more objective rhan others; we reject this as- 
S'omption, and postpone examination of the concept of cost 
as a surrogate for value to a later place. 

- 2: 

Acooiinvi7ig Distinguished from Statistics 

It wij.l be seen that accounting is a branch of 
numerical analysis applied to economic activity, and some 
v;riters have viewed it as a branch of statistics.'' It is 
clear that accounting data are available for statistical 
uses, and both macro- and micro-economic studies have pro- 
ceeded from this observation; business statistics include 
accounting data together with other measurem.ents . Scott 
looked forward to an i.ntegration of accounting and statis- 
tical processes, and postulated as the logical outcome of 
this "evolution" a "consistent hierarchy of rules and 
principles proceeding from the specific and detai led to 
the more and more general until the broadest accounting 
principles merged into still broader principles of social 
o-rgani^ation. "^ Vvhile it is not disputed that accounting 
and statistics are related methodologies, or that both can 
find a place within a socio-economic conceptual framework, 
it is important here to establish the differences between 


In the first place, statistics (as the name implies) 
is essentially staric, whereas accounting, as we have shown, 
is based on dynamic elements. A static model is one in 
which important variables are assumed to be unchanging, 
and in this sense all models have static aspects, including 
accounts. The kev variable in this context, however. 

- 23 - 

is tine) whereas statistics abstracts from the effects of 
time, accounting expressly includes time by dating all 
observations. Again, static models can be made dynamic 
by dating procedures, but the basis of the distinction 
remains; statistical method does not always include time 
as a variable. 

Secondly, statistics is "State Arithmetic, a system 
of computation by which differences between individuals 
are elim.inated by the taking of an average."^ "For the 
most part, Statistics is a method of investigation that 
is used when other methods are of no avail." ^° Statistical 
method is required v;hen wa are faced v/ith a large population 
and are forced to assume thar the average (however computed) 
is representative of the whole. Gini has complained that 
modern statistics displays a growing propensity for 
formulae, which he D.ooks upon as a sign of weakness in 
statistical p:iethod; he believes that the representative 
assumption is too readily m.ade on inadequate evidence con- 
cerning the population."^ The characteristic feature which 
distinguishes accounting here is that, given a definition 
of a value or set of values, it is possible to proceed to 
manipulate those values through time without any of the 
assumptions of consistency and comparability which are 
essential to the operation of the laws of chance, to 
correlation and the standard deviation, and to those 

- 24 

other mathematical models v/hich v;e group under the heading 
of "statistics. " ^ ^ Thus, statistics begins where accounting 
ends, in that, given assumptions of consistency and com- 
parability, statistical method can be applied to accounting 
dats- We Tn^v refer to financial ratio anal^^'sis as an 
example of this. 

Thirdly, and in contrast to statistics, accounting 
is holistic. We shall observe in the next chapter that this 
has not always been the case, and that early forms of ac- 
counting v;ere based on a selection process similar to that 
which characterizes statistical method at the present time. 
In using statistics, we start from, a hypothesis concerning 
the key variables to be studied; in accounting, we devise 
a closed system within which all identifiable economic values 
can be acconmiodated , no matLer how little they may appear at 
first sight to affect the result. This brings us to the 
fourth difference; accounting methodology includes models 
which prescribe the manner in which observations are to be 
made; this is the subject-matter of bookkeeping. The rules 
and techniques of bookkeeping cannot be divorced from the 
subject of accounting, which may be the reason why they 
are so often confused. 

The Uses of Accounting 

Accounting theory is teleological , and as Schumpeter 
has pointed out, teleology may be a proper manner of 

- 25 

approaching the study of purposive human actions. "The 
improper use of teleology consists in exaggerating the 
extent to which men act, and shape the institutions under 
which they live, according to clearly perceived ends that 
they consciously wish to realize in the most rational way."^' 

If "it is not possible to draw a theoretical line 
between economics and politics in the manner and with the 
significance so much stressed by most economists in their 
methodological discussions,"-'* then it is perhaps advisable 
to adopt an express empirical hypothesis concerning this 
point. Vie shall use initially the mental construct of a 
policy-maker who is at the same time a planner and an 
executor of his plans, and concern ourselves with the con- 
ceptual framework of this hypothetical businessiaan. ' "" At 
a later stage we shall see v/hat modifications the analysis 
must undergo if v-;e introduce a separation betv/een policy- 
making and planning, and between planning and execution, as 
well as a plurality of decision-makers. This device will 
permit us to abstract from, behavioral factors, such as 
motives and goals, while retaining the general idea of a 
purposive human being (Chambers' "actor"' ^) in the context 
of a given socio-political envirorunent. The danger to be 
avoided is illicit psychological reasoning from the indi- 
vidual to society as a vrhole.''' 

- 26 - 

We face here a number of philosophical alternatives. 
If prediction is meaningless, we have no subject for study. 
If prediction can be made deductively , not from experience 
but from some general principle, or principles alleged to be 
logically certain, as in modern theoretical physics, we 
must establish the axioms which will underlie our theorems; 
such behavioral axioms must be derived from observation of 
man in society. Or, we can make generalizations from 
experience which, while they can be valid inferences, are 
not made with certainty; in this case, traditional deductive 
logic would appear to be inapplicable. Finally, we can 
subscribe to an induction-deduction process of reasoning 
from the present to the future, such as characterizes what 
has become knov;n as "the scientific method." In all cases 
a description of the environment m.ust be undertaken, and 
it is to this task of distinguishing the historical from 
the logical that we now turn. 

The fact that accounting has invariably been 
associated with societies where business has flourished was 
to Hatfield "so obvious that I offend by explanation."^® 
He was referring to the latter part of the 19th century, 
and to Aiaerica, England and Germany; v/e v/ish to shov; thab 
this observation can be extended back through time as far 
as history will take us, Scotland in the 18th century, 
the Low Countries in the 17th, Florence in the 14th, Genoa 

- 27 - 

in the 13th, Rome at the birth of Christianity; Greece, 
Egypt, Persia, Babylon and elsevjhere in the pre-Christian 
era — all of these civilizations v/ere characterized by a 
developed structure of trade and industry, and have be- 
queathed to us accounting records . ^ ^ "Wherever trade 
flourished, the practice of double-entry could be found, 
lending colour to the views that trade followed double- 
entry, or that double-entry followed trade. "^-^ 

Again, we can verify the fact that accounting did 
not develop or occupy a significant role in ages and places 
where trade and industx-y V7ere subordinated to conquest and 
military adventure, where the aristocratic ethos took 
precedence over the bourgeois, no matter how v;ealthy the 
peoples concerned may have been. Spain and Portugal in 
their glorious centuries, feudal Europe in its "dark ages," 
the ancient empires of Ghengiz Khan and Attila the Hun, have 
left us no legacy of accounts. 

Obviously, accounting was a result of the invention 

of money, and the origins of both are lost in the nists of 

antiquity. Discussing the need for a metallic currency in 

pre-capitalist times, Sombart says: 

"Nov/, a money economy accustcm.s people to look at the 
world in a purely quantitative way. When the habit of 
applying money as a canon or rule for ail thd.ngs nas 
grown for years and centuries, the natural attitude 
of mind which regards the inherent and qualitative 
differences in things dies out. Aritnmetical valuations — 
weight, mass etc. — come to be taken as a matter of course 
in everyday life."^^ 

- 28 - 

We need not accept Sombart's assuraption that the 
quantitative and the qualitative are mutually exclusive to 
see the point of his observation. There is a well-known 
hypothesis that writing began in Sumer before 4000 B.C. as 
a symbolic accounting, to keep temple records of goods 
received and issued. ^^ It is, therefore, not entirely 
fantastic to see the origin of a quantitative approach to 
life in a need to keep accounts. VJherein lay the basis of 
this need? 

The customary answer to this question points to the 
stewardship function, a requirement to account for the 
stewardship of wealth. A typical view is that of Richard 
Brov7n, in his classic work on accounting history: "The 
development of social life and especially the formation 
of states or sovereignties levying any form of taxacxon 
necessitated ... a power of holding count and reckoning. 
In this we find the origin of the science of accounting."''^ 
And later, on the subject of auditing: "Whenever the advance 
of civilization brought about the necessity of one being 
entrusted to some extent with the property of another the 
advisability of some kind of check upon the fidelity of the 
former would become apparent. " ^ ** 

It would be tiresome to trace the recurrence of this 
theme, but we may note the recent statement, by a prominent 
accounting educator, that accounting today is "investor 

29 - 

oriented"; he also claims that this orientaticn has 
prevailed "throughout most of the history of accounting. " ^ '^ 
The similar observation of Enthoven has already been men- 
tioned.^^ We have rejected this hypothesis, hov7ever, since 
several contradictory observations have rendered it unac- 
ceptable. In our view, the following alternative hypothesis 
accords better with the evidence. 

In order to accomplish his objectives, man develops 
conceptual frameworks consisting basically of representations 
of reality — ^raodels — in a form which permits their, elements 
to be manipulated for the purposes of prediction, planning 
and controls Should I wish to spend my evening at a 
particular cinema, I can identify a set of conceptual 
frameworks required: a linguistic structure, a knov/ledge 
of certain technical equipment, a monetary system. We may 
consider additional quantitative models of this kind: if 
I am to arrive at my destination, I must possess a geograph- 
ical conception of the area in v/hich both I and the cinem.a 
are situated; in short, a inental or physical map, complete 
with distances. If I wish to be sure to see the whole 
picture, I must also have a system for m.easuring tiiae, 
which must be identical with that used by the operator of 
the theater. All of these are abstractions. 

It is suggested that accounting is a combination 
of conceptual frameworks, including those of language, 

- 30 - 

money, time and arithmetic, used by businessmen in their 
relations v^ith each other, for purposes of prediction, 
planning and control. If this is correct, then the 
stewardship function of accounting can be seen to occupy 
a secondary role, in importance and in time, to the role 
of accounting in economic development, for example, the 
creation of v;ealth or the achievement of such other goals 
as may be identified from the behavior of businessmen. 

Economists ' Uses of Aaaounting 

The 20th century interest of economists in 
accounting can be viewed as an aspect of their continuing 
effort to "grasp the economic order as a unified whole and 
to comprehend all its manifestations in a logically coherent 
system.''^' If we accept Myrdal's subsequent argument, that 
economic theorists have a concern for the improvemcent of 
human welfare, it is not inconsistent to assert that they 
are interested, in the first place, in describing and 
explaining the v^orld as they see it. 

The v;ork of the marginalists in the 19th century 
culminated in the general equilibrium, models of Walras and 
Pareto, which dem.onstrated again {for the point had already 
been made by the Physiocrats) that all econom.ic actions 
are interdependent. Influenced by this need for a 
holistic view, economists have relied largely upon pries 

- 31 - 

theory as a conceptual frairiework to contain their 
observations in all fields. It is possible to discern, 
in the 2Cth century, a renewed interest in accounting as 
a complementary aid in grasping the economic order whole. 

Macro- sconomics 

A striking feature of macro-economic theory in the 
second half of the 20th century is the use of accounting 
methodology for planning and control at the level of the 
state: ". . .a method of obtaining an over-all picture 
of economic activity is essential. This is the function 
of the national income accounts . . ."^^ 

The first four chapters of the typical macro-econoaiic 
textbook from which this quotation is Laken are devoted to 
the accounting framework and its relation to the "super- 
structure" of Keynesian economic theory within which it 
can be placed. ^^ The general acceptance of this approach 
can be traced to the v/ork of several economists (notably, 
J. R. N. Stone and J. R. Hicks) who, in the 1940 's, drew 
attention to the possibility of presenting in this form 
quantitative data for macro-economic studies. At the same 
time, a didactic purpose can be discerned: 

. . . the chapters on definitions, v/hich formed so 
indigestible a portion of the old text-books, hcive been 
kindled into life by the work of economic statisticians/ 
and also by some of the nev/er developments of economic 
theory. They have grown into a distinct branch of 
economics ^ a branch which is being pursued with very 
special success at the present time, and which is. 

- 32 - 

nevertheless, particularly suited to serve as an 
introduction to the science in general. If v/e want 
a name for it, it raight be described as Social Account- 
ing, for it is nothing else but the accounting of the 
whole coiraaunity or nation, just as Private Accounting 
is the accounting of the individual firm.^° 

The accounting approach to macro-economics is not 
an entirely nev; departure, having also been attempted by 
the P?iysiocrats in the 18th century; Mattessich has demon- 
strated the Tableau Eaonomique as a rudimentary system of 
national income accounts."^ Studenski identified 50 national 
income estimates for Britain and France down to the end of 
the 19th century , ^ ^ and a nurriber of other European countries, 
as well as the U.S.A. and Australia, experimented in this 
field prior to the 1930 's. Several factors combined to 
concentrate achievements in economic dccounting, one of 
which is certainly the writings or Irving Fisher, which 
will be discussed later. Much theoretical worK v;as done 
in the 1920 's, notably in the U.S.S.R., which established 
national budgets and centralized accounting control after 
the 1917 Revolution. The great increase in the size and 
scope of government activity after 190 led the countries 
mentioned to collect statistics which had not previously 
been available, and the extreme economic fluctuations which 
accompanied World War I, the boom of the lS20's and the 
Great Depression, focussed attention on the need for data 
to support economic forecasting. It is nctev;orthy that, 
in reply to criticisms raised by Ku::net3 , a group of 

~ 33 - 

economists and statisticians who had been involved in the 
formulation of the U.S. scheme of national inconie accounting 
placed emphasis on the analytical, definitional, pedagogical 
and statistical benefits to be derived from collecting this 
data in the form of a system of acr-ounts . ^ " The objectives 
of prediction, planning and control underlie these technical 
considerations; at least V7e can assert with some confidence 
that the stewardship concept is not much use in this instance, 
since it is impossible to determine v/ho is answerable to 
whom for the custody and administration of the national 
income . 

The use of accounts for planning purposes is not a 
new feature of governm>ont ; it is frequently forgotten that 
businesses took the practice of budgeting from the public 
sector. Accounting" for public fujidis v;as known in the 
kingdoms of the Nile and the tem.ples of ancient Greece; 
one of the fascinating byways of European history reveals 
the English, Norman and Flemish rulers using accounts in 
the process of converting their tax systems from a commodity 
to a money basis. Public finance theorists have long used 
government accounts in their empirical studies; we shall 
consider the limitations of this source in Chapter V. We 
may also note here that the mainstream of ideas in modern 
public finance can be traced to Sweden, whose King operated 
a double-entj-y budgeting system on the accrual basis for 

- 34 - 

the state treasury from 1623 onward-''* Enthoven makes 
reference to the fact that Simon Stevin's interest j.n ac- 
counts was stimulated by the efforts of the Dutch princes 
of the 15th and 16th centuries to improve the techniques of 
public administration.'^ 

Interest in accounting as evidence for a positive 
theory of public finance has grown with the availability 
of national income accounting miodels ; public finance 
theorists are also concerned with the problems of planning 
and control: "As the economic functions of government 
expand, the technical aspects of finance, of public ac- 
counting and of the control of expenditure,, assume a new 
importance. " ^ ^ Pryor has re.-rently attempted to formulate 
a positive theory of public finance based on empirical 
evidence as well as intuitive ideology.^' 

Kurihara, in sununarizing bhe economic developments 
leading to Keynes' General Theory, provides further clues 
for the incipient rediscovery of accounting, although we 
do not agree with his reasoning. ^^ 


1. Industrialization and 
urbanization in gener- 
al and mass production 
in particular. 

Our Comments 

The growth of capital-intensive 
firms and credit institutions 
destroyed the nexus between re- 
ceipts and income, payments and 
expenditure, thus increasing 
the need to develop dynamic 
models of the economv . 

- 35 


The increasing public 
sectors of the econo- 
my and the welling 
importance of the role 
of government finance 
for stability and 

The growing complex- 
ity and multiplicity 
of the phenomena af- 
fecting modern eco- 
nomic life require 
more and more over- 
all information. 

The Great Depression 
of the thirties . 

Our CoFiments 

But the emergence of a large 
nonmarket sector argues against 
the development of dynamic mod- 
els based on neo-classical 
price theory. 

This argument works against 
dependence on intuitive sira- 
plifications and places great 
emphasis on analytical obser- 
vations . 

But this and other 'similar ob- 
servations draw attention to 
the need to incorporate expec- 
tations in planning and con- 
trol models. 

Mi- aro-saoncm i. c s 

In spite of the evident interest of early economists 
in business practices and accounting data, classical and 
neo-classical economists have tended to ignore accounting 
methodology. This drew the strictures of Irving Fisher, 
and Schum.peter regretted that the consequence has been that 
economists have had to discover painfully phenomena they 
could easily have observed from business sources. Marshall 
was obviously familiar with these sources, so much so that 
Hansen referred derogatorily to his work as "cost accounting. 
The references to I;!ar shall relate to the calculation of cost; 
Erich Schneider sumraarizes this approach by saying; "By 
the costs of a particular output we understand the money 

■; 3 9 

- 36 - 

value of the quantities of means of production necessary 
for producing and selling this amount of goods . . . (the 
problems of valuation which arise belong to the field of 
business administration. ""* ° There seems to be no dispute 
concerning the relevance of accounting methodology to the 
cost aspect of price theory. 

More recently, the interest of economists in 
accounting at the level of the firm has become marked, 
notably as a result of Fisher's seminal work . '* ^ We are 
of the opinion that Fisher's knowledge of accounting was 
not sufficiently extensive to carry the load which subse- 
quent theorists have attempted to make it bear, but there 
can be no question of the importance of his contribution 
to capital theory, or its influence on eccnomic and 
a&counting theories. Indeed, Fisher's definitions and 
assumptions have been largely incorporated into present- 
day national income accounting,'*^ where they wreak incal- 
culable harm.'*" Tlie influence on accounting theory v/as 
transmitted through Fisher's pupil. Canning, whose v^7crk is 
an attempt to evaluate accounting in the light of Fisher ian 
concepts of capital and income.'*'* 

Two developments can be identified as flov/ing from 
this re.'^^ival of interest in accounting. The first, which 
can also be tx'aced to Wicksell,^^ is the attempt to base 

- 37 - 

economic decisions on accounting models, such as the 
"cost/benefit" approach to governnient taxation and pub- 
lic expenditure. In Wicksell's terminology, "cost" and 
"benefit" bear the same relationship to one another as 
"cost" and "revenue" in the profit and loss account of 
the firm. In the field of micro-economics, discontent 
with the marginal approach to price theory has led some 
economists to consider "average cost pricing,." which uses 
the profit and loss account model of the firm for explain- 
ing price formation; most of the work in this field has 
been done by questionnairG, however, rather than on the 
basis of account information. 

The second of these developments, which is also 
not new, is the use of account inform^ation for empirical 
work in other branches of economics. A good example is 
Krzyzaniak and Musgrave ' s study of corporate income tax 
shifting, which applies statistical techniques to account- 
ing data.''^ The principal use of accounts in this v/ay 
has been in the field of finance, where a considerable 
body of v/ork has accumulated in the U. S. and the U. K. 
during the past thirty years. "^^ 

In spite of this, the usefulness of accounts for 
economic analysis has been challenged by several critical 
economists. We shall discuss Yamey's position in Chapter 
III; here we shall rake Eoulding and Flanders as represen- 
tative. Eoulding'*^ finds economics and accounting concerned 

- 38 

with the same subject matter, but sees thorn as occupying 
different worlds. Scholars from the one field do not 
study the other in any depth, although many economic 
questions have been derived from accounting practices, 
and some ^ccountinrr rnethods have been develo'^ed to ansv:cr 
economic questions. The point of contact, he says, is 
the theory of the firm, where the accountant concentrates 
on net worth changes, i.e., on the measurement of profit, 
or net income. The valuation process v/hich underlies this 
computation must necessarily accommodate uiiknown future 
events, but the economist regards such a task as an impos- 
sible one, so that much of accounting is, to him, ritualis- 
tic, providing assurance rather than answers. Boulding 
looks to information theory and decision theory as possible 
sources from which the integration of accounting and eco- 
nomics may proceed. 

His pessimism is reflected by Flanders in tv/o 
articles which attempt to guide accountancy into the paths 
of economics. In the first of these, ''^ Flanders was reply- 
ing to a professor of accounting who had suggested that 
accountants were wrong to neglect social accounting as a 
field of study; he was prepared to place severe restrictions 
on the relevance of accounting to economic theory. In the 
context of social accounting, a knov7ledge of specific 
economic theories was required for understanding the 

- 39 - 

meaning and uses of a given system of social accounts, and 
a knowledge of "general economic theory" to comprehend the 
relationships between the different systems of social ac- 
counts. The accountant could be no more than bookkeeper? 
he "can tell you what accounting methods and techniques to 
apply" but "must rely on economics to interpret and explain 
the economic significance of the values discovered by the 
accounting process." Interdisciplinary studies could 
arise through the economist's reliance on accountants in 
complex situations v/hich could not even be analyzed with- 
out the kind of data accountants produce. The determination 
of what economi.c values to quantify was "in the realm of 
economic theory . " 

Flanders' views echo those of the outstanding 
American accounting ^:heori3t, A. C. Littleton, v;ho argued 
that the tasks which accountants undertake should be re- 
stricted to the area of business money flows, and Flanders 
quoted with approval Littleton's identification of account- 
ing theory vrith accounting practice. A later article by 
Flanders pursues this argument to the conclusion that 
accountants should adopt the behavioral, equilibrium, and 
restraint relationships used by economic theorists, or 
see their functions increasingly filled by operations 
research men who will combine accounting data and economic 
models.^'' Flanders' logical error is to confuse economics 

- 40 

with price theory, and to assume that accountants do not 

use economic models because they do not use price theory 

models, but his belief that economics is ccncerned v/ith 

human behavior, and accounting with the given results of 

behavior, would find a favorable reception in many quarters, 

His assertion that accounting is "mechanistic," and 

Boulding's view of it as "ritualistic," raise questions 

which must be answered if the theme of this study is to 

be accepted. 

Some accountants have also challenged ttie validity 

of accounting in similar terms. Perhaps the most fluent 

statement of this criticism is that of Mattessich, himself 

an accountant: 

Thus accounting is being criticized for many reasons: 
that it is based on irrelevant historical costs instead 
of opportunity costs; that it provides only a descrip- 
tion of the past, but no prediction of the future; that 
its models consist exclusively of identities but lack 
behavioral functions and do not lend themselves to opti- 
mization procedures; that it ignores psychological fac- 
tors and uses "arbitrary" allocation procedures » . . 
that the balance sheet is not comprehensive enough 
because its inclusion-criterion of measurability is 
too superficial; that the additivity assumption on 
which it operates is illusionary [sic] ; that its 
measures are not accompanied by error estimates, etc . ^ ^ 

Mattessich refutes these accusations on the grounds 

that it would cost more than it would be worth to improve 

accounting methodology in the desired direction, but this 

is surely the weakest of arguments; if the criticisms are 

justified, the cost argument implies that the opportunity 

- 41 ~ 

cost of doing better would be very low indeed. We shall 
attempt to show that all these criticisms stem from a 
misunderstanding of the basic features of accounting, and 
disappear when we accept the idea of accounting as a closed 
system which represents certain aspects of the realities 
of human intercourse, and when we abandon the unnecessary 
assumptions of profit maxim.ization and income (profit) 
determination. In short, v;e sympathize with those who 
are impatient with the shortcomings of accountants, but 
attribute them to human weakness and lack of application, 
rather than to inherent deficiencies of accounting theory. 


1. Gunnar Myrdal, The Potitioal Element in the Development 
of Eoonoinio Theory (Harvard, 1955), p. 154. 

2. Boullet and Serieys have shov/n that double-entry book- 
keeping is simply a special case cf integrated multiple- 
entry bookkeeping. See "Les moyens de traitement 
^l^ctroniques et 1' Evolution des concepts traditionels 
de comptabilite, " Paris, La Revue Francaise de 
Comptahilite (February, 1967) , p. 55. Cost account- 
ing typically involves triple-entry; national incom.e 
accounting, quadruple entry, which becomes sextuple 
entry at times. 

3. R. Mattessich, Accounting and Analytical Methods 

(Homowocd: Richard D. Irv/in, 1964), pp. 26-27. 

4. J. R. Hicks, Capital and Growth (New Yorlc and Oxford, 
1965) , p. 28. 

5. J. A. Schumpeter, History of E-jonomic Analysis (Nev 
York: Oxford University Press, 1954), p- 61. 

6. Ibid. 

7. DR Scott, "The Influence of Statistics upon Accounting 
Techniques and Theory," The Accounting Review, Vol. 24 

(January, 1949), pp. 81-87. 

8. Ibid., pp. 84-35. 

9. M. J. Moroney, Facts from Figures (3d ed . ; London: 
Penguin Books, 1961) , p. 1. 

10 . Jiia. J p. 2 . 

11. C. Gini, "On the Characteristics of Italian Statistics," 
Journal of the Royal Statistical Society, Vol. 12S, 
Part I (1965) , p, 105. 

12. Exam.ples of the use of averages can be found in 
accounting, e.g.. the weighted average cost method 
of pricing materials issued from a stock. 

- 'i^ - 


- 43 -- 

13. Schumpetcr, p. 58, n. 4. 

14. Myrdal, p. 11. 

15. The method is sirailar to that adopted by Knight ii 
his discussions of uncertainty. See Frank H. Knight, 
Risk J Uncei-'tainty and Profit (Nev7 York: Harper 
Torchbooks, 1955), Chs. XI and XII. 

16. R. J. Chambers, Towards a General Theory of Acaounting 

(Adelaide, 1961), p. 5, et. seq. 

17. Myrdal, p. 13. 

18. Henry R. Hatfield, "An Historical Defense of Book-," repr. in VI. T. Baxter (ed.) Studies in 
Acaounting (London: Sweet and Maxwell, 1950), p, 10. 

19. See, for a chronological list of significant dates in 
the history of accounting, George Abs. et al . , "His- 
torical Dates in Accounting," The Aooounting Review ^ 
Vol. 29 (July, 1954), pp. 486-93. See also: A. C, 
Littleton, Acaounting Evolution to 1900, (Nev; York: 
American Institute Publishing Co., 1933); S. Paul 
Garner, Evolution of Cost Accounting to 1925 (Alabama, 
1954), espec. Chs. 1 and 2? Joseph H. VDaemminck, 
Histoires et Doctrines de la Comptabilite , Brussels: 
Eds. de Treurenberg (1956); David Murray, Chapters in 
the History of Bookkeeping , Accountancy and Commercial 
A.vithmetic (Glasgow: Jackson, Vifylie & Co., 1930). 

20. B. S. Yamey, "Scientific Bookkeeping and the Rise of 
Capitalism;" repr. in Studies in Accounting y op. cit . , 
p. 16 . 

21. Werner Sombart, The Quintessence of Capitalism , transl. 
M. Epstein (New York: E. P. Dutton & Co., 1915), p. 309 

22. William H. McNeill, The Rise of the Vest (Chicago, 
1963) , p. 54. 

23. K. Brov7n , A History of Accounting and Accountants 
(Edinburgh: T. C. and E. C. Jack, 1905), p. 16. 

24. Ihid., p. 74. 

- 44 - 

25. Sidney Davidson, Arthur Young Professor of Accounting 
at the University of Chicago, in "Accounting and 
Financial Reporting in the Seventies," The Arthur 
Young Journal (Spring/Summer, 1969). The view 
echoes Knight, pp. 30 3-4. 

26. Supra 3 p. 5. 

27. Myrdal, p. 28. 

28. T. F. Dernburg and D. M. McDougall, Maaro-Eoonomias 
(2d ed.; Nev; York: McGraw-Hill, 1963), p. 2. 

29. See also Gardner Ackley, Maaroeoonomia Theory (New 
York: The Macmillan Co., 1961), Chs . I-IV. 

30. J. R. Hicks, The Social Framework (with A. G. Hart) 
(New York and Oxford, 1945), p. xii. 

31. Op. cit.^ pp. 106-18. 

32. Paul Studenski, The Income of uations (New York, 

33. M. Gilbert, G. Jaszi, E. F. Denison and C. F. Schwartz, 
"Objectives of National Income Measurement: A Reply 

to Professor Kuznets," Revue of Economics and Sta- 
tistiacj Vol. 30 (August, 1948), pp. 179-95. 

34. Per V. A. Hanner, General Ledger of the Kingdom of 
Sweden^ IS 2^ (Stockholm, 1952) . 

35. Adolf J. H. Enthoven, "Finance and Development," 
International Monetary Fund^ Vol. 6, No. 2 (June, 
1969) , pp. 16-23. 

36. Ursula K. Hicks, Public Finance (Cambridge, England, 
1955) , Preface^., p. ix. 

37. Frederic L. Pryor , Public Expenditures in Communist 
and Capitalist Nations (Homewood: Richard D. Irwin, 
Inc., 1958), 

38. Kenneth K. Kurihara, Introduction to Keynesian 
Dvnam.ics (London: Geo. Allen & Unv/in, Ltd., 1964), 
p"! 17. 

- 45 - 

39. Alfred Marshall, Frinaiples of Eaonomias (8th ed.; 
New York: The Macmillan Co., 1948), espec. pp. 360, 
394 and Book V, Ch. VII, Book VI, Ch. VII; also 

p. 406. 

40. Pricing and Equilibrium, transl. Esra Bennathan (New 
York: The Macmillan Co., 1962), p. 79. 

41. Irving Fisher, Tke Nature of Capital and Income (New 
York: The Macmillan Co., 1906). 

42. Ingvar Ohlsson, On National Accounting (Stockholm: 
Konjunkturinstitutet , 1953), p. 48. 

43. See infra, Ch. VI. 

44. John B. Canning, The Economics of Accountancy (New 
York: The Ronald Press Co., 1929). 

45. Knut Wicksell, "A New Principle of Just Taxation," 
transl. J. W= Buchanan, in R. A. Musgrave and A. T. 
Peacock, eds., Classics in the Theory of Public 
Finance (Nev; York: The Macmillan Co., 1958), 

pp. 72-118. 

46. M. Krzyzaniak and R. A. Musgrave, The Shifting of the 
Corporation Iricome Tax (Baltimore, .1963). 

47. In the V. S. , see the National Bureau of Economic 
Research Series, particularly the compilation on 
"Research in the Capital Markets," a supplement to 
The Journal of Finance, Vol. XIX (May, 1964), In 
the U. K. . see the publications of the National 
Institute of Economic and Social Research, Cambridge 
University Press, notably Studies in Company Finance , 
eds. Brian Tew and R. F. Henderson (1959) , and Tibor 
Barna , Investment and Growth Policies in British 
Industrial Firms (1962) . 

48. K. E. Bo'-lding, "Fconnmics and Accounting: The 
Uncongenial Twins." repr. in Studies in Accounting 
Theory, eds. W. T. Baxter and Sidney Davidson 

(Komewocd: Richard D. Irwin, Inc., 1962). 

49. Dwight P. Flanders, "Accounting and Economics: A 
Note with Special Reference to the Teaching of Social 
Accounting," The Accounting Review, Vol. 34 (January, 
195S) , pp.' 68--73. 

- 46 - 

50. Dwight P. Flanders, "Accountancy, Systematized Learning 
and Economics," The Accounting Review f Vol. 36 (Oc- 
tober, 1961), pp. 564-76, espec. p. 576. 

51. Mattessich, p. 414. 


We have stated that accounting is in the first place 
a conceptual framework useful for planning economic activ- 
ities, and that its control function is derived froFi its 
planning function. A similar proposition, or set of pro- 
positions, was formulated by Sombart, whose erudition in 
this field has not been challenged.'^ We shall outline 
Sombart 's position, and Yamey ' s criticisms of it, and show 
how V7e differ from both Sombart and Yamey in our interpre- 
tation of the evidence which they adduce, and on which v/e 
also rely in great measure. 

The Epstein translation was originally published 
in German in 1313, under the title VeT Bour-geois , and the 
brief comments on accounting contained in that early work 
were subsequently expanded and more fully documented by 
Sombart, in a work which does not appear to have received 
translation into English.^ Because of the significance of 
the relevant passages of the later work for the ideas devel- 
oped in this chapter, v7e have prepared a fairly complete 
translation of Sombart 's comments on accounting and the 
gro'vvth of scientific business management, v/liich v/ill be 
found at the end of this study. 

- 47 - 

- 48 - 

Sombavt and the Rise of Capitalii 


The Origins of Capitaltsm 

Sombart attempts to trace several causal factors 

which led eventually to the emergence of a capitalist 

civilization. He defines capitalism thus: 

By "capitalism" we mean a particular economic system, 
recognizable as an organization of trade, consisting 
invariably of two collaborating sections of population, 
the owners of the means of production, who also manage 
them, and propertyless workers, bound to the markets 
which they serve; v/hich displays the two dominant prin- 
ciples of Vv'ealth creation and economic rationalism. - 

The essential features are the profit motive and 
rationality; an exchange economy, in which the m^aterial 
requirements of several trades are satisfied by free ex- 
change? of equivalent goods or money, may be either arti- 
sanal or capitalistic.'* 

Sombart takes as his point of departure a precapi- 
talistic feudal society in early medieval Europe, when a 
sufficiency for existence was the goal of He 
then poses the question: by what means was society trans- 
formed into a different one, in which the profit motive 
replaced the satisfaction of basic wants as man's main 
driving force? 

The spirit of enterprise manifests itself in per- 
sonalities like the "freebooter," the "speculator" and 
the "projector," who rely on robbery of economic surpluses 

- 49 

created by others to form the capital necessary for their 
undertakings. Such ra^n can be found throughout history, 
but the qualities of the bourgeois capitalist are not so 
common; they include an organizing ability, a facility 
for rapid calculation, and the art of planning outl£\ys.^ 
What turns the craftsmari into a manufacturer? In two 
words, he must be able to calculate and to save.^ Sornbart 
sees the transition as a function of mental or spiritual 
changes which resulted in man ceasing to see himself as 
the center of his universe, and replacing himself with the 
institutions and material objects of a capitalistic society. 
This change in attitudes was dependent upon, if not actually 
caused by, the m-ensuration process. 

Thought in economic activities, then becomes more 
definite and conscious, in other words, more rational, 
and modern technical science has tended to make it so. 
^ But it has also helped to make it more exact and punc- 
tual, by providing the necessary machinery for meas- 
uring time. 

Clocks have played a very important part in the 
mental history of the business man. Pendulum clocks 
are said to have been invented in the 10th century, 
while the first clock worked by wheels vias that made 
by Heinrich von Wick, in Paris in 1364, for King 
Charles V. . . . Now, the exact measurement of time 
became possible only when the necessary instruments 
were available, just as the exact calculations in 
terms of money became possible only when technical 
progress was able to provide a reliable currency.^ 

The two elements are combined succinctly in 
Benjamin Franklin's dictum: Time is money. 

The ability to calculate can create wealth when 
combined with the requisite institution: The capitalistic 


enterprise. In Der Plodevne Kapitalismus Sombart describes 
the special .features of this institution: "... the 
complete independence of the business, raising an inde- 
pendent economic organization above the individual economic 
men involved in it; the combination of all concurrent and 
successive business operations into a conceptual entity 
which then appears as the performer of the individual 
economic actions, and leads a life of its own extending 
beyond the lives of the persons concerned."® 

Such entities had existed previously, but always 
tied to a named group of partners, family, villagers. The 
new concept of "the business" effectively separated the 
economic relations from the persons; property rights were 
depersonalized, permitting "it" to pursue profit without 
regard to any other goals. 

Three causal factors contributed to the independence 
of the capitalistic enterprise: 

1. The law "Firma" (the firm) 

2. Business management leading "Ratio" (the account) 

techniques to 

3. The market "Ditta" (credit) 

That is to say, the business could be viewed as a 
legal entity, an accounting entity and a credit entity. We 
are concerned here with the business as accounting entity. 

- 51 - 

The Business as Accounting Entiby 

The invention of accounting was vital to the 
development of the capitalistic enterprise. In particular, 
double-entry bookkeeping permitted the full representation 
of the flow of capital through a business: "... from 
the capital account to the transaction accounts through 
the profit and loss account and back into the capital ac- 
count. " 

This facilitated concentration on the idea of 
creating wealth; the "wealth producing sum" or anount in- 
vested for the purpose of obtaining profits was separated 
from all want-satisfaction objectives of the persons in- 
volved. In double-entry bookkecpinc there v/as only one 
objective: the increase of a sura of money. 

The concept of "capital" could only be formulated 
under these conditions; prior 1:0 double-entry bookkeeping 
there was no "capital"; thus, capital could be defined as 
the property of v/ealth represented in a double-entry system. 
of accounts . Double-entry bookkeeping also led directly 
to the principle of economic rationality- Since the book- 
keeper recognized no economic processes outside the books 
of account, and nothing could be recorded in these unless 
it v/as capable of expression in monetary terms, production 
and consumption could be reduced tc calculation. 

Economic rationality went hand in hand with 

planning and control; the accounting system permiitted the 

52 - 

analysis of business operations and the establishment of 
plans for their progressive and systematic improvement. 
In this way did the invention of double-entry bookkeeping- 
create the necessary conditions for the essential principles 
of capitalism to develop. FurLher, it created tlie concep- 
tual framework which was required in order to grasp the 
nature of a capitalistic economy, by means of concepts 
such as the classification of assets into fixed and circu- 
lating, the ascertainment of costs of production, and so 
on. The scientific equipment of economic theory, insofar 
as it related to captialist economies, was taken from 
double-entry bookkeeping.^" 

Finally, since the separation of the business from 
its owners was a necessary feature of the capitalistic 
enterprise, systematic bookkeeping gave material aid to 
the creation of the capitalistic enterprise. The business 
replaced the entrepreneur; the firm, represented by its 
capital, appeared as an accounting entity and the person 
of the entrepreneur was clearly shov/n to be a separate 
entity, more like a creditor than an owner. 

Sombart does not claim to produce evidence that 
this theoretical argument can be empirically verified; 
indeed, he complains on several occasions of the paucity 
of historical materials available to him. He does claim 
to be able to see the slow development of double-entry 

53 - 

bookkeeping taking place side by side V7ith the growth of 
juridical concepts of the firm as a separate entity, and 
that these changes coincided with what he terms "the period 
of early capitalism"'; he also refers to parallel develop- 
ments in a number of European countries as evidence of a 
tendency. Further, the rise of capitalism took place 
unevenly, so that artisanal and other precapitalistic 
features can be discerned in the business enterprises of 
the period. The organized and systematized business man- 
agement which accounting made possible is perhaps an ideal 
type, represented by only a fev; outstanding examples, while 
the majority of businesses remained .rooted in traditional 
inefficiencies; nevertheless, he concludes with conviction 
that, starting in Ibaly in z.he 14th century, new principles 
of business management were adopted, and their applicc.ticn 
depended upon accounting systems based on double-entry 
bookkeeping . 

Yamsy and the Sombart Propositions 

Son\bart's work has been assimilated into the 
mainstream of economic history and his view of the nature 
and origins of double-entry bookkeeping into accounting 
theory.'''^ However, in two papers published at an interval 
of fourteen years, Yamey has expressed criticism of what 
he calls "the Sombart propositions" relating to the 
connection between double-entry bookkeeping and the ris.9 
of capitalism.*^ 

- 54 - 

In the first of these papers , Yamey denies that 
the management objectives identified by Sombart — clarity 
of contractual relationships, economy of expenditures — can 
be pursued only through double-entry bookkeeping; he sug- 
gests that single-entry will do as well. As to the origins 
of the former, while he harbors some confidence in the 
asseirtion that double-entry bookkeeping had its origins in 
medieval Italy, he says: "But in the nature of things we 
are on less sure ground when trying to explain the process 
whereby earlier collections of incomplete and unorganized 
commercial accounting records become transformed into a 
systematized and simple yet elegant arrangement of inter- 
locking accounts . " 

He puts forward four possible hypotheses, viz., 

1. The single inventor 

2. The spirit of the Renaissance 

3. The result of chance or accidental influence 

4. The necessary outcom.e of a purposive evolution 
Yamey is unwilling to subscribe to any of these; 

while he is prepared to see some utility in accounts, he 
finds that evidence of how they V7ere used is missing. In 
his view, "narrow" bookkeeping purposes predominated,, in- 
volving comprehensive and orderly records of past trans- 
actions, and checks on accuracy and completeness. Financial 
statements of profit and loss or of capital, assets and 
liabilities were relatively unimportant. 

- DD 

In the second paper Yamey addresses himself again 
to the refutation of the SoK'ibart propositions that book- 
keeping aided the rise of capitalism and that double-entry 
bookkeeping made possible the separation of the business 
fx'Om its ov/ners. Ke eAaxuines " . ., , the simple question 
provoked by the thesis, namely, the contribution of double- 
entry accounting to the solution of problems in business 
organization and adm.inistration . " He would shov; that the 
contribution v/as small, and "not made by those features 
of the system or in solving those business problems par- 
ticularly emphasized by Sombart ... I also suggest, 
incidentally, that in the context of the solution of 
business problems, double-entry bookkeeping v;as not greatly 
superior to less elaborate methods of accounting." 

Yamey expresses the strange viev; (strange, that is, 
for an economist) that abstraction may lead to less suc- 
cessful decision- making, since the decision-maker "... 
would have had to view the complexities and detail of 
reality through the drastically simplifying and possibly 
distorting screen of his accounts." He finds little or 
no evidence that accounts were used in the decision proc- 
esses of 17th and 18th century entrepreneurs whose books 
of account he has examined, and, indeed, would be surprised 
to find any, since "steps in the dark" ].ie at the heart of 

- 56 

capitalistic entrepreneur ship. "Thus, when the businessman 
expresses himself most emphatically as entrepreneur he is 
necessarily without benefit of accounting records pertaining 
to past events and experiences." "Insofar as the early 
centuries of capitalism can be described as a period of 
dynamic change from a static base— —itself a dangerous sim- 
plification — -one would have to discount heavily the con- 
tribution made by systematic accounting or accounting 
calculation. " 

He also draws upon the evidence provided by the 
accounts of partnerships and joint stock companies to show 
that the business could be, and was, treated as distinct 
from its proprietors even in the absence of a double-entry 
bookkeeping system complete v/ith capital and profit and loss 

Yamey commences his paper with the statement that 
"Sombart's work gave prominence and prestige to the humble 
art of accounting by ascribing to it wide economic signif- 
icance." He concludes that "In the achievement of other 
aspects of successful enterprise . . . accounting records 
and accounting systems have only a humble, but nevertheless 
interesting, contribution to make." 

In taking a position on these arg\im.ents we shall 
concentrate on the later paper. It will be apparent from 
Chapter II that we agree generally with Yam.ey ' s criticism 

- 57 - 

of the Sombart propositions , particularly insofar as we 
see no special significance in double-entry bookkeeping 
other than that it permits accounting functions to be 
performed efficiently. 

It is undoubtedly true that the mechanics of 
double-entry bookkeeping cannot be observed before the 
14th century, but we may remark that, when observed, the 
system is so v'ell formed that it is unlikely to have been 
a new invention. The accounts of Pope Nicholas for the 
year 1279-80 and the expenditure book of Florence for the 
year 1303 are fairly complex examples of simple bookkeeping, 
but the books of the City of Genoa for 1340 display a 
double-entry structure v/hich ruast hav3 been long in the 
making. In this respect we tend to agree wj. ch Sombart 
that the m.ethod must have been "... well establ^.shed 
for a long time."^^ 

Nevertheless, Yamey ' s claim that single-entry 
will do as m.uch reveals that he has overlooked Sombart 's 
remark, admittedly expressed in a bibliographical note, 
that Pacioli's double-entry did not grow out of single- 
entry bookkeeping, the latter being a "crippled" version 
of the former, and of later date . ^ "* Business accounts of 
the early Middle Ages were quite different in form.; Sombart , 
calls them "sparse and confused" collections of notes. 

- 58 - 

This point acquires some significance in relation to the 

arguments of the second paper. 

They begin with this statement: 

knov/ledge of the total profit of an enterprise for a 
period, either absolutely or in relation to the amount 
of capital in the, is rarely necessary or 
useful for business decision-making within that enter- 
prise. In a continuing enterprise, knov/ledge of the 
total or aggregated profitability or rate of return on 
capital is not relevant to current decisions which 
are concerned with changes in the use of part of the 
resources at the firm's disposal, and these, in turn, 
are related to the expected profitability of the various 
separable activities constituting the firm's total 
activity and of other activities under consideration.^" 

There is obviously a valuation problem here; if the 
immediate past use of capital is a continuing alternative, 
the past rate of return constitutes the opportunity cost 
of capital and is a necessary element of a decision model. 
Generally speaking, one cannot change direction rationally 
without knovring where one happens to be, and the relevance 
for the future of the profit of past periods is a question 
of fact in each case. Perhaps the view of the entrepreneur 
as Janus is obscured by a tendency to read "year" for 
"period," a natural result of the preoccupation v^ith 
financial journalism to which v/e have drawn attention; a 
declining trend of weekly profits v;ould certainly not be 
irrelevant to a baker cr brewer. 

We must agree v;ith Yamey's statement (p. 120) that 
calculations of profit or of total capital can be made 

- ^Q - 

independently of a system of double-entry bookkeeping, since 
"profit" and "capital" may be defined in such a. way that it 
must be true. The proprietor of a "small business" (such as 
Marshall's locksmith employing thirty hands, or a motel with 
twenty rooms) may be able to accum.ulate data under his hat, 
but the emergence of a hierarchical structure in a business 
automatically separates the entrepreneur from the source of 
his data, and renders formal record-keeping obligatory. 
Double-entry bookkeeping, in our view, is simply an effi- 
cient and widely-accepted method of doing this, in both sim- 
ple and complex business situations. 

We must also consider the possibility that the 
single-entry bookkeeping systems referred to by Yam.ey v^ere 
in fact truncated double-entry systems like the one popular- 
ized in the 18th century by the indefatigable Jones of 
Bristol. The use of aggregates is common to both single- 
and double-entry bookkeeping, and it. is not essential in 
the latter system for each individual entry to be made twice, 
once on each side of an account. The basic equation of 
double-entry bookkeeping 

Assets = Liabilities + Proprietors' Capital 
leaves to the individual accountant the task of determining 
how these aggregates are to be derived; the number of pos- 
sible solutions to this problem is infinite. As long as a 

- 60 - 

balance sheet and profit and loss account dovetail into one 
another through the profit (or loss) figure, the equation 
can be established. It is fairly coimicn to find double- 
entry accounts which have not been formally completed by 
writing up a balance sheet and profit and loss account in 
the ledger, although the continental European tradition 
would see such a deficiency as more grave than it appears 
in the U. S. A. or in Britain. In such systems, these ac- 
counts can be seen as loose-leaf parts and are no different 
in kind from the loose-leaf sales account (composed of cop- 
ies of the sales invoices) or the somev;hat bizarre bits and 
pieces of an electronic data processing accounting routine. 
Yamey himself refers to the possibility that these incom- 
plete, or single-entry, systems were completed in an infor- 
mal manner, one less likely to leave traces than the bound 
books w^hich contained the transaction accounts. 

Further, Yamey admits that ". . .it is generally 
impossible to deduce from the records (or textbook discus- 
sions) precisely what was intended or achieved by the pro- 
cedures in question." ^° We may therefore conclxide that the 
way is still open to the acceptance of the Sombart hypoth- 
esis, that double-entry bookkeeping assisted the rise of 
capitalism by providing the capitalist with a pov/erful 
instrument for the management of a business.'^ 

- 61 

The assertion that double-entry bookkeeping was not 
a necessary condition for the separation of finance from 
production, which occurred during this period of early cap- 
italisra, is also debatable. It will be appreciated that 
the only accounts affected by the ownership of a firm are 
those relating to capital and profit. The only way in which 
accounting could have aided the creation of independent 
enterprises, therefore, is by techniques of accounting for 
capital and profit. If such accounts were not made up, as 
Yamey suggests, then his assertion is obviously true. Again, 
where the enterprise was not separate from its proprietor, 
as in the cases he mentions , these accounts would not have 
been called upon to perform any special function. 

Early form.s of corporate enterprise were of a 
temporary or "joint venture" kind. Trading operations, 
consisting very often of voyages by land or on sea, were 
treated as separate cycles, and on their conclusion the as- 
sets of the venture were divided among the participants in 
proportion to their investments. The dividend liquidated 
the firm>. Maintenance of capital and m.easurement of profit 
were of little significance to plural owners of this kind, 
although highly important to owners of banks and factories, 
as the accounts of the Medici, Datini. Fuggers and others 
demonstrate clearly. 

With the growth of continuing businesses, however, 
such as the chartered companies in Britain, the problem of 

- 62 - 

separate personae of owners and managers manifested itself. 
The maintenance of the firm's capital could no longer be 
the direct responsibility of the individual proprietor, and 
he came to rely more and more upon a balance sheet presen- 
tation to satisfy him on the condition of his investment. 
More important than this, however, and resulting from the 
fact of a changing body of shareholders, the profit and loss 
account begins to take on a different function from the one 
mentioned by Yamey, of reviewing overall business results 
(p. 119) . It becomes necessary to ascertain "a" profit 
figure in order to treat equitably successive groups of 
shareholders. The profit of the firm is a jointly owned 
residue and must be apportioned between periods, a feature 
which underlies all problems of profit measuren'.ent. 

The point Yamey makes is that some 17th and 18th 
century companies whose records have survived did not keep 
capital and profit and loss accounts, and therefore that 
these accounts cannot have been necessary for the separation 
of the business from its owners. We find the evidence in- 
conclusive- for reasons already given; on the other hand, 
we cannot envisage the continuance of such a separation for 
any length of time without a necessity to render account 
making itself felt. The spectacle of a succession of Brit-* 
ish companies acts in the 19th century, each of which placed 
great importance on financial reporting and auditing, and 

- 63 - 

the fact that this was done in order to protect financial 
investors in companies, is highly suggestive, to say the 

It is only fair to point out that in his 
"Introduction" to Studies in the Histopy of Accounting'^ ^ 
Yamey took some pains to emphasize that he was concerned 
only with criticizing the tendency to exaggerate the econom- 
ic significance of double-entry bookkeeping, rather than 
accounting generally. 

The Sombart Hypothesis brought Up-to-date 

Sombart 's Assumptions Criticized 

Although we have failed to find much substance in 
Yamey 's detaj.led criticisms of "the SomJoart propositions/' 
we do not accept Sombart 's views as they stand, and soms 
distance separates our thesis from his. It will be found, 
however, that this separation does not lead to conclusions 
which are diametrically opposed. 

Sombart was undistinguished as a forecaster. 
Writing shortly before World War I he predicted an end to 
large-scale wars, a declining world population and the im- 
pending disappearance of capitalism. Besides a defective 
telescopic vision, however, he also displayed attenuated 
historical perspective, attributable in some measure to the 
paucitv of source material then at his disDosal. Another 

- €4 

reason for his failure V7as methodological; in the preface to 
the second edition of his work on the rise of capitalisra, he 
confessed to a tendency not always to distinguish clearly 
between the empirical and the theoretical, a trait which had 
been brought to his attention, in the friendliest manner, by 
Max Weber. 

On the other hand, we cannot ignore his great 
contribution to the subject which is the field covered by 
this study. In the first place, Sombart was one of the 
first modern socio-economic theorists, attempting to vzeave 
together threads from several disciplines in order to create 
his tapestry of the origins of modern capitalism. Secondly, 
and with one exception which will be noted later, he care- 
fully examined all the source th-^n available to 
him, and did not hesitate ro draw conclusions from cliem even 
if these contradicted the conventional wisdovi of his time. 
Thirdly, the manner in which he integrated his knov/ledge of 
accounting into his socio-economic framework is far more 
sophisticated than any other attempt which has been made to 
combine accounting with economics for purposes of evaluation, 
and eventually, prediction. One can only speculate on the 
progress of social accounting if Fisher, Hicks or Stone had 
possessed a comparable grasp of accounting theory. Finally, 
as we have mentioned several times, his propositions lie 

65 - 

close to the central postulate of the present study and have 
probably contributed to its formulation. 

It is significant, however, that Sombart made no 
mention of Niebuhr ' s claim to have discovered, in the Vati- 
can fragments of the oration Pro Fonteic , evidence that the 
Roman quaestor-s used double-entry bookkeeping, invention of 
which could not, therefore, be attributed to the Lombards. ■^^ 
This claim has been denied by other historians^" but refu- 
tation had not been made when Sombart wrote ; en the other 
hand, it is hard to believe that he, with his great erudition, 
was unaware of the contents of Kiebuhr ' s German language 
masterpiece, particularly since it was over one hundred years 
old at the tim.e he wrote Lev Modcrne Kapitalismiis . The evi- 
dence v.Tould , of course, have been fatal to his thesis that 
double-entry bookkeeping was a creation of the pericd of 
early capitalism, although it might net iiave destroyed the 
validity of his v;ider propositions. Interestingly enough, 
de Ste. Croix in his lengthy treatise arguing against the 
view that double-entry bookkeeping v;as known to the Greeks 
or Romans, makes only one brief reference to Fro Fonteio , in 
another connection altogether. 

How, then, do we differ from Sombart? Like him we 
have chosen a tribological" ^ approach to cur subject matter, 
but during the intervening sixty years his appeals for 

66 - 

additional historical materials have been answered in large 
measure. Not only have accounting historians such as Melis, 
de Roover, Yamey and Moininen contributed to our knowledge of 
this field, but also archaeologists (Woolley) , antiquaries 
(de Ste. Croix, Elizabeth Grier) , students of the adminis- 
tration of medieval manors (Hudson) and of Roman Law 
(Jolowicz, de Zulueta) . We may also refer here to 
Schum^jeter ' s important contribution of a theory of economic 
development ^^ and to the many investigators of the history 
of scientific thought, who have taught us to be x>7ary of the 
very idea of "invention," As a result of tbese researchers' 
efforts we can no longer see the rise of capitalism in the 
same historical light. 

Mandeville, in his Fabls of the Btjea^ oy Privc.te 
VlasSj Pukliak Bene fits j pointed out that the prosperity of 
a nation depends upon the acquisitive efforts of its citi- 
zens, and ultimately on such immoral qualities as ambition 
and a desire for power and luxury. The social problem is, 
and always has been, to reconcile this with justice, chari.ty 
and equality. The Roman triumvirate of Pompey, Crassus and 
Caesar, taking for themselves the spoils of the Mirhridatic 
War, may be classed as speculators, or even as robbers, but 
the Roman colonists who settled Africa were as strongly mo- 
tivated to create wealth and by economic rationality as any 

- 67 

late medieval capitalist. The history of Carthage shows 
that, prior to its destruction, large-scale manufacture of 
furniture, beds, mattresses and pillows was undertaken for 
the Roman market, and problems of organization and manage- 
ment no doubt arose. Although we can never be certain, from 
the evidence now available to us it would appear that the 
capitalist-entrepreneur has been known at all periods of 
human history. Those socio-economic studies (Huberman's 
Man's Worldly Goods is another example) which start with the 
concept of a medieval precapitalistic society, ignore the 
fact that there v/ere earlier periods v/hen a "sufficiency^ for 
existence" v;as not the goal of everyman, ages when the domi- 
nant sectors of society pursued the aim of increased wealth 
through production and distribution by m.eans of trade, 
rather than through robbery and speculation. 

Nor can we accept Sombart's psychological assumption 
that man occupied the central place in human thought in pre- 
capitalist times, but was ousted by institutions and m.ate- 
rial things in the period of early capitalism. It was in 
this latter period, after all, that Pope wrote: "An honest 
man's the noblest work of God"^^ and echoed Charron's dictum: 
"The proper Science and Subject for Man's Contemplation is 
Man himself."^'* Although Maine's view of history as a move-* 
ment from status to contract no longer seem.s irreversible. 

68 - 

the statement still rings true of the period under 
consideration, and it was not until the 20th century that 
Sweeney replaced Samson agonistes . 

The humanitarian social initiatives of the 19th 
century would have been unthinkable in the 11th or 12th, 
but we are not on that account entitled to conclude that 
people then were somehow different, emotionally or psycho- 
logically. We must assume from the great mass of historical 
evidence that, in respect of all relevant characteristics, 
human beings have not changed during the past thousand years, 

The spirit of ursdertaking , Sorabart points out, 
combines the qualities of the conqueror, the organizer and 
the trader: "... he must by peaceful means influence 
masses of people v/hom he does not know so to shape their 
conduct that he will derive benefits from it."^^ Sombart 
connects the freebooter with the birth of capitalism, but 
the freebooter was primarily a species of robber, not. one 
who operates by peaceful m.eans. Consider also Sombart 's 
view of speculation as the noncalculatory approach to busi- 
ness, the attempt to participate in an "inherent and 
tative" manner in processes which are essentially quantita- 
tive and rational.^" We rather see speculation at one 
extreme in the spectrum of calculatory activities, lying 
imn\ediately beside games of chance, which are easily 
accommodated in the calculus of probabilities. 


He quotes v/ith approval Heine's words in English 
Fragments (1828) , Chapter iv: "Were it possible for the 
Irish by a sudden aoup de main to attain to the enjoyment of 
wealth they would seize upon it with alacrity. But ask them 
to get rich slowly by cultivating double-entry, sitting over 
miserable accounts until they are round-shouldered, and they 
cannot do it." Wlien the time came for the Irish to choose, 
they in fact chose the Sweepstake, an activity almost en- 
tirely carried out by "sitting over miserable accounts." 

Finally, we reject Sombart's assun'iption that the 
concept of capital resulted solely fj'cm the abstraction of a 
process of wealth creation (profit) , since it is clear that 
"capital" was ascertainable separately from market trans- 
actions involving the purchase cr sale of a business, or a 
share in one. As we have already attempted to make clear, 
this rationalization of Sombart's hangs together with his 
assumption that systematic accounting and double-entry book- 
keeping are the same, and we do not subscribe to this view- 
An Mtsvnati-oe Hypothesis 

We shall pose two historical questions: 

1. How does a Lebanese money-changer become an 
international banker, or an lovra farm boy con- 
struct an enterprise big enough to put the world 
on wheels? 

2. Why are occurences of this phenomenon increasingly 
apparent in Europe, starting with Italy in the 

- 70 

14th century and culminating in the great 
entrepreneurial explosion of the 20th century? 

Only by keeping these two questions separate are we 
likely to throw light on the subject of our debate. 

In Sombart's view, "projectors" such as Tonti , 
Caratto and Cagliostro turn into "promoters" of the order 
of a Law, de Lesseps, Rockefeller or Mond , through the in- 
vention of a conceptual framework which permits them to dis- 
criminate between ideas for wealth of the order of fantasies, 
and profitable plans which are capable of execution. This 
conceptual framework is a combination of double-entry book- 
keeping and commercial arithmetic. we subscribe to a similar 
hypothesis except that we attribute its origins to m.ultiple 
causes and a much earlier period in time; we do not regard 
the assumption that the plans must be profitable to be a 
necessary one; and we view accounting as a self-contained 
conceptual fram.ework different from., although clearly re- 
lated to^ the models of commercial arithmetic. 

We assume that the human mind seeks certainty and 
creates rationalizations in order to displace the unbearable 
idea of a purely stochastic environment.^' All conceptual 
frameworks are designed to this end; prediction, planning and 
control are the essence cf rationalism and by their means v;e 
liberate ourselves from the tyranny of birth, copulation and 
death. This desire for a certainty of the mind is often 

- 71 - 

aggravated by religious, political and social upheavals, so 
that the individual, robbed of one haven, seeks refuge in 
another. Son\bart relates the observation that the U. S. A. 
represents the apogee of economic rationality to the up- 
rooting of its iirimigrants , and the strangeness of their 
environment . 

We would replace the Sombartian hypothesis of profit 
motivation with the Keynesian view that: ". . . it is prob- 
able that the actual average results of investments , even 
during periods of progress and prosperity, have disappointed 
the hopes which prompted them. ... If human nature felt no 
temptation to take a chance, no satisfaction (profit apart) 
in constructing a factory, a railway, 5 mine or a farm, there 
might not be much investment merely as a result of cold cal- 
culation. "^ ' 

The desire to create a capitalistic enterprise 
arises out of a desire to bring goods and services to those 
who do not now enjoy them, and the basic problem faced by 
the entrepreneur is hov; to finance his enterprise, that is, 
how to acquire capital in order to bridge the time gap be- 
tween investment, or the allocation of scarce resources for 
production, and realization, or the receipt of payment in 
some forra from the market to be served. The creation of 
wealth and the recognition of profit are separate phenomena. 


altViough related; Bohm-Bawerk first pointed out that lapse 
of time in the production process was one of the factors 
perraitting profit to arise, and Knight confirmed this obser- 
vation: "Profit arises out of the inherent, absolute unpre- 

r) 1 r'-f-pi V-v 1 1 T -I . r f-\f- ■)- V« -i' r-, /~r ^ ^n +- ^ -P 4-U „ ^^ „ V — T J- ^ j: - .. I i 1, _ i 

the results of human activity cannot be anticipated and then 
only in so far as even a probability calculation in regai-d 
to them is impossible and meaningless."^^ 

If the entrepreneur does not face this critical 
financing problem, he may select whatever conceptual frame- 
work seems to him appropriate; not having any necessity to 
communicate his plaiis to others he may formulate them in 
any way he chooses. Business history is full of examples 
of achievers ^^7ho failed at the moment when it was necessary 
for them to exteriorize their systems. The historical nov- 
elist, Zoe Oldenburg, describes a feudal lord planning to 
build a road through his estate, presumably to bring its 
economic surplus to a market; he would not have needed ac- 
counts to convince a banker of the soundness of his project. 

It seems to us, as indeed to Sombart, that the use 
of m.athematics in the scientific preparation of decisions 
is a quite separate phenomenon fx"om the development of a 
conceptual framework which wi].l enable financial plans to 
be comitiunicated to financiers and others. The techniques 
of "commercial arithmetic" were all known to, and used by, 

- 73 

the Romans, and to even earlier civilisations. The use of 
accounts for planning and control is likewise of great an- 
tiquity, but accounting is not built out of compound in- 
terest, ratios and percentages. That the two subjects were 
treated together by Luca Pacioli and others may have led to 
soiTie confusion on this question. 

It is suggested here that accounting was not the 
product of "the period of early capitalism" but was, in 
fact, introduced into the public sector much earlier in time, 
for planning and control purposes. The customs of the an- 
cient Greek temples and Roman patricians are perhaps open 
to historical misinterpretation, but not so the practices 
of the Norman curiae in the 11th and 12-'-h centuries or of 
the medieval manors of the sanie period. Lyon and '7e^,rhulst 
have described in detail how accounts were used by the 
Flemish, Norman and French royal courts in the task of mo- 
bilizing the countries of Northwest Europe and converting 
them from a subsistence to a money economy.'" The records 
of the monastic mianor of Norwich in England have informed 
us about the use of accounts in the management of the m.e- 
dieval religious manors.'^ 

It is easy to understand, therefore, why, although 
double-entry bookkeeping is not observable before the be- 
ginning of the 14th century, v/hen observed it displays the 

- 74 - 

principal featurec recognizable in modern accounting 
practice. Music is another example of a conceptual frame- 
work which took several hundred years to develop, from a 
simple octave recorded by an 8th century monk to the 

important for our thesis, hovzever, to see that the slow proc- 
ess of constructing complex systems of interlocking accounts 
began long before "the period of early capitalism," and is 
attributable to economic growth situations of many different 

The march of events as we see it can be shortly 
stated: the decline of the Roman Empire v;as followed by 
several centuries of anarchy, from V7hich Europe emerged only 
when feudal systems established a measure of political sta- 
bility. This political stability permitted the exploitation 
of economic surpluses , v/hich the Normans and others sought 
to mobilize, and it is perhaps not without significance here 
that the revival of commerce and industry which preceded and 
accompanied the Renaissance was restricted to those lands 
which had once known the benefits of Roman administration. 
The Roman trading laws and customs appear to have been re- 
vived, for example, in the Jugements on Botes d' Oteron , 
which are one of the principal sources of mercantile law, 
and these included the use of accounts, which were first 

- 75 - 

applied to public administration and then taken up by 
private bankers, raanuf acturers and merchants. 

Unlike Somibart, who attributes the primitive 
business records of the early Middle Ages to man's preoccu- 
pation with value in use rather than value in exchange, ^^ 
we simply see in this evidence of the lack of educational 
facilities at that time, and point to other, earlier, pe- 
riods when exact calculation and meticulous record-keeping 
were fairly common.. As educational facilities expanded, 
through the efforts of the investment-minded rulers of the 
time, so the number of persons able to use accounts in- 
creased, and with then.i, the nuiTionr of potential entrepre- 
neurs. Combining this with a money econom.y, the important 
technical innovations of the tiiPe (arabic numerals; tne 
clock; the printing press; the gun) and capital, however 
acquired, we arrive at a picture oi conditions which were 
extremely favorable for the growth of capitalistic enter- 
prises, to an extent previously unknovm in human history. 
Aaaounting , Plann-iy.g and Control 

The idea of accounting as a conceptual framework is 
clearly brought out in this statem.ent by a German business- 
man : 

The object of the businessman's work, of his worries, 
his pride and his aspirations, is just his undertaking, 
be it a com_mercial company, factory, bank, shipping 
concern, theatre or railv/ay. The undertaking seems 

76 - 

to take on form and substance, and to be ever with him, 
having, as it were, by virtue of his bookkeeping, his 
organization and his branches, an independent economic 
existence. ^ ^ 

Clearly, Rathenau could not have believed that his 

business v/as a real entity; he was describing a system which 

he had constructed. The use of accounts for this purpose 

is also hinted at in the following confession, from 

Rockefeller's Memoirs z 

From my earliest childhood I had a little book in which 
I entered what I got and what I spent. I called it my 
account book, and have preserved it to this day.^"* 

The modern entrepreneur may phrase it differently, 

but the idea has not changed: 

What, then, do we chief executives expect nov;adays 
from our information systems? First, continual and 
sensitive checks on our present progress. We need to 
know at once v/hen we are off target. We need to iden- 
tify where v/e have gone astray, so that we can take the 
necessary action quickly. . . . Isolating the relevant 
information and pruning away the irrelevant is an all- 
important accountancy function . 

Second, we look for a really professional financial 
evaluation of the alternatives facing us in the major 
policy decisions we have to take. Decisions on such 
matters as capital expenditure projects, pricing policy 
and so on. ^ ^ 

Or this forthright statement: 

You m.ay take deferred cash flow, or any other method 
of comparing a business, but if those figures do not 
balance with the annual statement of accounts they are, 
in my view, folly and extremely dangerous. ... I 
personally never use any figures that do not balance 
with the annual statement of accounts . . . . ^ ^ 

The separation between accounting and mathematics 

is very marked in these quotations. 

- 77 

When interpreting statements of businessmen, it is 
important to remember that they are primarily engaged in 
creating values, not in transacting. As Knight pointed out, 
productive arrangements are made on the basis of antici- 
pations, and in an uncertain world these anticipations may 
vary from subsequently experienced reality.^' The essential 
fact is that men are acting and competing on the basis of 
what they think of the future: 

The whole calculation is in the future; past and even 
present conditions operate only as grounds of pre- 
diction as to what may be anticipated.^^ 

Decision involves comparing a subjective judgment 
of the significance of a commodity to the decision-maker 
with an estimated future price, and it is in the elaboration 
of the subjective evaluation that accounting serves the 
planning function. Its use as a control mechanism follows 
from its planning function, since we define control as the 
systematic measurement of performance against predetermined 
standards, with the objects of evaluation and prediction 
linking it up again with planning. 

The context within which this process takes place 
has been described by Mey, using the Limpergean formulation 
characteristic of the Amsterdam school of business eco- 
nomics.'® We assume a flow of values — Quesnay's pvoduit 
sooial seen in terms of Schumpeter's Kveistauf — which starts 

- 78 - 

from gifts of nature and ends with final consumption. This 
flow requires the intervention of business firms ,^ or pro- 
ducing entities, which are organized into branches, trades, 
industries and sectors; in the last we include organs of 
national and local government, without the cooperation of 
which production could not take place. These subdivisions 
are connected by markets. 

The entrepreneur contemplating participation in 
this process by contributing a product or service to a mar- 
ket must distinguish between the functions of: 

1. The acquisition of means of production, resulting 
from investment. 

2. The human tasks of utilizing these means of 

3. The marketing of the product, or its distribution. 
Each of these functions has financial implications, 

and v;here means of payment are involved in both acquisition 
and distribution, money measures can be imputed to invest- 
ment and the work involved in production. The entrepreneur 
elaborates his business decisions using data derived from 
such an imputation, and represents them to himself and to 
his financiers in the form of accounts and financial state- 
ments. This is the planning function. Subsequently, he 
collects data, or measures performance, in the sam^e way, 
and it is this control operation which we recognize as 
accounting. The planning operation, cr "accounting for the 
future," is not different in kind. Our argument is that 

- 79 - 

the control function of accounting presupposes a prior 
planning function, vrhich is implicit in all accounting 
systems but only made explicit, in the form of business 
budgets, in a minority of cases. 

We shall consider in Chapter IV the different models 
of this imputation process which have been used by accounting 
theorists . 


1. Werner Sombart, Der Bourgeois (Munich and Leipzig: 
Duncker & Hurablot, 1913) , transl. by M. Epstein as 
The Quint of Capitalierr. (Mew York: E. P. 
Button & Co. , 1915) . 

2. Werner Sombart,- Der Moderne Kapitalismus (3d ed.; 
Munich and Leipzig: Duncker & Huniblot, 1919). 

3. Ihid.^ (Vol. I, 1, p. 319 (our transl.). 

4. Ibid., pp. 92-3. 

5. Sombart, Quintessence, p. 102. 

6. Ibid., pp. 201-2. 

7. Ibid. , p. 326. 

8. Vol. II, 1, Chapter X, p. 101 (our transl.). 

9. The follov/ing is a summary of the contents of the 

10. Echoing Proud 'hon: "La comptabilite est toute 
I'economie politique et le comptable le veritable 
economiste a qui une coterie de faux litterateurs 
a vole son nom." 

11. See W. W. Cooper, "Social Accounting: An Invitation 
to the Accounting Profession," The Aooouyiting Review, 
Vol. 24 (July, 1949), p. 233. 

12. B. S. Yamey, "Scientific Bookkeeping and the Rise of 
Capitalism," Economic Histoi'ij Review, second series, 
Vol. I (1949), pp. 99-113, repr. W. T. Baxter, ed.. 
Studies in Accounting (London, 1950), pp. 13-30; and 
"Accounting and the Rise of Capitalism: Further Notes 
on a Theme by Sombart," Journal of Accounti?ig Research, 
Vol. 2, No. 2 (1963), pp. 117-36.' 

13. Quintessence , p. 128. 

14. Der Moderne Kapitalismus , II, 1, p. 115. 

- 80 

- 81 

15. Yamey, "Furthar Notes," etc., p. 119. 

16. Ibid. J p. 126, n. 17. 

17. Quoting Sombart, and also H. M. Robertson, Aspects of 
the Rise of Eoonomic Individualism (Carabridge, England, 
1933) (which appears to be a bowdlerized version of 
Sombart). Yarney ' s n. 25, p. 128 appears to confuse 
Sombart 's planning hypothesis with the conceptually 
distinct hypothesis that accounting assisted business- 
men to prepare decisions scientifically. See Der 

■ Moderne Kapitalismus , Vol. II, 1, p. 121. 

18. Ed. A. C. Littleton and B. S. Yamey (Homewood: 
Richard D. Irwin, Inc., 1956), pp. 1-13. 

19. B. G. Niebubr, ffoemise^e Gesohiohte (2d ed.,- Berlin, 
1830), Vol. II, p. 673, n. 1319. This note is omitted 
from the English translation (London, 1844) . 

20. The principal reference is G. E. M. de Ste. Croix, 
"Greek and Roman Accounting," in Studies irt. the 
History of Acaounting , pp. l'?-74. 

21. Tribology = the technology of interacting surfaces. 
The term "interface" in cybernetics has a related 

22. J. A. Schum.peter, The Theory of Eaonornio Beveto-pment 

(Nev; York: Oxford University Press, 1961) (first 
German ed. 1911) . 

23. A. Pope, Essay on Man, Ep . IV, 1. 248. 

24. P. Charron, Gf Wisdom, Bk. I, Ch. I (1601), Stanhope's 
translation. See Pope, Essay on Man, Ep. I. 1. 57. 

25. Quintessence J pp. 52-4. 

26 . Ibid. J p. 312 . 

27. For a similar statement, see Schumpeter, Theory of 
Economic Development , p. 85. 


J. M. Keynes^ The General Theory of Employment, 
Interest and. Money (New York: Harcourt, Brace & 
World, Inc., 1965), p. 150 (first pub. 1336). 

- S2 - 

29. Frank H. Knight, Risk, Unoevtainty and Profit (Nev7 
York: Harper Torchbooks, 1955), p. 311. 

30. Bryce Lyon and A. E. Verhulst, Mediaeval Finance 

(Brown University Press, 1967). 

31. Kenneth S. Most, "New Light on Mediaeval Manorial 
Accounts," London, The Accountant, Vol. 160, No. 4910 

(January 25", 1969), pp. 119-21. 

32. Quintessence , p. 18. 

33. Ibid. , p. 173. 

34. Ibid., p. 237. 

35. Sir Kenneth Keith, U. K. investment banker, reported 
in The Accountant, Vol. 161, No. 4952 (November 15, 
1969) , pp. 642-3. 

36. A. Chester Beattie, Chairman, Selection Trust, Ltd., 
reported in The Accountant, Vol. 158, No. 4S74 

(May 18, 1968) , p. 668. 

37. Frank H. Knight, p. 272. 

38. Ibid., p. 273-4. 

39. Abram Mey, "Le circuit economique et sa relation avec 
la theorie de la valeur et du calcul rationnel de 
I'economie industrielle, " Paris, Revue de I'Economie 
Politique, Eds. Sirey (1960), espec. pp. 8 and 12. 


In putting forward the proposition that accounting 
antedates the rise of modern capitalism, and that its ob- 
jective was primarily to aid planning and control rather 
than the stewardship of v^ealth, we place ourselves in direct 
opposition to some notable historians of accounting. 
Littleton argues that accounting is a recent invention, 
and although Garner disagrees with him in this, he never- 
theless sees cost accounting as a 19th century phenomenon.^ 
It is, of course f difficult to avoid the temptation to mis- 
read records of the past, and the modern micanings of the 
words "account" and "accounting" may well be fundamentally 
different from the meanings of similar words used by Zenon 
and Cicero. On the other hand, we have suggested that tha 
views of accounting theorists have been formed as a result 
of a technical preoccupation with the features of double- 
entry bookkeeping, and we shall now exeimine rhe thesis that 
a more fundamental obstacle in the path of understanding is 
the fixation with techniques of imputation characteristic 
of accounting literature of the last hundred years. This 
would explain the fact that Garner's conclusion is so 
patently at odds with the cumulative effect of the historical 

- 84 - 

evidence adduced by him in the first two chapters of his 
work. In our examination of the imputation process we shall 
attempt to show that recent formulations in accounting theory 
are fully consistent with our planning and control hypothesis, 
and indeed, fit badly into a conceptual framework which sees 
accounting as record-keeping having, as its main object, the 
discharge of stewardship obligations, together with a set of 
reports to investors. It will be seen that the imputation 
problems which have preoccupied accounting theorists are a 
special case of the general problem of valuation, which ac- 
quires its particular importance through m.anagerial needs 
in relation to the planning and control functions. 

The greater part of accounting theories deals with 
business or corporation accounting, and we shall, therefore, 
concentrate on imcputation in the context of the business 
firm. We shall then examine to what extent the models of 
the firm can be modified to embrace other fields in which 
account is found. The models of the firm, can be clas- 
sified into the eoonomia , the financial , and the aybevyietia ."^ 

The Economis Theory Model of the Firm^ 

One proximate source of an economic model of the 
firm is Irving Fisher, whose ideas recur in the literature 
of accounting theory, and who has been expressly cited for 
this purpose by Canning and Mattessich, among others.** 

- 85 - 

Fisher defines v;ealth as "material objects owned by human 
beings," and the significance of "material" is that the ob- 
jects in question can be physically measured. Valuation is 
a species of physical measurement "involving the principle 
of exchange," and appraisement is a method of pricing which 
supplements actual exchanges in m.arkets. Although an ap- 
praisement m.ust proceed from a knowledge of the purpose for 
which it is carried out, "price or prices do actually exist 
without ambiguity." The physical unit of measurem.ent can 
be multiplied by a price, and the resulting price 'data 
aggregated to produce values, this last process being wholly 

The significance of the phrase "owned by human 
beings" is that it incorporates the idea of property rights, 
which are rights "to obtain and enjoy the uses of wealth," 
i.e., to future services. It is clear that Fisher is 
thinking in terms of consumption as the object of owning 
property; property rights are "desirable changes effected 
by means of wealth," and desirability is equated with 
satisfaction and utility. This construct is not confined 
to consumption, however, but extended to investment. "We 
may speak of the desirability of a fruit orchard to a 
particular person en January 1, 1905, but the pleasure 
derivable from that orchard is only to be experienced during 
future years, as it bears fruit and the fruit gives en- 
joyment to those who eat it."^ 

- 86 - 

Wealth may be a stock or a flow, but income is a 
flow of services, i.e., those future services described by 
"property rights." Fisher disregards distinctions between 
"income," "gain," "profit" and "benefit," and in his later 
work this restriction is made explicit, indicating that he 
is working with a static model throughout.^ "Income is a 
series of events," but they are events of a particular kind; 
they are the rights to services enjoyed by an individual; 
these services produce satisfaction, so that income is es- 
sentially a psychic phenomenon. The services can be taken 
to represent psychic income, and money paym.ents for the 
services are a surrogate which can be used in economic 
analysis . 

If we were to try to structure Fisher's tima theory 
ox production, it. would probably resemble the constructs used 
by Jevons and Bohm-Bawerk. "^ The problem is to describe in 
a way suitable for mathematical analysis the process v/hereby 
the product of a given quantity of labor increases with 
every increase in the "dose" of capital applied, capital 
being defined as the intermediate products which are used 
in final production. The state of technology is given. 
Jevons adds successive units of time to a given amount of 
resources, e.g., one month's labor. The amount of investment 
capital, which has a tim.e dimension, is divided by the amount 
of capital invested, which has no time dimension, to give 
the Bchm-Bawerkian "period of production." 

- 87 - 

Let m' s represent n quantities of physical resources 
that are being applied at n points in time t i . . . t to 
the production of a consumer's good that is sold and con- 
sumed. This involves either identifying these physical 
resources with a single homogeneous agent — Jevons and 
Bohm-Bawerk chose homogeneous units of labor (subsistence 
equivalents) — or the assumption that these resources consist 
of doses of invariant composition. For axis we choose time, 
and the zero point is the time at which the consumer's good 
is sold. The t's are all to the left of this zero point, 
hence negative (the expression is made positive by prefixing 
a minus sign) and decrease numerically as we proceed from 
the first act of investment in ti to the right, tov;ard the 
zero point. The expression 

m it I + mztz • . • + m t 
rn n n 

■nil + mz . . , + n 

has only a time dimension, since the m's cancel out. This 
is the "period of production," the average of the time 
distances from the (negative) investment to the sale of 
the product. ® 

This device permits Fisher to construct a theory of 
capital in which capital i.s simply the present value of 
income, and the valuation model which results is called 
by Canning "direct valuation." Canning contrasts this with 
the "indirect valuations" used by accountants, which he 

- 88 - 

regards as second-best figures, to be used where direct 
valuation is impossible or inconvenient. Canning does not 
make explicit the assumptions which are necessary in order 
to arrive at Fisher's result, and which restrict the appli- 
cability of his model to situations in which the process of 
production is not of the essence, nor does he discuss the 
particular point that, in order for the Bohm-Bav7erkian 
structure of capital to be made analytical, this structure 
must be comparable physically. It is instructive to trace 
the implied model of the firm to its Ricardian origin, in 
order to demonstrate the significance of this observation 
for accounting theory wnich seeks to explain business or 
corporation accounting. 

The Ricardian model. Hicks has suggested, is a model 
of the fa,rm. Hicks depicts it as follows: 

Figure 1. Ricardian Model of the Firm 
Sourcs: J. R, Hicks, Capital and Growth (Oxford, 1965), p. 44 

- 89 - 

The horizontal axis measures output of corn, the 
vertical axis, the capital/gross output ratio, both terms 
in corn. The length OH is unity, so that the rectangle OHPN 
represents the same quantity of corn as input (of capital) 
as the output OH. At output ON, RN is the marginal capital/ 
gross output ratio; given diminishing returns RN is an 
increasing function of ON, suggesting a marginal "curve" 
AR. At the margin one unit of output (FN = OH = 1) requires 
RN of capital to produce it, leaving PR as profit. The 
rate of profit PR/RN is a constant, which is shown by pro- 
ducing RA backward to meet the horizontal axis at T and 
then joining TP, cutting the vertical axis at B; now 
BA/AG = PR/RN. If v;e take the rectangle OHPN to represent 
total output, the three parts are: (1) OARN , the replacement 
of capital, (2) BARP, the profit, and (3) HBPf the rent. 
If output must be expanded, N moves the right, the AR curve 
is unaffected and therefore T remains the same; TP must 
swing downwards, showing that the rate of profit falls while 
rent rises. 

The theory of the firm in price theory was 
substanhially modified in the 1930 's, but it is probably 
correct to state that the earlier Ricardian model remained 
a formative influence throughout the first half of the 20th 
century.^ We shall not attempt to trace the use of this 
model in economics, but we shall offer a suggestion as to 
how it has been used by accounting theorists. 

- 90 - 

$ per unit 

pital + Labor + Land 

Capital + Labor ^******«««,^ 

Goods or Services 



*>^ .agtOiAa^a--*n-jfcTU*tfcqa.iSMM 

Inputs (in output 



Figure 2, Static Price Theory Model of the Firm 

Figure 2 shows a different presentation of the firm 
of micro-economic theory. It is assumed to be small enough 
to conteniplate an unlimited supply of homogeneous inputs of 
capital and labor at prices unaffected by the volum.e of 
its output. Land, however, is a set of fixed quantities 
of varying qualities, displaying the characteristic of 
diminishiiig returns, and expansion raises the price of 
land relative to the unit of output until the margin, where 
the cost of production equals selling price, and beyond 
which output will not be taken. The model is conceived 
in stock terms; in flow terms it might be viewed as in 
Figure 3, where we use accounting terminology to describe 
the factors of production. In this new model, materials 

- 91 - 

inputs are included which are abstracted in the previous 
model on the grounds that they cancel out in aggregating 
all firms in order to demonstrate the workings of the 
economy as a v.'hole. "Expense" is a residual category 
embracing interest on capital, rent and other factor in- 
comes, as well as depreciation. 


mn — 

+ Labor 
^' Expense 



Figure 3. Managerial Decision Model of the Firm 

A landmark in this process of utilising the 
"see-through" model of the firm was Henry Hess's invention 
of the break-even chart in virtually the sarie form as 

- 92 - 

Figure 3, but classifying costs into "fixed" and "variable" 
in relation to specific production decisions, rather than 
according to their factor income descriptions.^" This 
model patently underlies much of the literature on managerial 
accounting which has appeared in the last two decades. ^^ 

Thus, as shown in Figure 3, quantification in money 
terms of the Ricardian comparison between input and output 
quantities permits "income" (profit or loss) to be ascer- 
tained as a difference; this is Paton's "matching" concept, 
which corresponds with the idea of profit in economic theory 
as a residual income. ^^ The measurement process relies upon 
the output market to quantify outputs and the input markets 
to quantify inputs, although Paton v/as prepared to depart 
from the latter rule in certain cases. 

The accountant makes certain important assumptions in 
connection with costing and valuation. In the first 
place, he assumes that cost gives actual value for 
purposes of initial statement . . . . Cost is the only 
definite fact available when a property is purchased, 
constructed or otherwise, acquired. ... He 
that every exchange is fair ... in the absence of 
definite evidence to the contrary the accountant has 
every right to treat initial value as equivalent to 
cost. . . . Later, if substantial evidence of depre- 
ciation or original loss is adduced, it will be time 
enough to revise the original figures. ... An initial 
record of total cost would, of course, be necessary 
even if cost and original value were not identical. . . . 
However, if it immediately became evident in any case 
that the real value were greater or less than cost, 
the profit or loss would be recognized at once.'^^ 

We see from this the assumed equivalence of value 

in exchange and value in use which underlies the assimilation 

- 93 - 

of "cost" with "payment" and is one of the several meanings 
of "cost" to v.'hich we alluded in Chapter II. We also see how 
the introduction of time into the model as an express 
variable establishes a necessity to distinguish between 
these two value concepts.^'* Since time is abstracted from 
the micro-economic model of the firm, in equilibrium the 
proceeds of sales (revenue) can be imputed directly to the 
factors of production (costs) in order to determine their 
values, and the only way in v/hich time can affect the result 
is by a delay in the transmission of receipts from the output 
market to the firm; this is handled by means of a discounting 
algorithm. A disequilibrium situation postulates the in- 
equality of revenue and costs, the consequent difference 
betvreen which is classified as a "quasi-rent" or a "profit," 
d-epending upon whether it is imputed to a factor of production 
or accrues to the entrepreneur as a residual. Time does not 
enter into this process of imputation. In the accounting 
analysis of the firm, however, there is an additional delay 
recognized between the acquisition of the factors of pro- 
duction and the output of goods and services, and the problem 
of valuing factors in relation to their uses becomes critical. 
When we recall the many assumptions of price theory which are 
incorporated into the micro-economic model of the firm., it . 
will be seen that the imputation problem now assumes a 
complexity which calls for a quite different approach. 

- 94 - 

In order to accommodate this problera in the 
framework of his profit (or income) determination process 
of matching costs with revenue, Paton introduced the con- 
cejJts of cost "expiry" and "attaching." Since cost first 
and foremost designates an acquisition, all costs can be 
viewed as assets, defined as valuable objects or property- 
rights owned by the firm; value is measured by market price. 
During the time the asset is held by the firm, which is a 
consequence of the superiority of "round-about" methods of 
production, its value may change through exogenous or 
endogenous causes, the latter of transformation or waste 
(loss to the "entity") . This process of (negative) value 
changes is designated "cost expiry," and describes the basis 
for accounting operations converting an asset into an expense 
(.cost) . A positive value change characterizes the exterior- 
ization of the product on sale. 

We can thus identify three classes of value change 
to be recognized by accountants: 

1. Valuation adjustments (appreciation or depreciation 
of land, equipment, supplies or securities) . 

2. Losses through waste, and windfall profits and 

3. Transformations. 

Valuation adjustments and windfalls, arising 
primarily from changes in expectations, are to be dealt 
with on an ad hoc basio; only depreciation is formally 

- 95 - 

included in the scope of the theory, and although Paton 
lists several examples of other adjustments, he purposely 
avoids the general problem of revaluation.^^ Losses and 
transformations are brought under the doctrine "costs 
attach"; by making a metaphysical assumption, Paton sees 
the value represented by costs as flowing in some unspecified 
way into the objects for which the costs were incurred: 
processes, products, and ultimately, the act of sale.^^ 
Accounting operations relating to this internal flow of 
values are rationalized as a recognition of this "fact" of 
attachment, so that the valuation of work in process, in- 
ventories of products and cost of sales is linked directly 
with "costs" as the acquisition prices of factors of 

The metaphysical aspects of this doctrine, with 
its overtones of hypostatization and reifi. cation, are m.ost 
clearly brought out in Paton and Littleton's influential 
monograph on the theory of corporate accounting. ^ ^ Accounting 
"roots," "traces," "keeps step," "exists"; costs "adhere," 
"trace," "express," "become," "await their destiny," "have 
a natural affinity for each other," "cling." The model to 
which we are to refer these statements is nowhere described, 
and it is quite im.possible to follow the train of thought 
which leads from them to the principles or "standards" of 
accounting to v/hich they purport to lead. V7e conclude that 

- 96 

the necessary step of articulating the model of the firm 
has not been undertaken. 

Paton's theoretical constructs V7ere used by 
Littleton as the basis for his considerable contribution 
to accounting thought. Littleton adopted an evolutionary 
approach to his subject, giving accounting theory overtones 
of adaptation to the environment which echo Sombart, and 
possibly suggesting thereby a biological analogy which has 
been taken up by Chambers, among others. Deinzer has called 
this organic viev; a "coherence point of view for establishing 
the verity of accounting doctrines ." ^ ^ It may be noted that 
Paton shov/s evidence of a similar organic viewpoint, for 
example when he states that double-entry bookkeeping is the 
only system which can accoian.iodate all the economic aspects 
of a transaction.^^ 

Nevertheless, Littleton V7as acutely conscious of 
a need to construct a theory of accounting which would 
demonstrate and support the usefulness of financial state- 
ments as a record of stewardship. On the one hand, he took 
as his point of departure the same economic concepts as did 
Paton; on the other hand, he wanted to relate them to a 
concept of the firm which went beyond the abstract construct 
of price theory. He, therefore, adopted the empirical ap- 
proach of observing accounting practices and attempting to 
make generalizations concerning them.^' He sav/ the meaning 

97 - 

of accounting theory in the critical examination of beliefs 
and customs in order to direct attention to the "genesis and 
outcome" of accounting work. Practices were facts and theory 
consisted of explanations and reasons, and one objective of 
theory was to furnish explanations of seeming inconsistencies 
in practice. ^^ The tools of accounting theory were defini- 
tions, reasons, principles and concepts, and a principle was 
a "concisely worded generalization of considerable use- 

The most important of these principles was the 
"principle of invested cost" which was a requirement to 
value accounting observations at prices measured at the 
time of a transaction. This idea was merged with Paton's 
"matching" concept to formv a "realization principle" which 
states that income determination results from a comparison 
of invested cost, or input market price, with sales revenue, 
or output market price, so that there can be no income 
(profit) without a sale.^^ This v;as a slightly different 
use of the word "realization," which had previously 
designated the rule that revenue from sales v/as recognized 
on the basis of invoiced deliveries, which then became the 
definition of sales. It has been suggested that one of the 
factors leading Littleton to this result was the series of 
Federal tax lav/ cases, culminating in the Eisner v. Maaomber 
decision, requiring a "severance of income from capital" 
for income to be taxable.^** 

- 98 

This model, which is fully compatible with the 
micro-economic model of the firm, permitting sales proceeds 
to be im.puted directly to factors of production, led 
Littleton to the use of input market prices for valuations; 
we shall see that the same model led Chambers in precisely 
the opposite direction. However, it did not provide an 
approach to valuation in situations to which the underlying 
assumptions of the Ricardian model do not apply. ^^ This 
appears from May's reply to Littleton's advocacy of "invested 
cost," which, again, does not advance our search for a more 
useful model. ^ ^ 

Chambers' contribution to accounting theory is 
notable in several respects; in particular, he has tried 
to substitute the human "actor" for the metaphysical "entity" 
as the centerpiece of the field of study (v;ithout, however, 
being able to maintain this viewpoint beyond the first as- 
sumption stage) , and he has demonstrably accepted the need 
for a theoretical structure which embraces charitable, 
government, social and international accounbing as well 
as corporate accounting . ^ ' But he , more than any other 
accounting v;riter. demonstrates a naive acceptance of the 
characteristics of the micro-economic m.odel of the firm. 

The evidence is fairly substantial, particularly 
in the more extensive treatment of his ideas in a book-length 
work. A consumption model of the firm is suggested by the 

- 99 

fact that the individual's "satisfactions" provide both a 

point of departure and a point of arrival,^® persons are 

represented as homeostatic systems, although this construct 

does not appear essential to his thesis. The use of a 

static equilibrium model of the firm is also implied by 

the following passage: 

. . . in any limited situation, and most action situations 
are limited, the wider reference systems in which we act 
and the valuations we attach to them may be taken as 
given. They may be regarded as implicit in the system; 
as being held in comm.on, at least by those members of 
the society with whom one interacts; and as having a 
considerable degree of stability through time.^^ 

A discussion of "utility" in relation to means is 
remarkable in that it attaches directly to inputs those 
properties which are discussed in economic theory in relation 
to outputs. ^° The latent imputation problem is not made 
patent, but the Marshallian and Ilicksian models are given 
as sources (in a footnote) without any recognition of the 
conceptual problems inherent in this approach.^'' These 
conceptual problems are raised in the next section, on 
"Employment of Means," which distinguishes technical from 
value considerations, but they are assumed to be soluble 
by the marginal approach, which is only correct on the as- 
sumptions cf price theory. 

Chambers' macro-economic model also abstracts from 
time^^ and thus fails to distinguish between saving and 
investment; the Keynesian distinction betv.-een ex ante and 
ex post is not respected. Chambers' description of the 

- 100 

legal framework is also highly simplistic, so that ownership 
is seen as "unrestricted and exclusive control" over means, 
recalling Fisher's view of property rights. He does dis- 
tinguish the consumer-role from the producer-role^^ but does 
not pursue the implications of this duality of viewpoint, 
and he goes on to state the conclusions of price theory 
without any reference to the assumptions from which they 
are drawn. ^'* The Fisherian model is apparent from this 

Wealth may be considered to be the general capacity for 
satisfaction represented by the things owned by a per- 
son; so regarded, wealth is a subjective notion related 
to individual appraisals of utiLity,^^ 

What of the transformation process? 

A decision to convert ... is predicated on the 
expectation that the product of conversion will yield 
a greater price than the means to be converted vrauld 
yield if sold. 

Remote yields, of course, are to be discounted to 
present values. But all this is a belief; producti.on 
processes frequently cause saleable comniodities to be 
converted into unsaleable forms, so that this argument 
applies to the whole process r not to any part of it.' 

The money calculation is used only in order to 
resolve the "questions of when and whether to buy or sell."^^ 
"For a person or association acting in a specific role we 
will use the general term entity. It will be necessary 
when dealing with particular entities or classes of entity 

- 101 - 

to stipulate the rights, powers and obligations which attach 
to it. . . ."^^ The absence of a reference to organization 
or process will be noted. Now the entity is personified: 
"A person has only one position in relation to his envi- 
ronment at a point in time" and to know this position is a 
necessary condition of success in acting. Thus, an actor's 
position is uniquely determined, and is essentially a 
position found with reference to markets; Chambers calls 
this "financial position," defined as "the capacity of an 
entity at a point in time for engaging in exchanges.""^ 
The financial position of an entity may not include any 
anticipatory calculations, since future prices are not 
susceptible to independent corroboration, and all results 
and inferences from them are "individual and subjective." 

The key to understanding Chambers' approach to 
valuation lies in his assumption that objects and events 
can have "monetary properties," which they acquire by ex- 
changes in markets. "*" Numbers of monetary units assigned 
to events and nonmonetary things are prices, and prices are 
determined in the market (although revaluation is permis- 
sible for durable goods, as with Fisher); they are, there- 
fore, objective measurements. In these circumstances, the 
accountant could use either buying price or selling price, 
but the former does not indicate financial capacity; he 
should, therefore, use "market selling price," called 

- 102 

ourrent cash equivalent . Where no resale market quotations 
can be found, hov/ever, input market prices can be used as 
a matter of expediency, and this point of view, v;hich echoes 
Canning, raises anew the question: by what means can we 
move from the idealized market situation of the Fisherian 
model to the real world in which accountants live and work? 

Chambers, like Paton and, to a lesser extent, 
Littleton, is not concerned with this real world in his 
theoretical iiivestigations ; indeed, the object of his in- 
quiry is the practice of accounting and not the process of 
production, distribution and consumption. "* ^ Kis inquiry 
results in a definition of accounting which will sit easily 
with his image of economic reality: "Accounting is a m.ethod 
of retrospective and contemporary monetary calculation the 
purpose of which is to provide a continuous source of finan- 
cial information as a guide -co future actions in markets. '*^ 
This functional definition indicates a concern with pricing 
rather than planning and evaluation of a process of production, 
which is again evidenced by his repeated (and incorrect) as- 
sertion that accounting abstracts from all properties of 
things except correspondence to money value. 

A numh'er of works on accounting theory proceed from 
the same "utility in consumption" behavioral assumptions and 
the price theory model of the firm; in particular, Gilman,** 
Edwards and Bell,'*'* Mattessich, "* ^ and Ijiri.'*' They also 

- 103 - 

demonstrably fail to articulate the model in such a way as 
to provide a basis for explaining the methodology of ac- 
counting and the accounting concept of value, and the main 
thrust of the later works is toward an algebraic expression 
of double-entry bookkeeping rather than research into 
valuation models.**^ 

The Financial Model of t?ie Firm 

The "see-through" model of the firm is clearly 
inadequate as a representation of the realities of pro- 
duction, which becomes quickly apparent when the writers 
discussed proceed to attempt to explain particular aspects 
of accounting m.ethodology; it is obviously insufficient to 
support the precepts and examples of accounting textbooks 
or the detailed practices of public and private accounting. 
As Machlup points out in the paper cited, if we study the 
grovjth of the firm, the organization and some of its 
properties and processes are the very objects of the 
investigation. His comment that the firm in accounting 
theory is a collection of assets and liabilities is not 
acceptable here, since these terms are themselves concepts 
which require certain beliefs about reality, and if we 
define them as property rights and claims we are back in 
the Fisherian framework.**® Even if we postulate a circular 
flow we shall require a more detailed image of reality than 

104 - 

these juridical concepts can provide. One such image is 
the financial model depicted in Figure 4; that the model 
is used by business corporations is indicated by Figure 5, 
which v/as developed by General Electric (GE) , a corporation 
v.'hich has a long history of research and experirnentati on 
with the form and content of published financial statements. 

The image of the firm as a receptacle containing 
a "liquid" substance representing purchasing power recurs 
in the literature on corporation finance and conceivably 
informs the comments of writers on accounting, particularly 
those who define "costs" as "payments."**^ The reference is 
to a narrow concept of finance as "means of payment," linking 
up with legal and social uses of the term "liquid capital" 
to denote undifferentiated purchasing power. Such an image, 
while of undoubted utility as a pedagogic device, leads 
subtly to the metaphysical assumption that there exists 
some physical substance, having properties akin to those 
of liquids, which circulates through a business firm and 
which can be "measured" in the scientific sense of the word. 
Such an assumption is patently false, since v/hatever liqui- 
dity characteristics money as such may possess are of little 
or no significance to the processes of the business firm. 
Furthermore, the assimilation of acquisitions to uses, which 
is a coimnonplace simplification in economic theory, is un- 
tenable when we consider the organization and processes 

- 105 - 


Lenders of M^ney 
Short Tpim I Long Ten 

Pvtichasars of 
Csplt«l Stock 


fciccna taxtt j 


/ ■.,—. A *** Selling and AdTilni&tratlvc ^^""^V 


Finished GooJs 
(At Cost) 

Flnls!iKJ GooJt 
(At &ale» price) 

Figure 4. Model of the Firm 

Source: John A. Griswold, Cash Flow Through a Business 
(Dartmouth: The Amos Tuck School of Business Administration, 
1955) , p. 2. 

- 106 - 




























107 - 

of the firm/ where the phenomenon of durable goods must be 
accommodated, and the GE diagram demonstrates graphically 
the ensuing dilemma where it shows depreciation "flowing" 
into inventories . ^ ° 

The problem, arises out of the observation that 
there are three separate financial "flows" through the 
business, using the word "financial" to mean "capable of 
expression as values." There is the long-term, or capital, 
flow, the rate of which determines the capacity of the 
business to fulfill its economic objectives; the periodic 
or revenue flow, the rate of v^hich determines the level of 
activity; and the cash flow, the rate of which determines 
the day-to-day viability of the business. This last is a 
"flow" of means of payment, and is certainly a critical 
factor; if the cash flow is inadequate, the business will 
die. But the cash flow is not the determinant of either 
capacity or activity; if the capital and revenue flews are 
strong, and if a money market is available to the firm, then 
cash flov7 can be maintained at a rate adequate for survival. 
The causal relation is inverse: the capital structure and 
the revenue flow are the determinants of the cash flow, 
given the existence of a money market. 

The necessity to observe cash flow as a separate 
and subsidiary financing problem arises from the nonsynchro- 
nization of the three value flows, the rates of which can 

- 108 

and do differ in all but a minority of business firms. The 
sources of the divergencies between them can be summarized 
as follows: 

1. Payments in advance 

A. Acquisitions which will become expenses (even- 
tually, costs) as the goods and services ac- 
quired are used. 

, a. Depreciable fixed asset, or equipment, 

b. Research and development expenditures, and 
construction of own equipment, 

c. Supplies of materials, parts, fuel, etc. 

d. Advance peiyments for future deliveries of 
goods and services. 

B. Payments V7ill produce corresponding 
receipts at some future date. 

a. Nondepreciable fixed asset purchases. 

b. Loans advanced. 

c. Investment securities purchased. 

2. Payments which correspond with previous receipts, 
e.g., loan repayments. 

3. Revenues which have not produced corresponding 
receipts, e.g., sales on credit. 

4. Expenses which have not produced corresponding 
payments . 

A. Purchases on credit. 

B. Expense accruals. 

C. Tax accruals. 

D. Imputed costs. 

5. Receipts which will produce corresponding payments 
at some future date, e.g., loans received. 

- 109 

6. Receipts which will become revenues as the goods 
and services to which they relate are delivered 
by the firm. 

7. Noncash capital or revenue transactions. 

A. Goods or services transferred to the firm as 
contributions of capital by proprietors, or as 
loans by lenders, or in payment for goods and 
services delivered. 

B. Government and other subsidies in kind, of a 
capital nature. 

C. Government and other revenue (operating) sub- 
sidies in kind. 

The three forms of accounting statement which attempt 
to summarize these three flows of values are, respectively: 
the balance sheet (capital flow), the income statement 
(revenue flow) and the funds statement (cash f lov:) . Con- 
centrating on the last of these, their interrelationship 
can be seen from the cash flow statement illustrated in 
Figure 6 . 

The financial model of the firm, although it can 
be fitted to the underlying reality of business operations 
only with great difficulty, represents an advance upon the 
pries theory model in this context, because it is conceived 
in flow terms. The Fisherian model fits the relation ex- 
pressed by the accounting "basic equation" : 

Assets = Equities (1) 

whereas the cash flow model fits the expanded equation: 

Assets + Costs (expenses) = Liabilities + Revenue 

-!- Proprietors' Capital (2) 

- 110 - 


Cash was received from : 

Net income after taxes 

Add: Noncash expenses, e.g.. 
Bad debts written off 
xAmortization of goodwill, 
formation expenses, discount 
on issue of loan, etc. 

Add: Decrease in noncash assets, e.g. 
Accounts receivable 
Inventories of raw materials, 
work in process and finished 
Loans to others 
Fixed assets sold 
Increase in liabilities, e.g.. 
Loans received 
Accounts payable 
Taxes and dividends payable 
Proceeds of capital issues 

Total Cc;sh inflow 

Cash was used for: 

Increase in noncash assets, e.g, 

Accounts receivable 

Inventories of raw materials, 
work in process and finished 

Investments in securities 

Loans to others 

Purchase of fixed assets 
Decrease in liabilities, e.g., 

Loans repaid 

AccounLs payable 

Taxes and dividends payable 
Repayment of capital 

Total cash outflow 

Net cash (in) (out) flow 

See Income Statement 

Included in Income 

Available from 
comparison of 
opening and closing 
balance sheets 

Available from 
comparison of 
opening and closing 
balance sheets 

Difference between 
opening and closing 
balance sheets — 
cash funds only 

Figure 6 . Cash Flow Statement 

- Ill - 

from which we return to the basic equation by cancellation 
(matching costs against revenue), to produce: 

Assets = Liabilities + Proprietors' Capital (3) 


A (Assets - Liabilities) = A Proprietors' 

Capital (4) 

Equation (4) is a definition of net income on the 
assumption that no contributions or withdrawals of pro- 
prietors' capital have taken place. 

It would appear from the priority given to liquidity 
aspects of the balance sheet that this model presupposes an 
emphasis on the stewardship objective of accounting, v/hich 
would be understandable in the light of the new importance 
which published financial statements had acquired for re- 
porting to investors. This model also suggests that the 
balance sheet is being made to serve a. dual purpose, by 
drawing attention to features which would be more clearly 
disclosed in a funds statement. It is noteworthy that 
references to this model first appear at a time when the 
income statement was beginning to acquire an importance 
equal to that of the balance sheet, and also when the first 
funds statements were being published. ^^ The preoccupation 
with liquidity in balance sheets is still acute; not only 
does the typical U. S. corporation begin its balance sheet 
with this item (than which no piece of information could 

- 112 - 

be less significant) , but a recent study which draws 
repeated attention to the inadequacy of a concept of 
liquidity as a basis for balance sheet classification 
ends by concluding that working capital should be clas- 
sified into monetary assets and unexpired costs. '^ Yu has 
shown that this classification is relevant to the funds 
statement, not the balance sheet. ^^ 

We can also observe the implied use of the financial 
model in the accounting profession's approach to the prob- 
lems posed by fluctuating price levels. The prevailing 
view, not only in the United States but in other countries 
as v/ell, is that input market prices have continuous rele- 
vance to objects of valuation at all points in the production 
and distribution process prior to "realization," or exte- 
riorization through an act of sale. The "money costs" or 
acquisition prices are transcendental forms of purchasing 
power, "in suspense" while the operations of the firm are 
being undertaken; by a speleological analogy this purchasing 
power appears to go underground, to return in the form of 
receipts from sales only at the conclusion of the operating 
cycle. The effects of price-level changes are, therefore, 
seen to have purchasing power significance, and restatem.ent 
of the so-called "historical costs" by application of an 
index of general purchasing power will thus permit financial 
statements to be expressed "in terms of current dollars."*** 

- 113 - 

This approach has recently been adopted by a leading firm 

of Certified Public Accountants.^^ 

In this connection, we may quote a specialist in 

the field of corporation finance: 

It is useful, I think, to speak metaphorically of the 
invested funds of a firm as a pool of some liquid, say 
a cup of coffee. As it enters, it has sharp boundaries 
and can be distinguished, just as a lump of sugar can 
be identified in the cup of coffee — but not for long. 
The dissolving of the sugar can be compared to the 
sinking fund aspect of a project — the funds thrown off 
become an identifiable part of the pool. "Of course, 
the coffee will become just as much sweeter as the 
sugar added, as those who prefer marginal analysis are 
correct in pointing out. Nevertheless, confirmation 
of the idea that the funds of a project are soon part 
of a pool can be furnished by any cost accountant who 
has tried to design a system to follow the results of 
projects once they have become a part of a firm's 
operations. The almost unsurmountable difficulties 
of this task reflect the merging of the project with 
other activiries in the firm; they are not simply dif- 
ficulties caused by technical matters of accounting 
procedure. ^ ^ 

The accountant's difficulty, according to us, arises 

from the use of a narrow financial model of the firm which 

depicts only one aspect of reality, and a secondary one at 

that. There is no possibility of deducing from this model 

any rules which will permit assets to be distinguished from 

costs, or revenues from equities, other than by referring 

to metaphysical ideas of physical "flow" or "attachment." 

The central problem of valuation is uneasily handled by the 

"historical cost" rule, which im.plies (a) that money payments 

are the only relevant value phenomena to be considered by 

the accountant, and (b) that these payments can be uniquely 

- 114 - 

associated with the objects of the firm's organization and 
processes throughout its capacity and operating cycles. 
Neither of these assumptions is tenable in the light of 
empirical observations to the contrary. The model, there- 
fore, has nothing to say on the critical accounting questions 
of depreciation, inventory valuation and tax allocation, and 
has failed to provide a conceptual framework in the fields 
of cost and management accounting, where financial accounting 
theory is said to be inapplicable. The consequence of using 
this model is seen from financial accounting textbooks to be 
a catalog of valuation methods and bookkeeping procedures 
which fail to display any connection with the conceptual 
framework from which they purport to oe derived. It is 
this lack of any logical nexus which drove Paton and 
Littleton backward into the arms of Fisher; other accounting 
theorists have found more contemporary embraces alluring. 

The Cubernetias Model of the Firm 

The term, "cybernetics" is used here to designate 
all those accounting theories which proceed from the con- 
cept of an information system of which an accounting system 
forms part. The model has two aspects, a behavioral and 
a mechanical; the behavioral aspect is that the firm is 
conceived as a formal association of human individuals, 
and depicted in the form of the organization charts so 

- 115 - 

beloved of accounting textbook writers; the laechanical 
aspect is the representation of the firm as a decision- 
unit, the formal structure of which resembles a computer 
program. An increasing number of books and periodical 
articles adopt this approach to accounting theory.^' 

The various behavioral models of the firm used 
by organization theorists such as Barnard, and Cyert and 
March, would appear to have little interest to an accounting 
theorist who abstracts from behavioral factors; we regard 
the human problems of organization as separable from the 
processes of production. It is true that budgets can be 
conceived as tools for delegating authority, and that a 
firm can then be structured as a set of "responsibility 
centers," leading to a concept of responsibility accounting 
which has received substantial support from^ practitioners 
as well as theorists. The difficulties, hov/ever, are real: 
each individual presumably displays different behavioral 
characteristics, which are not necessarily those presupposed 
by the organization chart — Barnard and others have drawn 
attention to the distinction between formal and informal 
organization. Changes in organization are inclined to 
take place frequently, and to be less than perm.anent in 
nature, leaving the organization chart limping slov/ly in 
their wake. The responsibility centers may not be truly 
independent, and the valuation problem, lies at the roots 

- 116 - 

of all transfer prices. Some individuals have multiple 
responsibilities; some centers have more than one responsible; 
and so on. V7e are inclined to agree v;ith Machlup that little 
analytical utility attaches to behavioral presuppositions 
in this context, and we believe that the usefulness of 
responsibility accounting systems must be a function of 
the extent to which the responsibility centers (and the 
related "profit centers") are selected to correspond with 
the de facto organization and processes of the firm, rather 
than with de jure titular responsibilities. 

The decision-unit model of the firm, in fact, 
abstracts from behavioral properties other than these 
embraced by communications theory, and depicts the firm 
as a computer program representing its information flow, 
a-s in Figure 7. The organization and processes of the 
firm are again abstracted, on the grounds that the ac- 
counting system must conform with the requirements of a 
hypothetical decision-maker who functions in the same way 
regardless of his situation. The conceptual framework 
underlying this model was described by a Committee of the 
American Accounting Association in 1966^® and has been 
called an "events" approach to basic accounting theory. ^^ 

In this model, accounting is not limited to cash 
flows, or transaction data, or profit-making entities; 
indeed, it is not even limited to observations which can 

- 117 - 






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- 118 - 

be quantified in money terms. The object is to produce 
information which is useful in economizing, i.e., in using 
scarce resources, and the all-inclusive criterion of any- 
standard or rule is the usefulness of the information to 
which it leads. Basic standards would permit accountants 
to accept or reject particular accounting methods, and the 
Corrimittee found them to be four in number, viz.: relevance, 
verif lability ,- freedom from bias, and quantif lability . 
These guidelines are consistent with basic communication 
theory, which would also accommodate the possibility of 
"trade-offs" between the standards in problem situations. 

It is no doubt salutary to be reminded that the 
publication of financial statements or managerial accounting 
reports is an exercise in communication and not an end in 
itself. The concealed weakness of the "events" approach, 
however, lies in its implication of the information system 
as a Bing an si oh. "Undoubtedly, the unsophisticated person 
thinks in terms of 'systems' and 'principles.' . . . Popular 
ideas tend to be formalistic and to mistake the form for 
the reality. ... In reality there is no such thing as a 
system. ... It is at best an analytical tool for analysing 
social phenomena. . . . Economists are on safe ground as 
long as they describe actual events and their causal con- 
nections, and as long a~ they examine the effects of certain 
clearly defined 'interventions' under specified conditions." 

- 119 - 

The concept of a financial information system as a part of 
a total information system, and the application of communi- 
cation theory to these concepts, must be structured by 
reference to some underlying reality observable in firms 
and other economic units, and not by analogies with the 
natural and other social sciences. 

The problem would be otherwise if we were able to 
identify some conceptual framework — call it "General Systems 
Theory" — ^which had been seen, through appropriate scientific 
inquiry, to apply to all fields of human knov;ledge; a 
science like logic or mathematics. On close examination, 
however, the possibility of such a construct is transformed 
into an "interdisciplinary approach" similar to the one to 
which we are ourselves coirimitted. ^ ^ True, the homeostatic 
model used by Chambers and others could conceivably represent 
a universal "system/' possessing the characteristics of a 
computer; it is unlikely, however, that this model represents 
any economic reality, or if it does, empirical evidence to 
that end has not yet been produced. ^^ It is more likely 
that the computer is simply a machine which is capable of 
performing certain routine operations than that it is a 
microcosm of the universe. 

Wiien we read that "There is a growing tendency to 
define organizations as information entities or systems, 
and information processing as their major function, "^^ 

- 120 

we know that we are again in the realm of concept rather 
than belief; just as Littleton and Chambers are studying 
"accounting," so the information theorists are studying 
"cybernetics." The problem involved in using the infor- 
mation system concept is its open-endedness , as Moonitz 
has pointed out;^'' the idea of providing the decision- 
maker with the inforniation necessary for his decision is 
not operational. Computer technologists are becoming 
increasingly skeptical about the value of systems designed 
for information production, if only because managers cannot 
specify what information they require. Updating the data- 
base and other human aspects of the problem are insignifi- 
cant in comparison with the major obstacle provided by the 
absence of an image of a reality to which the phrase 
"management information system" can be referred. IBM, 
for example, recently experimented with a highly sophisti- 
cated "management information system" at its Armonk, New 
York, headquarters, but it was soon discovered that managers 
did not bother to use it, apparently because it did not 
provide the information they needed in a form they could 
use.^^ Since information is defined as "purpose-oriented 
organized data,"^^ and, since we require both a defined 
purpose and certain beliefs about the realities to be 
planned if we are to utilize the idea of a "system," the 
computer has to be programmed accordingly. If we understand 

- 121 - 

a production process, we can program a computer to control 
it; if we understand the organization and processes of the 
firm, we can likewise express them, in the form of flow 
charts and block diagrams, so that a computer can be 
programmed to plan and control them. So far, the accounting 
theorists who make use of the information systems or cyber- 
netics model have not attempted to describe the firm to 
which their programs will apply, although Bedford has 
come very close to stating the problem as explicitly as 
we are doing here.^^ 


We have attempted to show, not only that the price 
theory model of the firm in its Fisherian formulation lies 
at the base of the structures erected by a num.ber of recog- 
nized accounting theorists, particularly those whose 
influence we regard as paramount, but also the reasons 
why it is out of place in this context. The model is, of 
course, an economic decision model, and, therefore, would 
conform with the initial assumption made by us. The 
cybernetics model is likewise a part of decision theory, 
and is being used increasingly by accounting theorists 
whose orientation is "managerial" rather than "financial." . 
The financial, or "cash flov^," model of the firm appears 
at first sight to be better suited to a stewardship view 

- 122 - 

of the function of accounting; on closer examination, 
however, it reveals itself equally compatible with a plan- 
ning or a pure control hypothesis , ^ ^ In the next chapter, 
we shall attempt to construct a planning model which is 
free from the deficiencies of those already examined. 


1. See A. C. Littleton, Accounting Evolution to 1900 (New 
York: American Institute Publishing Co., 1933), p. 320; 
S. Paul Garner, Evolution of Cost Accounting to 1925 
(Alabama, 1954), Ch. I. Littleton's "Accounting Redis- 
covered," The Accounting Review, Vol. 33 (April, 1953), 
pp. 246-55 emphasizes the recording function although 
seeing it as a managerial requirement. 

2. We do not overlook the legal sources of accounting theory, 
but we regard it as improper to confuse juridical and eco- 
nomic concepts in a work on accounting theory. Juridical 
concepts must be taken as given, and are incapable of 
analysis outside a work on jurisprudence. For explora- 
tions in this field, see A. C. Littleton, Accounting Evo- 
lution to 190 0, and Essays in Accounting (Urbana, 
Illinois, 1961); also Arthur H. Dean, "The Relation of 
Law and Economics to the Measurement of Income," The Ac- 
counting Review, Vol. 28 (July, 1953), pp. 328-42. See 
also a series of articles by Sidney L Simon in the sam.e 
journal, 1953-56. 

3. The reliance of accounting theorists on a :nethodology 
devised by 19th century economic theorists for a totally 
different purpose has been demonstrated by James T. Robey 
in The Economic Standard for Contemporary Accounting 
Theory Formulations : Some Implications of Changes in the 
Methodology of Economics , Doctoral Dissertation, Florida 

(1969). The first section of this Chapter pursues Robey's 
argum.ent in a different direction from the one selected 
by him. 

4. Irving Fisher, The 'Nature of Capital and Income (New York: 
The Macmillan Co., 1906) and The Theory of Interest (Nev; 
York: The Macmillan Co., 1930). 

5. Fisher, The Nature of Capital and Income, p. 43. 

6. Fisher, The Theory of Interest , p. 28. 

7. See J. A. Schunipeter , History of Economic Analysis (New 
York: Oxford University Press, 1954), pp. 905-9. 

8. For an illustration of Fisher's use of this construct, ' 
see The Theory of Interest , pp. 64-5, 

9. See Fritz Macnlup, "Theories of the Firm: Marginalist, 
Behavioral, Managerial," American Economic Review, 
Vol. LVII, No. l" (March, 1967), pp. 1-33, espec. p. 3. 

- 123 - 

- 124 - 

10. Henry Hess, "Manufacturing: Capital, Costs, Profits 
and Dividends," Engineering Magazine , Vol. 26, No. 3 
(December, 1903) , p. 367 et seq. 

11. E.g., Harold Bierman and Allan R. Drebin, Managerial 
Aooounting : An Introduction (New York: The Mac- 
millan Co., 1968); Nicholas Dopuch and Jacob G. 
Birnberg, Cost Aooounting (Nev7 York: Harcourt, 
Brace & World, Inc., 1969). 

12. Frank H. Knight, Risk^ Unoertainty and Profit (Nev7 
York: Harper Torchbooks , 1955). 

13. W. A. Paton, Accounting Theory (A.S.P., 1962) 

(original publication. The Ronald Press Co., 1922), 
pp. 489-90. 

14. Paton distinguishes the concepts "expenses," "cost" 
and "loss," but his terminology is imprecise and he 
consistently equates cost with acquisition price. 

15. Paton, p. 42 4. 

16. Ibid. :, p. ^91 . 

17. W. A. Paton and A. C. Littleton, An Introduction to 
Corporate Aooounting Standards (American Accounting 
Association, 1940), Ch. II, "Concepts." This mono- 
graph attempts to establish the "basic concepts" 

or "postulates" underlying previous formulations of 
accounting theory sponsored by the Am.erican Account- 
ing Association, in which Littleton, in particular, 
took an active part. 

18. Harvey T. Deinzer, Development of Accounting Thought 

(New York: Holt, Rinehart and Winston, 1965) , p. 41, 

19. W. A. Paton, "Theory of the Double-Entry System," 
repr. in Fat on on Accounting , ed . H. F. Taggart 
(Michigan: Bureau of Business Research, 1964) 

pp. 3-18. 

20. Deinzer, p. 56. 

21. A. C. Littleton, Structure of Accounting Theory 

(Aitierican Accounting Association, 1953), Ch. 8. 

22. Ibid.:, Ch. 10. 

- 125 - 

23. See Floyd W. VJindal, "The Accounting Concept of 
Realization," Accounting Review, Vol. 35 (April, 
1961) , pp. 249-58. 

24. See Clifford D. Brov.'n, The Balance Sheet to the In- 
come Statement 3 Doctoral Dissertation, Michigan 

25. See Deinzer, p. 87: "Did Paton and Littleton chart 
their passage from the simple concept of business 
entity to a pro-position about costs and assets?" 

26. G. 0. May, "Limitations on the Significance of In- 
vested Cost "The Accounting Review, Vol. 27 (October, 
1952) , pp. 436-40. 

27. R. J. Chambers, "Blueprint for a Theory of Accounting," 
Accounting Research, Vol. 6 (January, 1955), pp. 17-25; 
Towards a General Theory of Accounting (Adelaide, 1961); 
Accounting, Evaluation and Economic Behavior (New 
Jersey: Prentice-Hall, Inc., 1966). 

28. Charabers, Accounting , Evaluation and. Economic Behavior , 
p. 50, p. 53. 

29. Ibid., p. 43. 
30= Ibid.^ pp. 48-9. 

31. There is no imaginable rea^son why the firm should 
experience decreasing satisfaction expectations as 
its stock of a comjTiodity is increased, although this 
may be undesirable if it can be expected to reduce 
profits . 

32. Chambers, Accounting, Evaluation and Economic Behavior, 
p. 52 , 

33. Ibid., pp. 49, 66. 

34. Ibid., pp. 67-8. 

35. Ibid., p. 70. 

36 . Ibid. , p. 73 . 

37. Ibid., p. 79. 

38. Ibid., p. 80. 

- 126 - 

39. Ibid., p. 81. 

40. Ibid. J p. 85. 

41. Ibid., pp. 8-9 and pp. 46-7. 

42. Ibid., p. 99. 

43. Stephen Gilraan, Aooounting Concepts of 'Profit (New 
York: The Ronald Press Co., 1939). 

44. Edgar 0. Edwards and Philip W. Bell, The Theory and 
Measurement of Business Income (California, 1961) . 

45. Richard Mattessich, Accounting and Analytical Methods 
(Homewood: Richard D. Irwin, Inc., 1964). 

46. Yuji Ijiri, The Foundations of Accounting Measure- 
ment: A Mathematical J Economic and Behavioral 
Inquiry (Mew Jersey: Prentice-Hall, Inc., 1967). 

47. We may mention two important publications of the 
American Institute of Certified Public Accountants: 
Accounting Research Study No. 1, The Basic Postulates 
of Accounting , by Maurice Moonitz (1961); and No, 3, 
A Tentative Set of Broad Accounting Principles for 
Business Enterprise.-. , by Robert T. Sprousa t? 
Maurice Moonitz (1962). These works, which have 
been subjected to a substantial volume of critical 
comment, appear to have been based on the same type 
of model. In this context, see Maurice Moonitz and 
Charles C. Staehling, Accounting : An Analysis of 
Its Problems , Vol. I (Brooklyn: Foundation Press, 
1950) . 

48. Machlup, p. 8. 

49. E.g., "at cost, that is, at the actual number of 
dollars spent or promised ..." in Lawrence L. 
Vance and Russell Taussig, Accounting Principles 
and Control (New York: Holt, Rinehart and V7inston, 
1966) , p. 10. 

50. The financial model has also proved attractive because 
of its applicability to nonprofit organizations. We 
simply remove the flow from sales v;hich replenishes 
the reservoir of cash, and substitute for "Proprietors' 
Capital" the relevant source of funds, e.g., taxes, or 
donations. The model becomes a one-way "flow- through" 
representation of the organization. 

- 127 - 

51. L. S. Rosen and Don T. DeCoster, "Funds Statements: 
A Historical Perspective," The Aooounting Review, 
Vol. 44 (January, 1969), pp. 124-36. 

52. William Huizingh, Working Capital Classifiaation 

(Michigan: Bureau of Business Research, 1967). 

53. S. C. Yu, "A Flow-of -Resources Statement for Business 
Enterprises," The Acoounting Review^ Vol. 44 (July, 
1969) , pp. 571-82, 

54. This result has been arrived at through a number of 
persuasive studies, starting with H. W. Sweeney, 
Stabilized Aaaounting (New York: Harper & Row, 1936) 
and culminating in the Accounting Research Study 

No. 6, Reporting the Financial Effects of Price-LeveZ 
Changes (New York: A.I.C.P.A., 1963) and Statement 
No. 3 of the Accounting Principles Board, Financial 
Statements Re-Stated for General Frice-Level Changes 
(A. I.e. P. A., 1969). 

55. See Accounting and. Reporting Problems of the Account- 
ing Professio'n (3d ed. ; Chicago: Arthur Andersen & 
Co. , 1969) , p. 6. 

56. Pearson Hunt, Financial Analysis in Capital Budgeting 
Harvard: Graduate School of Business, 1964), pp. 13-19 

57. See Thomas R. Prince, Extension of the Boundaries of 
Accounting Theory (Cincinnati, Ohio: South-Western 
Publishing Co., 1963); Hector R. Anton, "Some Aspects 
of Measurement and Accounting," Journal of A.cccunting 
Research, Vol. 11 (Spring, 1964), pp. 1-9; Norton M. 
Bedford and Vahe Baladouni, "A Communication Theory 
Approach to Accountancy," T'he Accounting Review, 
Vol. 37 (October, 1962), pp. 650-9. 

58. A Statement of Basic Accounting Theory, American 
A-Ccounting Association (1966) . 

59. George H. Sorter, "An 'Events' Approach to Basic 
Accounting Theory," The Accounting Review, Vol. 44 

(January, 1969), pp. 12-19. 

60. G. Myrdal, The Political Element in the Development 
of Economic Theory (Harvard, 1955), pp. 197-8. 

61. See Kenneth E. Boulding, "General Systems Theory — The 
Skeleton of Science," Management Science, Vol. II 
(April, 1956, pp. 197-208. 

- 128 - 

62. For example, which feature of an association of persons 
can be designated a servo-mechanism? 

63. John W. Buckley (ed.), in Contemporary Accounting and 
Its Environment (Belmont, California: Dickenson 
Publishing Co., Inc., 1969), p. 339. 

64. Moonitz, p. 4. 

65. See report by Timothy Johnson in the Business Section 
of the London Sunday Times dated October 5, 1969. 

66. Peter A. Firmin and James J. Linn, "Information Systems 
and Managerial Accounting," The Accounting Review^ 
Vol. 43 (January, 1968), pp. 75-82. 

67. Norton M. Bedford, Income Determination Theory: An 
Accounting Framework (Reading: Addison-Wesley , 1965). 

68. The duality is apparent in W. J. Vatter, The Fund 
Theory and Its Implications for Financial Reports 
(Chicago, 19 47) , where management requirements are 
given as "the most direct demands" on accounting, 
but the exposition is clearly directed toward 
financial reporting requirements. 


The psychological processes involved in comiaunications 
are not understood even by neurologists; for this reason, 
if for no other, a communications theory of accounting is 
inconceivable at the present time. The attempt to consider 
man in fundamentally biological terms such as homeostasis, 
a form of logical error which involves the presupposition 
that man is continuous v/ith all other animals except for 
the modifications forced by civilization, underlies the be- 
havioral approach to accounting theory, v/hich v.'e have like- 
wise rejected, "Philosophical anthropology today looks 
away from essences of man in order to grasp man in his par- 
ticularity and his complexity."^ 

Just as philosophers and psychologists are 
attempting to move, from concepts about man to the image 
of man, so must we also endeavor to identify the beliefs 
held by accountants concerning some reality of human inter- 
course in order to be able to depict a model of the firm. 
In this chapter we shall describe the organization and 
processes of production which we believe to characterize 
the contemporary business firm, in order to postulate a 

- 129 - 

- 130 - 

model of the firm to accounting methodology can be 
seen to apply. We shall then attempt to relate this model 
to other human activities in which accounting is done. The 
cyclical movements described will be dealt with sequen- 
tially, although it is clear that many of them occur simul- 

The Organization and Processes of Produation 
Investment and Capital 

We define investment as the allocation of scarce 
resources to production; it is therefore an alternative to 
consumption, which is the centerpiece cf economic theory. 
"The one term that straddles both se3.f and other, 'produc- 
tive,' is the most ambiguous o'F all; it is so far from 
being self-evident as to what is 'productive' that every- 
thing . . . may be labelled such."^ Nevertheless, v/e are 
forced by the logic of our assumptions to take a position 
on this question; by combining the concept "scarce resources" 
with the function of choosing between present satisfactions 
(including the production of present satisfactions) for 
oneself and the future satisfactions of others, we hope to 
have formulated a belief that "production" constitutes an 
acceptable iiriage of reality. 

The investment decision per se does not involve 
either the acquisition or the use of resources; these follow 

- 131 

as part of the processes of production. It consists 

essentially of identifying and quantifying the resources 

required, together with the intention to produce goods or 

services for a knov/n or unknown market, which intention 

leads to action. 

Knight thought that "Whether any particular 

individual becomes an entrepreneur or not depends upon his 

believing (strongly enough to act on the conviction) that 

he can m.ake productive services yield more than the price 

fixed upon them by what other persons think they can make 

them yield (with the same provision that the belief must 

lead to action)."^ We do not find this assumption necessary, 

even though the social sanction constituted by a profit 

motive or goal is clearly a factor to be considered as part 

of the decision process of the entrepreneur. We find more 

congenial Knight's later observation on this subject: 

It is common to think of the economic process as the 
production of goods for the satisfaction of wants. 
This view is deficient in two vital respects. In the 
first place, the economic process produces wants as 
well as goods to satisfy existing wants. . . . The 
second point is that the production of the indirect 
means of want satisfaction is by no m.eans altogether 
directed to the ultimate satisfaction of v;ants in any 
direct sense of the terms. . . . It is a great error 
to assume that in a modern industrial nation production 
takes place only in order to consumption [sic]."* 

Thus, we are at one V7ith Knight when he asserts 

that the object of the entrepreneur is to create wealth. 

- 132 - 

but we see the wealth in the goods and services produced, 
not in the profit thereby attained, or desired. 

The investment decision involves finding answers 
to three fundamental questions susceptible to quantitative 
3n^.l'V''sis ■ 

1. What quantity of scarce resources is required for 
the tulf.ilment of the postulated economic objective? 

2. From what sources are these to be obtained, and 
on what terms? 

3. Is the fulfillraent of the economic objective (in- 
cluding v/here relevant the probability factor) 
valued higher than the sacrifices (costs) which 
these terms represent? 

It is perhaps paradoxical that only in the marginal 
situation, where costs and benefits are equal, are the non- 
quantifiable value elements likely to prove the main deter- 
minants . 

The quantification of resources proceeds in money 
terms, since the value characteristics of money as a means 
of exchange can be transferred to the use of a money scale 
for a variety of goods and services required as inputs. 
The summation of these quantities produces a set called 
capital , defined as a representation in money of the scarce 
resources identified by an investment decision. Since the 
more common usage is to apply this word capital to the 
sources from which the resources are to be acquired, in- 
cluding the terms which must be agreed with the persons 

- 133 - 

involved, we shall use assets to denote what the economist 
means by capital; thus capital and investment are not m.ere 
identities, the capital of the firm being the investments 
of those who provide it, nor are capital and assets iden- 
tities, since they are determined by some common and some 
separate factors. The confusion which ensues when these 
concepts are used interchangeably has been noted by several 
distinguished economists, without, however, having been 
thereby diminished. Everyday usage likewise substitutes 
capital for assets, and we must be aware of this in our 
observation of reality. 

Business firms acquire capital from proprietors, 
lenders and the state, which latter generally fails to make 
its position clear in this matter. Presumably these sources 
will require certain incentives in order to cause them to 
refrain from both consumption and alternative investment; 
these incentives are known collectively as the "cost of 
capital." The incentive required by any investor should 
be at least equal to the benefit lost through foregoing the 
next best alternative; this V70uld be as true of state sub- 
sidies as of any other forra of capital, except for the fact 
that civil servants are under no social obligation to count 
costs. A lender will require interest, based upon condi- 
tions in the capital market at the time he makes his de- 
cision, A proprietor may have no "expectations" as such. 

other than that he wil3 be able to share in any residual 
income, or profit; if he requires an additional incentive 
it will be in the nature of an "opportunity cost" and be 
capable of expression as a rate (of return) similar to 

Tne conj.u5j.on oetween capital snd assets Iss.ds to 
the further logical error of failing to distinguish betv;een 
"cost of capj.tal" and "interest on capital (= assets)," a 
common feature of both economics and accounting. That these 
two phenomena are separable can be seen from the income 
distribution account of a socialist enterprise, reproduced 
by Marczewski . ^ 

Sales 423 

Purchases 176 

Depreciation 39 

Interest on fixed assets 13 

Interest on current assets 4 

Wages 61 

Social Security 27 

Profit 103 

Total £23 

Distribu tion of Profit 

40% to Federal Government 41 

20% to Republic 21 

Reserves 2 
Supplement to special 

category of workers 9 
Supplement to Social 

Security 4 

Balance of wage supplement 18 

Local government 4 

Freely disposable by firm 4 

Total 101 

- 135 - 

The statement shows that the two problems are 
handled quite separately. The amount of capital required 
is determined by the resources to be allocated to production, 
and insofar as production has a time element, involves a 
necessity to calculate interest. The cost of capital re- 
quired is determined by the opportunities foregone by in- 
vestors, as perceived by them at the time they decide their 
investment. Eva].uation is a process of comparing the costs 
of the firm v/ith its revenue, and the costs of capital are 
not the costs of the firm, but of other investors-. 

Equipment 3 or Investment in Capaaity 

The first class of resources identified by the 
investment decision is composed of those goods and services 
which are required in order to create a capacity to produce. 
Like "production," "capacity" presents a problem, and in 
order to define it operationally we shall distinguish be- 
tween three possible conditions of the firm, the last two 
of which are usually merged under the concept "liquidation." 
The three conditions are: going-concern, shut down and 
abandonment. As a going concern, the firm requires certain 
resources to fulfil its economic objective; it can, hov;ever, 
operate at varying levels of activity between zero output 
(shut down) and some practical maximum. The variable ele- 
ments of the total resources required, which may be zero 

- 136 - 

in a shut-down condition, constitute the "circulating" or 
"working" capital (=assets) of the firm; the fixed elements, 
which are changed only in order to expand or contract the 
practical maximum level of activity, is the equipment com- 
ponent. Thus, capacity to produce is defined as the factor 
or factors which limit the practical maximum level of ac- 
tivity at a given moment in time, and in the abandonment 
situation, capacity is zero. 

All firms require equipment, although the proportion 
of its total resources which a given firm, v.'ill invest in 
equipment varies from "very little" to "nearly all," de- 
pending upon the technology of the industry and the structure 
of its markets; the author needs only a room, of his own and 
a typewriter, but an oil refiner needs an oil refinery not 
too far from a population center. We must include the tech- 
nology of finance in this class of determinants, since the 
ability of a society to fractionate investment situations 
by institutional devices permits some industries to reduce 
investment in equipment, while creating nev; industries with 
equipment needs to take their place. The author can rent 
both room and typev/riter, whereas oil refiners must still 
own their refineries; doubtless, not for long. 

Besides the state of technology in the particular 
industry, the size and other characteristics of the market 
determine capacity. The economic size of a cement works. 

- 137 - 

that, is to say, the size v/hich permits the production of 
each ton of cement at the lowest cost, may be known to lie 
at 300,000 tons annually, but whether a cement works will 
be built or not, and, if so, with what size, depends upon 
the population being considered, its building needs and 
techniques, the organization of the building industry, its 
financial possibilities and distance from the nearest com- 
petitive producer, the location of raw material sources and 
many other factors. Further, investment in equipment is 
determined not only by the current states of technology and 
markets, but by expectations concerning future developments. 
A brewery may be constructed with a greater capacity than 
the consumption requirements of the area which it is to 
serve, and which will produce relatively uneconomically at 
levels of activity substantially below capacity, if the 
population of the area and its age distribution are ex- 
pected to change within a few years in a direction favorable 
to the consumption of beer. Again, the possibility of con- 
structing a rail transportation system which will be eco- 
nomically efficient and serve a large and mobile population 
will not result in a corresponding investment if rail use 
is expected to decline; a smaller capacity may be selected, 
the optimal factors of which will become apparent only 
with time. Market features are particularly dominant in 

- 138 - 

this area, and the relevance of subjective considerations 
concerning what is, and what is not, "the market" are clear 
and unmistakeable. 

However difficult the preparation of the decision, 
and there are some who maintain that only in the determi- 
nation of capacity does the entrepreneurial skill come into 
play, the number, type and nature of the resources which 
constitute capacity must be found, quantified in money and 
somehow aggregated, in order to find the first component 
of the money amount we have called "capital." 

Finanae and Working Capital 

The second class cf resources identified by the 
investment decision is the variable quantity which will be 
required to support given levels cf activity. It follov7s 
that this part of the decision involves the separate act 
of determining the level of activity for a specific period 
of time, called the "operating cycle" time, and this level 
of activity need not correspond with practical maximum ac- 
tivity for the reasons given above. The separation of 
"working capital" from "fixed capital" is a principal fea- 
ture of the financial model balance sheet; this is under- 
standable, since the avowed purpose of this form of balance 
sheet was to disclose liquidity as a support for obtaining 
credit.^ The decision to clarify the liquidity position 

- 139 - 

by means of a balance sheet classification arose through 
observation of the essentially distinct financing operations 
called for by the "fixed" and "variable" aspects of the 
firm's investment. Again, the economic distinction between 
partial adaptation and total adaptation, which underlies 
the separate theoretical treatment of the short-run and the 
long-run, can be traced to the same observation.^ The as- 
sertion that, because balance sheets are used for purposes 
other than the granting of credit, therefore the working- 
fixed capital classification has little utility for these 
other situations, is a typical non sequitur .'^ 

The working capital classification was given nev; 
life some twenty years ago by its reformulation in terms 
of the operating cycle. Dissatisfaction with the -cime- 
period rule VJhich liquidity considerations had introduced 
led Kerrick to distinguish between "fixed capital," or 
"facilities with which to conduct . . . business" and "cir- 
culating capital" or "properties in which [the business] 
deals. "^^ Unfortunately, Herrick's distinction was like- 
wise based upon the concept of rates of flow of cash, so 
that the underlying reality with which we are concerned v/as 
not brought out either by him or by the official accountancy 
bodies which sponsored this viewpoint. The many criticisms • 
of the operating cycle approach to working capital classi- 
fication which were subsequently voiced are attributable to 
this defect. 

- 140 - 

Since we are contemplating a variable quantity of 
resources, however, it is useful to think of them in the 
first place in the form of purchasing power, that is, in 
the form of bank deposits and negotiable instruments to be 
used for the day-to-day acquisition of the factor inputs 
which are required for production and can be varied from 
one operating cycle to another. This store of purchasing 
power will rise and fall with the receipt of the proceeds 
of sales and with payments to suppliers of inputs. Certain 
factors add to the working capital requirements of the firm, 
in particular the supply position, or necessity to store 
factor inputs for varying lengths of time, and outputs be- 
tween the time when they are produced and the time the mar- 
ket is ready to take them. There are invariably good 
reasons for both of these conditions; a striking modern 
example of the latter case is provided by the hairdressing 
industry, v/hich has found it possible to store haircuts 
(in the form of wigs) in order to im.prove the productivity 
of labor. Credit relations, on the other hand, may sub- 
tract from or add to the purchasing power requirements of 
the firm, depending mainly upon whether they arise out of 
the acquisition of inputs or the disposal of outputs. 

Working capital, then, can be defined as the 
quantity of resources required by a firm to support a given 

- 141 - 

level of activity, over and above the quantity of resources 
which constitutes capacity. It is determined by the planned 
level of activity, which is, itself, in part determined by 
capacity, and thus ultimately a function of the product mar- 
ket and its technology. In addition, working capital is 
determined by such factors as: location, v;hich affects 
supply at both ends; general economic conditions, which af- 
fect credit relations; and special conditions applicable 
to particular firms, such as credit-worthiness, from which 
v;e abstract here. 

Operations 3 or Costs and Production 

So far we have discussed the acquisitions which 
characterize preparation for production,- but these are a 
function of the planned level of activity and of capacity, 
so that they are themselves determined fc)y the operations 
of the firm. The objective of the firm has been stated 
as the production of goods and services, and its operations 
transform factor inputs, each measured in its appropriate 
unit, into a finished output, measured in its appropriate 
unit. The valuation of these required quantities of inputs 
we call "costs." If the costs of a firm are related to 
periods of time, rather than operations, we call them "ex- 
penses"; in the lindting case, where there is no loss 
through v;asto or v/indfall gain, and v:here all inputs used 

- 142 - 

during a period can be associated v;ith outputs of that 
period, costs and expenses are equal. The costs of the 
firm are composed of equipment use as well as the use of 
input factors acquired with working capital; the valuation 
problem is common to both types of input. 

The typical firm will recognize costs in a v/ide 
variety of forms. The traditional classification into 
materials, labor and expense (the last a residual class) 
is understandable in the light of its 19th century origins; 
the firm of that period used proportionally large quantities 
of materials and labor, and small quantities of other fac- 
tors. A more appropriate classification of factor inputs 
is given belov?; it dis cinguishes between goods and services 
used because of the storage possibilities of the, 
and between current income distribution and interperiod 
transfers, because of the social implications of income 

1. Goods and services 

a. Goods produced by other firms. 

b. Services produced by other firms (transpor- 
tation, insurance, rent, etc.). 

c. Services produced by government (taxes, fees, 
licenses) . 

2. Current factor incomes 
a. Wages and salaries. 

- 143 

b. Social security charges. 

c. Interest on capital (= assets) . 
3. Interperiod transfers 

a. Depreciation. 

b. Research and development. 

c. Pensions. 

It viill be recalled that we are here considering 
the use of goods and services, and not their acquisition, 
so that those features of the classification which relate 
to acquisition are not essential to the categorization of 
the subject matter as costs; this warning is particularly 
necessary because of the temptation for the reader to pre- 
suppose that all wages and salaries paid should appear in 
2a. From the point of view of the user, i.e., the invest- 
ment planner, the only significance of this classification 
is its relevance to the valuation problem, where it will 
prove of great utility. 

We must again be careful to avoid the fallacy of 
misplaced concreteness. The "liquid flow" image was ex- 
tended to the cost valuation problem in a famous and in- 
fluential study of the early 1950s, in which the phrase 
"pools of cost" was first used.'^^ There are, of course, 
no such "pools" in reality, and the introduction of this 
image, while it may have served to rationalize a procedure 

144 - 

and provide advocacy for its adoption, has thrown no light 
on the nature of the underlying reality. Accountants sub- 
classify processing costs into two principal categories: 
"direct" and "indirect" costs, the latter often referred 
to as "overheads." Direct costs are those valuations of 
factor inputs where the acquisition price of the required 
physical unit of input is attributable to the physical unit 
of output through the presence of a one-for-one correspond- 
ence or isomorphism in a physical sense. The payment of a 
royalty to an author, amounting to so much per book sold, 
is attributable to the book sold in the form of a direct 
cost, as is a pure piece-rate payment for printing labor, 
or a specially purchased piece of wood used for making a 
print for the book. The purchase of paper for the pages of 
the book, if it is one of several thousand copies, is a less 
simple case, because of the assumptions which are necessary 
to relate the physical quantity of paper purchased to the 
physical quantity represented by one copy of the book, and 
by this means to take a proportion of the purchase price. 
The physical correspondence, or isom.orphism, involved is 
only one of the variables which may be accommodated by a 
valuation model, however, so that it cannot be said even 
in the most direct case that the payment is the cost. Further, 
many input factors must be classified as overheads in the 

- 145 

absence of any such isomorphism, but are no less input 
factors on that account, and they have invariably to be 
valued as costs by means of a different model, known as the 
calculation of an overhead rate. 

The object of the production process is to bring 
goods and services into the hands of either consumers or 
those who will use them as intermediate products in the 
production of consumer goods and services. Seen in this 
light, there is no fundamental distinction between "manu- 
facturing" and "selling" costs, nor is there a separable 
noncost area to be designated "administration" or "financ- 
ing"; if the organization of the firm calls for these areas 
to be grouped under such headings, they are no different 
from the other overheads which we have discussed. The dif- 
ferences between these categories of cost are purely dif- 
ferences of timing; manufacturing costs represent uses of 
goods and services in bringing products to a saleable con- 
dition; selling costs represent uses of goods and services 
necessary to bring saleable goods to their consumers. In 
many cases no clear distinction can be m.ade between them, 
since to be saleable to a given consumer the product must 
be made in a specified way; this observation lies at the 
base of marketing management theory. The timing problem 
affects valuation, since manufacturing and selling expenses 
are rarely synchronous. The financial expense problem is 
of a similar nature. 

- 146 - 

The relationship between the operations of the firm 
and its costs of production is shov/n in Figure 8. The 
equipment of the firm constitutes its infrastructure, its 
organization, a superstructure. Acquisition of inputs via^j. j-,.v, ^^ ^j-^^i^euo <-n_ cij-j. j-c:vi^x£), as> uotis use, uu.l. (jury cne 
latter js attributable to actual operations. The problem 
of valuation lies in the need to distinguish betvjeen goods 
and services at various stages in the production process 
according to the value they represent to the producer; oven 
where a physical flow can be determined, the relation of 
acquisition prices to physical units at points in the flow 
is rarely isomorphic; the same observation holds for selling 
prices, so that Chambers' and other direct valuation models 
are equally inapplicable. The idea of a "flow of values" 
is an image of an accounting process; if we abstract from 
the valuation problem, it is also an image of a real pro- 
cess of transformation and eventually exchange. The val- 
uation problem can only be approached by first identifying 
the real process of transformation and exchange, and its 
stages, for each of these stages presents the accountant 
with a separate valuation requirement. 

Sales Revenue , or Distribution 

The final act of the entrepreneur in the operating 
cycle is the exteriorii:ation of the good or service pro- 
duced, V7hich we usually represent as a sale. This 

- 147 - 

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- 148 - 

fulfillment of the objective of the firm creates the 
conditions under which the investment can be liquidated, 
i.e., converted into purchasing power; in the majority of 
cases, however, reinvestment is automatic, so that pro- 
duction becomes a continuum of investment. A sale is an 
invoiced delivery; two features must be present, the 
delivery of a good or service to a customer (consumer or 
other producer) and the intention to recover the value of 
the good or service from the customer, manifested by the 
submission of an invoice. Liquidation of the sale by 
receipt of the purchasing pov/er represented by the amount 
invoiced is only one possible consequence of a sale; if it 
follows, then this aspect belongs to the financing of 
operations, or the "cash flov/" which, as we have pointed . 
out, is a separate problem affecting the working capital 
of the firm and the manner of its composition. 

As expenses are costs related to time periods, so 
revenues are sales related to time periods. The "matching" 
process is predicated on an underlying reality which relates 
both to the same period of time. But the reality under- 
lying the act of sale is the transformation of the objects 
of the production process into either consumption goods in 
the hands of consumers or intermediate goods in the hands 
of the producers who are responsible for the next stage in 

- 149 - 

the production process. These are the goods and services 
for which the costs of production v;ere incurred, but we 
must distinguish betv/een the various possible outcomes, 
as follows: 

1. All goods produced are saleable in the current 

2. Some goods produced are not saleable. 

a. Because there is no market for them (waste) . 

b. Because they are to be used by the firm 
itself (own machines constructed; samples 
to be given away , etc . ) . 

3. Some goods produced are saleable in a subsequent 
period (inventories of work in process and finished 
goods) . 

4. Some goods sold ix\ the current period were pro- 
duced in a prior period (reduction of inventories) . 

■■■ ■— 







Where the object of the firm is given as the 
maximization of profit, or "net income," the model assumes 
that the value of what is exteriorized will be greater than 
the costs, or values of what is used for that purpose. This 
is clearly an unnecessary assumption, since the underlying 
relation of inputs to outputs is independent of their valu- 
ation. It is conceivable that all oroduction is unsaleable. 

- 150 - 

or destined to be given away, in which case there will be 
expenses without revenue; even though the "matching" con- 
cept is unserviceable here, we can still calculate a nega- 
tive profit, or loss. The identification of stages in the 
productxon process extends the possibilities of analysis 
beyond the primitive ascertainment of profit, suggesting as 
it does the functional areas in which profits and losses 
may occur. 

It goes without saying that the capital of the firm 
is increased by the full value of the sale, and not by the 
profit element included in this value, and that the cost 
element restores that part of the capital which was consumed 
or "used up" in the production process. Conventional fi- 
nancial models of the firm ignore this observation, and this 
is particularly noticeable iii the theory of corporation fi- 
nance, where revenue as a source of capital is wholly dis- 

The Fvoduotion Process Acoounting Model of the Firm 

The production process model of the firm is shown 
in Figure 9 , where the manner in which it underlies the two 
most frequently used accounting statements is revealed. 
The contents of the first five columns compose the balance 
sheet; of the last three, the income statement. The third 
accounting statement, the funds flow, is a com.posite picture 

- 151 - 


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- 152 - 

of the entire cycle; a cash flow statement would be a 
summary of the third column, "Finance," and so on. The full 
model applicable to a particular firm would need to be sup- 
plemented by an image of the actual production cycle, as 
shown in Figure 8 . 

The history of the development of this model has 
been explained in detail elsewhere^ ^ and it is suggested 
that the use of accounting methodology for planning and 
control must necessarily rely upon some complex view of 
reality such as this one; we shall therefore call Figure 9 
the accounting model of the firm, and assume that it can be 
used to explain accounting and to predict the form which ac- 
counting methodology will give to new phenomena not before 
experienced. It is also a potential decision model, using 
the techniques of sim.ulation, although marginal models can 
be used in some situations where it is permissible to pro- 
ceed by abstracting to a great extent from the complexity 
of reality; such abstractions are the essence of operations 
research models using linear programming methods. The de- 
gree of abstraction permissible m.ust depend upon the nature 
of the planning decision which is at issue. In the simplest 
case, where only one or tv70 variables are affected, the 
"see-through" model of decision theory may be efficient; in 
a more complicated planning situation, it may well be de- 
ceptive . 

- 153 - 

The accounting model is particularly eloquent on 
the subject of valuation. It will be recalled that the 
"see-through" model of the firm presented a straightforward 
choice between entry and exit prices, and accounting the- 
orists have argued the acceptance of both of these; the 
cash flow and other models provided no assistance in solving 
the valuation problem, either because they were presented 
in a nonexistent physical form or because it was assumed 
that value considerations were part of the behavioral pat- 
tern of each individual decision-maker. The accounting 
model shows that there is not one valuation problem but a 
succession of these, since each stage of the production 
process presents one; we must therefore contemplate the 
simultaneous use of a variety of valuation models, rather 
than the general acceptance of one ubiquitous method of 
calculation. Although this observation is implicit in the 
conventions of accountants, it is rarely made explicit, and 
of the accounting theorists, only Mattessich has admitted 
more than one valuation m.odel into his conceptual framework, 
albeit in a less extensive form than the one adopted here.^^ 
The reason why theorists find it so hard to accept the co- 
existence within a set of accounts of a wide variety of 
valuation models is the implication of this view for the 
mathematical decision models in which they are primarily - 

-► 154 - 

intere;^ted; the application of statistical method to 
accounting data must remain at a fairly elementary level 
until the data themselves can be demonstrated to have a 
high order of homogeneity. This is, however, the least of 
the problems involved, as V7e shall attempt to show in the 
next section, where the essentially subjective nature of 
all valuations v;ill be discussed.^** 

What else can we say about the organization and 
processes of the firm from a study of the accounting model? 
The firm is linked with the outside world through markets : 
the real estate market, the labor market, the raw materials 
market, and so on. It is clear that there must be both a 
capital market and a money market, and that any attempt to 
analyze these markets as if they were one is doomed to 
failure. Profits and losses can arise from dealings in any 
of these markets, and although profit itself is a residual, 
and as such not susceptible to analysis, the forces from 
which it is derived can be identified and quantified for 
purposes of prediction, planning and control. This adds a 
necessary dimension to the concepts of "responsibility ac- 
counting" and the "profit center," and constitutes a firm 
bridge between organization theory and economics which 
supplements the somewhat less secure behavioral assumption 
upon which they both tend to rely. 

- 155 

Since markets actually exist between the organi- 
zation and the outside world, information systems may be 
devised to represent the relationships between them and, 
given the present state of communications theory, it may 
be useful to construct such systems in the form of com- 
puter programs, or block diagrams. It would be more useful, 
perhaps, to attempt to verify the assumption that the elec- 
tronic processes of the computer are not only representative 
of certain types of communication processes, but also nec- 
essary elements in these processes; given the variety of 
stimuli which affect human behavior, and its high degree 
of unpredictability, this is not immediately apparent. We 
can create a relatively unstructured image of a "total in- 
formation system" as a set of information systems linking 
actors with markets; we are unable to say, however, what 
forms these systemis take, or specify their contents. It 
is the absence of this knowledge which underlies the failure 
of the "management information system." concept to produce 
a workable model of the firm; accounting systems, on the 
other hand, if they are structured to conform with known 
operating systems within the firm, are relatively easy to 
program and have been successfully transferred to computers 
over the past fifteen years. ^^ 

The division of the processes of the firm into 
stages in this way facilitates the measurement of any 

- 156 - 

physical flows between markets and the firm and within the 
firm, but as we have repeatedly pointed out, there is no 
value flow in a physical sense, so that this feature does 
not help us on our way toward the development of appropriate 
accounting valuation models by, for example, measuring flovjs 
and calculating rates of flow. Where such a physical flow 
is measurable we still are faced with a valuation problem 
in much the same form as where it is not, except in those 
relatively rare cases where there is a one-to-one corres- 
pondence between the acquisition price and the physical 
unit of flow. 

The Accounting Model AppZ-ied to the Nonprofit Firm 

Valuation and Government Revenue 

If we define a firm as an organization of resources 
for the purpose of production, and if we assume that the 
objective of government is to produce goods and services 
which individuals cannot or will not provide in any other 
way, then government (and other nonprofit production units, 
such as charities) can be analyzed by using the accounting 
model of the firm. It is with a "formalized and abstract 
description of the history of the firm" that Boulding claims 
accounting to be conventionally associated, ^ ^ and while we . 
would take issue with the emphasis on "history," we agree 
with him that the concept of the firm should be extended 

157 - 

to include nonprofit units. We also agree that the 
accountant is concerned only with those aspects of the or- 
ganization and those processes of production which can be 
valued; the underlying realities, which he calls "physical 
quantities" but which we can conceive in more intangible 
forms, are replaced by a quantity expressed in money as 
the unit of account. The problem of valuation is common 
to all forms of organization, and we must therefore ask: 
in what way must the accounting model of the firm be adapted 
for use in the analysis of nonprofit firms? We shall assume 
that the government agency is representative of the problems 

Government receipts from taxation are obviously not 
revenue, since they are clearly attributable to the "cash 
flow" or liquidity of the organization; we speak of govern- 
ment revenue loosely to denote government ireceipts from all 
sources, but it would appear that this term is being used 
as a surrogate for the services which government is being 
paid to provide. The final act of distribution,- the ren- 
dering of a service which com.pletes the operating cycle, 
cannot be defined in terms of sales revenue, but there is 
clearly an exteriorization of services produced which takes 
place when the government agency performs its economic pur- 
pose; the question is v;hether the purpose can be defined in 

- 158 - 

such a way that the service rendered can be valued. If we 
were to pose this question to a consumer, such as an indi- 
vidual or a household, the answer would be that, in the 
absence of an agreed scale of interpersonal utility compari- 
sons, such a valuation would remain purely subjective and 
have no relevance to any problems extending beyond the per- 
sona of the individual or individuals concerned. In this 
case, the only possible area of interpersonal agreement is 
the valuation of cash transactions, since all interested 
persons can satisfy themselves concerning quantities of 
money received and paid; for this reason, governments rely 
largely on cash accounting in the field of personal income 
taxation, and attempts to extend the observations of the 
income tax official to uses instead of acquisitions in- 
variably prove counter-productive. Cash accounts are all 
the accounting the consumer normally requires, although the 
appearance of investment expenditures changes the picture. 
Again, the extent to which the consumer can plan his con- 
sumiption depends upon his ability to value, in money terms, 
a diversity of satisfactions to be received at different 
times, together with the related sacrifices; failing this, 
he can still plan his acquisitions and disposals of goods 
and services, but not their uses. The cash budget is the 
appropriate mechanism for this limited objective, and cash 
accounting the related control situation. 

- 159 - 

Government accounting has traditionally been 
performed on the cash basis, modified to include p^irchases 
and sales on credit, and attempts to adapt it to the ac- 
counting model of the firm have been strenuously opposed. 
The Taft Coroip.ission ' s re'^^ort of 1921 led to the introduction 
of federal budgets, but its reconim.endations that budgeting 
and £iCcounting should reflect economy and efficiency (i.e., 
should be concerned with use and not only with acquisition) 
were not implemented by the legislature; the Treasury also 
placed a narrow construction upon the Budget and Accounting 
Act of 1921.^'^ The Hoover Commission of 1949 made similar 
recommendations, leading to the introduction into govern- 
ment of the concept of a "Planning-Program-Budgeting System" 
(PPB) , and the Budget and Accounting Act of 19 50 directed 
improvem.ents in government accounting for planning purposes. 
Starting in 19 61 in the Defense Departm.ent, and with the 
official backing of the President of the United States, by 
19 69 only 26 of nearly two hundred agencies of t?ie federal 
government had initiated inquiries into the system, and many 
of these v/ere held back by procedural problems of valuation 
and bookkeeping, known generally as the "crosswalk" problem 
of reconciling the full accounting model with the rigid 
rules for recognizing government expenditures heretofore 
applied. A few had identified formal parts of the system 

- 160 - 

and incorporated them into the budget process by January, 
1969. ■^^ A study of the work done by these agencies reveals 
that it is largely an extention of the "cost/benefit analy- 
sis" technique, which is statistical in nature and predicated 
upon the assumptions of price theory which flow from the 
concept of the individual consumer. 

In national income accounting the government is 
classified as a consumer, on the grounds that its expendi- 
ture is a "final product," that is, represents acquisitions 
of goods and services which are not resold. Preoccupation 
with the phenomena of exchange is understandable in a pure 
market economy, but the growth of the public sector in the 
modern state renders market criteria inadequate. A large 
part of the economic activity of the United States consists 
of the production of services by the public sector, which 
in 1969 accounted for some 35% of the gross national pro- 
duct; in Western Europe the proportion is higher, having 
reached 50% in the United Kingdom in 1968, and the commu- 
nist countries display a similar characteristic. In the 
light of this evidence, we find the assumption that the 
government is a consumer to be in conflict with the facts, 
quite apart from the moral and political overtones of such 
a concept, which leads inexorably to the corporate state. 
Kuznets has pointed out that many government services can 

- 161 - 

best be thought of as intermediate goods, in that they 
contribute to output in the business sector, but this does 
not go far enough, nor does his proposal to divide govern- 
ment expenditure into two parts, consumption and investment, 
answer our criticism. ^^ We agree that government investment 
should be separated from government production of current 
services, which is a normal by-product of applying the ac- 
counting model of the firm to the processes of planning and 
control . 

We accept the proposition that the specific 
objectives of government agencies are identifiable, which 
is the form our assumption of rationality takes in this 
context, even though we recognize the unv;illingness of 
public servants to commit themselves in this way; an un- 
willingness that no doubt finds its origins in their ex- 
perience of the ingratitude of the people they serve. If 
the objectives of a government service can be isolated, 
then their valuation presents no greater problem than the 
theater ov/ner faces in pricing admissions, or, more appro- 
priately perhaps, than the manager faces in deciding how 
much a corporation can afford to pay for subsidizing the 
meals it serves in the works cafeteria. 

The intellectual problem encountered is the 
Aristotelean distinction between value in exchange and 

162 - 

value in use, and the attempt to resolve it by means of the 
assumption that acquisition prices are objective evidence 
of value. That the word "value" has two meanings was illus- 
trated by Adam Smith with his celebrated "water and diamonds" 
paradox; the obvious solution lies in finding a common fea- 
ture in these two meanings, which Wicksell undertook to 
do.^° Noting that value in exchange involved the concepts 
of usefulness and saaraity , some economists had deduced 
that utility governed demand and scarcity, supply; price 
was a function of both, an observation which Wicksell found 
too trite to warrant a place in economic science. The cost 
of production theory of value depended upon exchange values, 
and therefore could not be offered as an explanation for 
them. Wicksell based his explanation on degrees of utility, 
that is, he explained the phenomenon of exchange by refer- 
ence to the fact that, for one party value in use was less 
than the price, and for the other party more. But this did 
not establish a meaning for "value in use"; merely a reason 
for the profitability of exchange. Under the assumptions 
of perfect competition it is legitimate to deduce that value 
in exchange is evidence of value in use for the parties to 
the exchange, and given the further assumptions of the 
stationary state, that value in exchange is a constant 
throughout the market and through time. In the absence of 

- 163 

perfect competition, however, economists are agreed that 
actual prices are mere faits divers without normative sig- 
nificance, and that the value in use which underlies value 
in exchange is not thereby revealed. Whether value in use 
will lead to a corresponding value in exchange is a sec- 
ondary problem to us, although a primary problem to the 
price theorist. 

If it is accepted that the valuations which the 
entrepreneur makes as a means of planning and controlling 
the organization and processes of his firm are subjective 
quantifications in money, d.ncluding the planning estimates 
of selling prices which must, given roundabout production 
methods, take place in advance of the exchanges from vrhich 
alone objective price data could be derived, then it cannot 
be held that the expression of government services in money 
quantities is any different in kind. All that is required 
is a validation procedure so that the subjective estimates 
of civil servants can be rendered as objective as the sub- 
jective estimates of corporate officials; this is what PPB 
and cost/benefit analysis to achieve. We are aiming 
at Coleridge's "willing suspension of disbelief" rather than 
Disney's "plausible impossible." 

The resistance which is encountered to the valuation 
of revenue in the absence of market sales arises from 

- 164 - 

certain fundamental logical errors in the theory of money, 
which are so important in this context that we shall treat 
them in a separate section. 

The Nature of "Money" and "Valuation" 

The function of money as a unit of account and of 
a m.onetary scale as a measuring device are derived from the 
same source as the functions of m^oney as a means of payment 
and as an asset. To assume that these functions can only 
be found together is the first of the logical errors re- 
ferred to above . 

We first observe that a good or service has exchange 
value, and define a price as a quantitative representation 
in money of exchange value. If the price expressed in money 
is the desired measure of exchange value, in what way can 
this property be separated from the good or service and 
transferred from one person to another (as a book debt) or 
stored (as an asset) ? In order for this operation to be 
possible, money must have some abstract quality which is 
distinct from the properties it possesses when considered 
in relation to any one of its four functions. This abstract 
quality must be distinguished from the "real" characteris- 
tics of money as coins, bills, and so on, just as the numis- 
matist must distinguish between coins which are legal tender 
and coins v;hich are collectors' pieces. It is this abstract 

- 165 - 

quality, whether derived from custom or statute, which gives 
money its power to mediate exchanges and serve as an asset, 
and which also gives it a separate but related power to 
measure values and serve as a unit of account. 

The second logical error is to regard valuation 
in money as a measurement of the same kind as, for example, 
measurement in weight. In other words, we may not assume 
that the propositions "X weighs 20 lbs." and "Y costs $20" 
are structurally comparable. ^ ^ In the first case, we have 
four elements; (1) X, the object being measured (2) lbs., 
the unit of measure (3) 20, the quantity and (4) weight, 
the quality being measured. In the second case we have 
only three of these elements: (1) the object, Y (2) the 
unit, $ and (3) the quantity, 20. Where is the quality 
being measured? The phrase "objective value in exchange" 
reveals its emptiness, as does Chambers' invention "numer- 

The proposition "Y costs $20" can never tell us 
anything about properties of Y which can be perceived in 
the absence of the price, as the weight of an object can 
tell us about a quality we could perceive, albeit less 
precisely, in the absence of such a measure. The proposition 
means either "pay me $20 for Y" or else: "if I pay $20 I 
will receive Y." The only meaning of such a proposition,. 

- 166 

in other words, is to be found in its usefulness to human 
actors; of valuation in general we can say no more. 

It is noteworthy that the papers given at a recent 
seminar on research in accounting measurement made no men- 
tion of this aspect of valuation; ^^ although Sprouse raised 
the question of specifying the attribute to be measured/-^ 
for some reason this thought was not pursued, and all con- 
tributors directed their attention to the object being 
measured. Only Devine presented a treatment of measurement 
which is compatible with the idea of valuation as. a sub- 
jective quantification; in his view, all measurement is 
fiat measurement, and the desire to assign numbers to mean- 
ingful relationships need not be arbitrarily limited.^'* 
The writers who have discussed the theory of measurement 
in relation to accounting theory^ -^ have all taken as their 
point of departure the interesting and influential views 
of Stevens and Torgerson;^^ it must be remembered, however, 
that these scientists were concerned with the application 
of statistical method to observations of social behavior, 
which is a problem of a lower order than the problem of 
quantification which we approach through the concept of 

- 167 - 


VJe have thus arrived at a conclusion v.'hich will no 
doubt fail to satisfy those whose incipient ideal it is to 
hand over the management of production to the computer, but 
which the h^amanist will find reassuring. In order to iden- 
tify a conceptual framework which will embrace all aspects 
of accounting we have reconstructed the reality which un- 
derlies the organization and processes of investment and 
production, and found that it discloses a continuing need 
to value if these processes are to be quantified in a form 
suitable for planning and control. We have also found that 
only in a minority of cases, where acquisition and use are 
simultaneous, can the acquisition prices of the factors of 
production be assumed to be the costs of production, and 
that the planning function necessarily involves forecasting 
future selling prices, the relevance to which of present 
market prices is a question of fact in each case. Many of 
the phenomena of use are divorced from acquisition of the 
object being used in such a way that a subjective evaluation 
is all that can be hoped for in this context, e.g., depre- 
ciation of plant and equipment; provisions to make good at 
some future date the current damage being perpetrated by 
the elements; research and development. It is clear to 
us that the element of expectations incorporated in even 

- 168 - 

the most conventionally prepared set of accounts is greater 
than has been recognized by accounting theorists, and that 
human cooperation hias been a more substantial factor in 
progress using accounting statements than has technical 
achievement. We find this conclusion pointing to a greater 
role for accounting in the economic management of society, 
since it liberates the theory of accounting from unnecessary 
restrictions which have led many writers away from the broad 
view of accounting as a planning and control methodology 
and tov/ard a narrow view of accounting as business history. 


1. Maurice Friedman, "The Changing Image of Human Nature: 
The Philosophical Aspect," American Journal of Psycho- 
analysis, Vol. XXVI, No. 2 (1966), p. 141. 

2. Ihid., p. 143. 

3. Knight, Risk, Uncertainty and Profit (Harper Torch- 
books, 1955) , p. 280. 

4. Jbid.j pp. 317-18. 

5. J. Marczewski, Planification et Croissance Economique 
des Democraties Populaires (Paris: Presses Universi- 
taires de France, 1956), Vol. 1, p. 303. (Our transl.) 

6. E.g., J. A. Schumpeter, The Theory of Economic Develop- 
ment (New York: Oxford University Press, 1S61) , 

pp. 62-3. (First pub. 1934.) 

7. See Paul- Joseph Esquerre^ Accounting (New York: The 
Ronald Press Co., 1927), p. 106 and Maurice E. Peloubet, 
"Current Assets and the Going Concern," Journal of 
Accountancy, Vol, XLVI (July, 1928), p. 19. 

8. The modern three-period division of time corresponds 
with our three situations of the firm. See p. 135. 

9. Stephen Oilman, Accounting Concepts of Profit (New 
York: The Ronald Press Co., 1939), pp. 110, 113, and 
National Association of Accountants, Cash Flow Analysis 
for Managerial Control, Research Report No. 38 (Nev; 
York: N.A.A., 1961), p. 4. 

10. Anson Herrick, "Current Assets and Liabilities," 

Journal of Accountancy, Vol. LXXVII (January, 1944), 
pp. 48-55, and American Institute of Accountants, 
Accounting Research Bulletin No. 30 (Nev7 York, 1947) 
(Final edition, 1961.) The quotation is from Herrick, 
p. 50, and the semantic problem recalls the GerTnan 
struggle to distinguish between Gehrauchsgut and 
Verbrcuchsgut . 

- 169 - 

- 170 - 

11. John A. Higgins, "Responsibility Accounting," The 
Arthur Andersen Chronicle^ Vol. XII, No. 2 (April, 
1952) , pp. 1-17. 

12. Marcel Morranen, Le Plan Comptable International, 
Brussels, Eds. Cambel (1958) and Kenneth S. Most, 
Uniform Cost Accounting (London: Gee and Co. 
(Publishers), Ltd., 1961), Chs. 6 and 7. 

13. R. Mattessich, Accounting and Analytical Methods 
(Homewood: Richard D. Irwin, Inc., 1964), pp. 217-20. 

14. Myrdal and Hagerstrom both argue that there are no 
values in the objective sense, but only subjective 
valuations which must be distinguished from per- 
ceptions of reality. See Gunnar Myrdal, The Political 
Element in the Development of Economic Theory (Harvard, 
1955) , p. 13. 

15. In a recent publication by the public accounting firm, 
Haskins and Sells, the partner-in-charge of managem.ent 
services for the fdrm, Mr. Gordon L. Murray, describes 
the stages of evolution of the management information 
systems for which he has been responsible since 1950. 
It is clear from the illustrations reproduced that the 
vital separation of the organization from the processes 
has not been undertaken in constructing these systems, 
although a subconscious striving to effect such a 
separation is evident in the changes v;hich took place 
between 1950 and 1970. 

16. Kenneth E. Boulding, "Economics and Accounting: The 
Uncongenial Twins," in W. T. Baxter and Sidney David- 
son (eds.), Studies in Accounting Theory (Homewood: 
Richard D. Irwin, Inc., 1962), pp. 44-55. 

17. Arthur Smithies, The Budgetary Process in the United 
States (New York: McGrav7-Kill , 1955), pp. 68-71. 

18. Joint Economic Comm.ittee of the United States House of 
Congress, The Analysis and Evaluation of Public 
Expenditures: The PPB System, Vol. 2, Part IV, U. S. 
Governir.ent Printing Office, 1969), p. 617. 

19. S. Kuznets, National Income: A Summary of Findings 
(New York: National Bureau of Economic Research, 
1946) , pp. 131-33. 

20. K. Wicksell, Lectures on Political Econom^y, Vol. I, 
Part I, "The Theory of Value" (New York: The Macmillan 
Co., 1934) , p. 18. 

- 171 - 

21. Gustav Adolf Gross, die wirtschaftstheoretisohe?! 
'- Grundlagen dcs "Modernen KapitaZ-Csmus " von Somhapt 

(Jena./' Verlag von Gusta Fischer, 1931), p. 142. 

22. Researoh in Accounting Measurement , eds > Robert K. 
Jaedicke, Yuji Ijiri and Osv/ald Nielson, Araerican 
Accounting Association (1966). 

Position and Income: Purpose and Procedure," ibid.j 
pp. 101-14. 

24. Carl Thomas Devine, "Some Conceptual Problems in 
Accounting Measurements," ibid., pp. 13-26. 

25. Mattessich; Chambers, Accounting , Evaluation and 
Eoonorriic Behavioy? (New Jersey: Prentice Hall, Inc., 
1966); Thomas R. Prince, "An Overview of Conceptual 
Measurement Issues in Financial Accounting Theory/' 
in Theory Formulatioyis , Accounting Series No. 6, 
Florida (1970). 

26. S. S. Stevens, "On the Theory of Sca].es of Measurement," 
Science^ Vol. CIII (1946), pp. 677-80 and VJarren S. 
Torgerson, Theory and Methods of Scaling (New York: John 
Wiley and Sons, 1958). 


If our hypothesis is correct, then the appearance 
of an accounting system which embraces the activities of a 
society as a whole will depend upon two factors: 

1. The extent to which the society purposely sets 
out to plan its economic future. 

2. The extent to which the planners can agree on a 
fairly detailed image of the realities of the 
planned society. 

The usefulness of such an accounting system will 
depend upon the extent, to which the planners ' image con- 
forms with the reality v;hich it purports to represent. 

Social accounting is such an accounting system; 
Yu v;ould prefer to call it macro-accounting, since he sees 
important similarities between this and other forms of 
accounting which suggest to him that the distinction be- 
tween social and private accounting lies primarily in the 
size of the economic unit studied. ■' "We use the term social 
accounting ... to mean the whole system of accounts and 
balance sheets of a nation or region, their price and 
quantity components and the various consolidations that 
can be derived from them."^ Although the term can be 
criticized it appears to have acquired wide currency, and 
we shall follow this current usage. 

- 172 - 

- 173 

In this chapter we shall first examine the history 
of social accounting in the context of national planning, 
and the Soviet Russian and U. S. systems which represent 
the two principal branches found in practice; this will 
permit us to identify the image of economic reality which 
underlies them and to show hov/ they may be modified to 
conform with a more complex picture of a modern industrial 

History of Social Accounting 

Early work in the measurement of national income 
and wealth was predominantly statistical.^ First attempts 
at "national income accounting,'' or providing estimates of 
national economic aggregates through the m.edium of an ac- 
counting model, were made in the 1920s in Soviet Russia; 
a similar path was followed by the U, K. , the U. S. A. and 
Canada after World War II, aided by a 194 4 conference on 
procedures which clarified the terminology and m.ethods to 
be used."* Many other countries have introduced social 
accounting since those pioneering efforts established the 
feasibility of this method. 

Planning is a complex of actions v/hich involves 
determining the goal to be attained, identifying the 
necessary means and choosing among those means the ones 
which appear to permit attaining the goal at the lowest 

- 174 

subjective evaluation of sacrifice. The plan itself must 
arrange the employment of those means selected through time 
and space in such a way that their complementarity is fully 
exploited. Soviet planners first attempted to formalize 
their plans purely in terms of physical quantities, but the 
great failures of their early efforts directed attention to 
the need for a financial plan, or national economic budget. 
Only by translating the various operations contemplated by 
the plan into monetary terms, and expressing the result in 
the form of accounts, could the hierarchies of preferences 
and scarcities and the possibilities of substitution between 
goods and manufacturing processes be brought together in 
order to evaluate them and produce an economic plan.^ In 
Marczewski's view, the fact that important economic decisions 
were made without such national accounts does not vitiate 
this observation, since they consisted of choices between 
a limited number of variables and variations, the full ef- 
fects of which v;ere impossible to measure and compare. 

Like the Soviet social accounts, the U. K. system 
was first developed for planning purposes. The watershed 
can be found in the period 1940-42; in 1940, Hicks published 
an important paper distinguishing between the concepts of 
national income at m.arket prices and at factor costs, but 
which was clearly statistical in outlook,^ and in 1942 he 
published the equally influential textbook The Social 
Fz'amework^ which he had to be dissuaded from calling 

- 175 - 

"The Social Accounts,"^ In the inteirvening two-year period, 
a collection of national income statistics such as the ones 
provided by Colin Clark^ were transformed into a putative 
accounting system; Harrod, in his biography of Keynes, 
indicated exactly how thia took place. Keynes' book, 
Bnw to pay for- the War-, created soiTie interest in the pos- 
sibilities of planning the national economy more effectively 
and led indirectly to the appointment of two economist- 
statisticians, James Meade and Richard Stone, to the staff 
of the U. K. Treasury, where Keynes was already installed 
in a semiofficial capacity. These economists produced a 
statement in account form which analyzed the U. K. national 
income and expenditure in the v/inter of 1940-41, and the 
following passage from the Harrod biography is particularly 
interesting in the liglit of our comments on the valuation 
problem in Chapter V of this study: 

The Treasury had hitherto confined itself to figures 
for actual, knov.'n transactions » This account included 
estimates, and certain figures had to be obtained by 
the method of difference from other estimates — all of 
which was very dangerous. Yet this kind of national 
income accounting has com.e to be regarded as the es- 
sential tool of any economic planning, whether of an 
individualist or socialist variety. 

There appear to have been tv/o principal causes 

leading to the adoption by non-Communist nations of an 

accounting framework for their national income statistics. 

The first cf these was a series of persuasive books and 

papers, starting v.'ith Fisher's The Nature of Capital and 

- 176 - 

Income, asserting the relevance of accounting methodology 
to the measurement of national income; these works created 
an intellectual climate favorable to the task. The second 
and proximate cause was the wartime condition under which 
i^^civ^^ ciiii^ i^^v^j.*^ ,«^i.jvv_^, ,_ii^ gvj V ^^ n^ii^in^ iiciG rcquisitioneci a 
large part of the U. K. economy, and the government budget, 
in the form of an income and expenditure account, became a 
major part of the total picture v.'hich national income sta- 
tisticians were attempting to portray. The construction of 
a similar tv;o-sided income and expenditure account for the 
entire national economy was thus facilitated.^^ The ini- 
tiative was follov/ed almost immediately by economists in 
the U. S. A. , v;here the annual publication of social accounts 
was started in 1947, the same year as the U. K.^^ 

Although the transition from statistics to accounting 
can be demonstrated fairly clearly, the subsequent devel- 
opment of systems of social accounts in the non-Communist 
world cannot be attributed to national economic planning. 
True, the stated objects of national income statisticians 
include the formulation of economic policy, but few of the 
countries concerned possess the legal and institutional 
framework which would permit policies to be translated 
into plans, and those which do, such as France, aim prin- 
cipally at the planning of money flows rather than the 
production of goods and services; the state influences the 

- 177 - 

choices of its subjects by increasing and decreasing their 
coromand over the means of payment, and not by directives 
allocating land, labor and capital to specific output ob- 

It has been suggested that the testing and 
development of economic theory is an important objective 
of national income statisticians, who are interested in 
the production of quantitative data to be fitted into macro- 
economic models, in particular . ^ "* This motive is clearly 
apparent in the Hicks paper cited, ^^ where the money valu- 
ation of the national income is considered. The particular 
money values to be used, says Hicks, depend upon the purpose 
for which the calculation of national income is to be used; 
if social income is to serve as an index of welfare then it 
should be valued at market prices "because jJ^'i-^'^s give us 
some indication of marginal utilities," but if social income 
is to serve as an index of production, then it should be 
valued at factor costs. This distinction is only tenable 
on the assumption, firmly made by public finance theorists 
at that time, but less acceptable today, that indirect taxes 
are passed on to consumers in the form, of prices (and that 
corporation and other direct taxes are not) . 

It can be seen from the Hicks paper that he had in . 
miind the empirical testing of propositions in welfare theory 
as a reason for obtaining a figure for social income at 

- 17 3 - 

market prices, thus extending the scope of Pigou's 
contribution to this field. ^^ The empirical testing of 
propositions in macro-economic theory, by providing quan- 
titative data on aggregate demand, the consumption function, 
the multipliei" and the marginal propensity to invest, and 
by demonstrating the ex post equality of saving and in- 
vestment, would also stimulate efforts to calculate national 
income at market prices. National income at factor costs 
would provide data for the development of a social pro- 
duction function and for verifying theories of the effects 
of changes in labor productivity on wage rates. As evidence 
for the proposition that Richard Stone was also thinking on 
these lines, v/e may note that he has said: 

In attempting to give quantitative expression to 
empirical constructs, such as the national income, it 
is now generally recognized that a theoretical basis 
is necessary and that this basis should be the conscious 
concern of economists and not left in its practical 
aspects exclusively tc business men, accountants and 
the Comraissioners of Inland Revenue. Equally is it 
clear that economic theory cannot be left at the 
theoretical stage but requires to be tested and given 
quantitative expression by being brought into relation 
with observations. These lines of attack have resulted 
in very considerable efforts to bring into being both 
observations which are relevant to economic theories, 
and also economic theories, or formulations of theories, 
which are capable of being brought into relation with 
observations . ^ '' 

The history of social accounting since World War II, 

and particularly its development in the U. S. A. and the 

U. K. , tends to support this hypothesis, albeit tenuously. 

A great deal of work has been done to improve the quality 

- 179 - 

of the individual statistics collected, but the accounting 
framework remains inchoate, as it was left by Stone and 
the other pioneers.^® The disappearance of the business 
sector from the U. S. national income accounts, which has 
been criticized by Yu and Rosen, among others,^' is expli- 
cable with reference to an economic theory which abstracts 
from institutional factors: there are no theoretical con- 
structs which call for quantification here. The main thrust 
of government has been on the "Flow-of -funds" accounts, 
presumably because the Federal Reserve System has accepted 
some responsibility for planning and controlling money 
flows. The interrelated social accounting systems of 
France, Holland and Norway, countries which have established 
forms of national economic planning, provide a sharp con- 
trast to the U. S. and U. K. systems, which contain a vast 
amount of statistical material but are composed of sets of 
accounts leading "separate lives." 

The Soviet System 

In the Soviet system of social accounting, a 
techno-economic production plan constitutes a budget in 
real terms, on the basis of which the accounts themselves 
are constructed. The main purpose of these accounts appears 
to be aimed at adjusting money flows to correspond with the 
real flows envisaged in the plan. There are three kinds 
of account: 

- 180 - 

1. National product. 

2. National income. 

3. Flov; of funds. 

The national product is defined in Marxist terms 

as: C + V + M, where C is the constant capital (equipment 
a a 

and production materials) , V the variable capital (sub- 
sistence requirements of labor) and M the surplus-value, 
produced by the variable capital. National income is 
defined as V + M. The national product account is divided 
into investment (A) and consumption (B) as a preliminary 
to controlling the distribution of income in money terms. ^^ 

In the Soviet system, as in any other, there is 
no question of an equality between "surplus- value" and 
"investment"; firms are not allowed to retain the whole 
of theix- profits, or forced to rely on profits for their 
investments. The greater part of profits is paid over to 
the state, and firms receive subsidies for the acquisition 
of equipment. The picture must, therefore, be completed 
with the aid of a flow-of --funds account, which in this 
context is primarily a cash account for the whole economy. 
This cash account is a consolidated statement of the trans- 
actions of the various organs of the State, state enterprises, 
banks and other institutions, together with estimates for 
the public. 

- 181 - 

The Soviet National Product Account'' 

— — 1 

■ '• — '—- ~ 

^ : E^'^— 

~— -^-'— 

=— =.-i=ar-^.i=^-:^=-_-=.-.^— .-t= 









goods : 

1. Equipn'.ent 







2. Consuiaption 



1. Fixed 










2. Working 


Reduction of 

Capi tali •^- 

tn+-inn of 


working capital 

tic firiMs 


e.g., rav; rr.ater- 

ials inventory 


Product! on 


goods : 






tional incoir^e* 


Fixed capital 


these are 
to -> 



V.'orking capital 
forir^a tion 



and then 
to -y 


Increase in 
stocks of 

services of 



*V + M 

The national incoRS account shows hov; the national product is distrib- 
uted, in the form V + M. 

The Soviet National Income Account' ' 





sump>tion goods 



es and social security (V) 




V7ages — tangible production 




Social security charges 

a. Civil 


IncoT^e of agricultural and 

b. Military 

craftsmen's cooperatives 



estment goods 



plus-value (M) 


Productive fixed capital 




Nonproductive fixed 

s. State enterprises 
b. Agricultural and 


Working capital 


ciaftsr.'.S'n's cooperatives 

c. Sniall traders 

d. Capitalistic finns 
Turnover taxes 

- 182 - 

Receipts and Payraents of the Soviet Union 

2 3 


Recei pt s from ente r p x i s e s , 

state agenci~e's~and 
coop eratives , 

1. Public sector wages 
and cooperative 
members ' incom.e 

2. Receipts of com:nunal 
units other than from 

3. Sales of agricultural 
produce to state and 
Study bourses 
Interest, insurance, 
construction loans 



Total Section A 

B. Receipts f rom the sale of 
goods and services to the 
population . 

1. Receipts from coramunal 

2. Receipts from crafts- 
. - men's sales 

Total Section B 

Total A + B 

(= reduction in money supply) 



P ayments to enterp ris e s , 
state agencies and 

cooperatives . 

1. Purchases of 
from state e 
prises and c 
atives . 

2. Payments for 
ices : 

a. Rent 

b. Transpor 

c . Other cu 

d. Cinema, 
and othe 

e. Sanatori 
day home 

f. Other se 

3. Taxes, insur 

4 . Saving 

Total Section 




r shows 
a, holi- 
s, etc. 
ance , 


Payments for purchases 
of goods and services by 
the population . 

1. Purchases on the 
communal market 

2. Other purchases 

Total Section B 
Total A + B 
(= increase in money supply) 

- 183 - 

Whereas the product account appears to be an attempt 
to portray the process whereby real goods and services are 
produced and the capital used up in the process is replaced, 
the receipts and payments account shows the transactional 
relations between the sectors of the economy. It is, there- 
fore, more of a cash account than a funds statement. 

The U. S. System 

We shall regard the U. S. system of social accounts 
as representative of the non-Communist world; it is not as 
well articulated as some systems, but provides more statis- 
tical detail than most.^** The division of the economy into 
production and consiim.ption conflicts with the transactional 
basis of primary sectorization, and is conceptually narrower 
than the Soviet division into investment and consumption; 
this may arise out of the reliance of Western economists on 
marginal techniques of analysis. The assumption that 
physical quantities of goods and services are the basic 
measures, separable from the prices by which they must be 
multiplied to arrive at values, is a first indication that 
we shall find the same Ricardian model of the economy 
underlying both the So\'iet and the U. S. system.s. Hicks 
is explicit on this point: there are two problems involved 
in the determ.ination of the national incom.e, the enumeration 
of real goods and services and their evaluation in money. ^^ 

- 184 - 

There is also an index nuiriber problem, which has been 
studied at length by welfare economists . ^ ^ 

Unlike the Soviet system, the U. S. accounts fail 
completely to come to grips with the physical quantities, 
and start with monetary data concerning payments, which 
are adjusted for accruals to make them correspond with 
acquisitions and disposals. Consolidation of transactions 
originating in the business sector, however, obliges the 
accountant to accommodate data concerning uses , the most 
important item being depreciation. The imputatio.ns of 
interest in the business sector accounts and of rental 
income in the personal sector accounts further aggravate 
the duality of the construction of these accounts, v/hich 
can be seen on a comparison v/ith the Soviet receipts and 
payments account to deal essentially with acquisitions 
rather than uses. This attempt to include nonmarket 
phenomena obscures the money flows of the nation, so that 
a quite separate Flow-of-funds (or "money flows") account 
is produced by the Federal Reserve System. Identification 
of this "flow" in the real world discloses the existence 
of capital movements in addition to those differences in- 
cluded in the essentially "current" income and product ac- 
count; the net result of the Flow-of-funds account is to 
equate saving and investment and to demonstrate the insti- 
tutional structure of each of these classifications. 

- 185 - 

The Flow-of-funds statement is, therefore, comparable not 
with the receipts and payments account of the Soviet 
system but with the funds statement of the business enter- 
prise. In the last analysis, the U. S. national accounts, 
like the business accounts which they attempt to imitate, 

in the detailed statistics of the Federal Reserve System, 
and only the net increase or decrease of the money supply 
is incorporated in the Flow-of-funds statement. 

U. S. National Income and Product Account 

=.i; : : — ^ . 



Factor payments 

Wages and salaries 

Sales to 


Rental income of persons 

Sales to 


Interest received 

Sales to 


Corporate and other 

Sales to 


profits (including 

Net change in inventories 

Corporate profits taxes 

Social security payments 

Transfer payments 

Depreciation (not a payment) 

Indirect business taxes 

Business and government 


U. S. National Flov7-of -Funds Account 

Current expenditures 
Goods and services 
Transfer payments 

Capital expenditures 

Financial investment 

Current receipts 

Income receipts 
Transfer receipts 

Increase in liabilities 

NB. There is usually a balancing figure, due to a statis- 
tical discrepancy. 

- 186 - 

The input-output tables which make up the third 
principal component of the U. S. system of social accounts 
are something of an oddity; they attempt to perform, in 
money terms, the function which the Soviet national product 
account performs in real terms. The assumption of an 
identity between money flows and real flows is supported by 
additional assumptions of constant input coefficients (as 
compared with the Soviet practice of using calculated norms 
as techno-economic coefficients) , a constant allocation of 
inputs to outputs in multiproduct firms, and constant prices. ^^ 
The result is a set of tables which purports to quantify the 
"flow" of resources interindustry, between the public and 
private sectors, and between the U. S. and the rest of the 
world, but which in fact represents a primitive attempt to 
analyze complex economic phenomena using an inadequate con- 
ceptual framework. In this it resembles the cost depart- 
mentalization tables used in industry r particularly in the 
late 19th century, v/hich led indirectly to irrational price 
competition and ultimately to price-fixing agreements, 
trusts and cartels. It seems unfortunate that the knowledge 
accumulated by cost accountants and industrial engineers 
during the past seventy years could not h.ave been tapped 
before Leontief started his enormous undertaking,^^ 

Turning to the measurement of wealth: although the 
earliest national statistical exercises were aimed at the 

- 187 - 

measurement of wealth, recent emphasis has been on 
Fisherian "income flows." For this reason the U. S. does 
not count a national balance sheet among its social accounts, 
although unofficial attempts to construct one have been 
made . ^ ^ 

The structure of a national system of social 
accounts of the non-Communist type is shown in Figure 10, 
which also reveals the extent to which the U. S. is in a 
position to implement it in its entirety. The dotted lines 
signify the elements and connections v;hich are as. yet in- 
complete, and the diagram should be read in conjunction v/i th 
the criticisms of the U. S. social accounting system which 
this chapter contains. In the conceptual framework of 
Chapter V, the diagram shows only the capital and revenue 
"flows" and the cash "flow" would necessitate a separate 
set of accounts linked to the right-hand boxes through 
cash transactions. Flow accounts for other forms of 
resources, including credit, would likewise call for 
separate sets of accounts, linked to particular values as 
they appear in balance sheets. 

Sooiat Accounting Critioaltij Appraised 

Both systems of social accounting are incomplete, 
although their technical deficiencies could conceivably be 
rectified as economic statisticians learn more about 

- 188 - 















V > 

(13 o; 






O rH 



■+J 0) 

M 0) 

1 0) 

o > 

o > 

X! > 

(1) CD 

•H (U 

3 (1) 

W M 

S -H 

W rH 

- 189 - 

accounting, or as accountants occupy themselves with 
social accounting. What is more to the point, however, 
is that both systems are conceptually defective, since 
they proceed from certain beliefs about economic realities 
which are scarcely tenable in a 20th century environment. 
The Soviet social accounts are founded on Marxist econom.ic 
theory,"" and a misreading of it, at that.^^ This not only 
leads to the adoption of a "narrow" concept of income which 
excludes many services ; it also precludes a rational ap- 
proach to investment because of the inability to value the 
services of capital which is inherent in Marxism. A 
further feature of the Soviet economy which undermines the 
effectiveness of the social accounts is the characteristic 
directive system, v/ith planning effected primarily in 
physical quantities and prices im.posed from the planning 
level rather than agreed at the level of consumption, or 
investment. The basic materials of Soviet social accounting 
are money and physical resources, the balances de ressouroes 
en nature as Marczewski calls them, lists of which are sub- 
mitted to the political organs of the state for consumption 
and investm.ent decisions. The confrontation between 
ideology and reality takes place at the highest political 
level, and the task of the planning branch of government 
is to translate the wishes of the political organ into a 
form capable of fulfillment. The prices which are used 

- 190 

in the social accounts enter into the planning process at 
a comparatively late stage; they are "valuations," it is 
true, but of a kind which differs fundamentally from the 
agreed values of a free society originating in the sub- 
jective considerations of a multitude of individuals. 
There is no way of determining whether the contents of the 
Soviet national product or income accounts are "true" or 
"false"; only cash receipts and payments are capable of 
objective verification. 

If the society which the Soviet leaders are engaged 
in planning were in fact susceptible to direction of this 
kind, that is, if the people were v;illing to accept the 
valuations made by the planning officials, then this 
method of constructing social accounts would not be open 
to criticism. The values would provide stimuli of a 
quasi-physical nature, and the "body" politic would react 
accordingly. But the Soviet people are not essentially 
different from other people, and each individual is capable 
of developing his own values; since there is no official 
institutional framework within which these values can be 
asserted, he must necessarily create an unofficial one. 
The unofficial institutions which arise exert their pres- 
sures against the organs of the state, and the resulting 
compromise falls far from the planned parameters of the 
national budget. The usefulness of the Soviet social 

191 - 

accounts appeai-s to lie more in the initiation of a debate 

than in the resolution of a conflict arising out of the 

fact that means are scarce relative to ends. 

The U. S. system also fails to come to grips with 

this problem since the relevant aspects of valuation are 

purposely avoided. 

Instead of seeking to build up a single total, such as 
the national income, an investigation is first made of 
the classification of accounting entities, of the types 
of accounts that they keep and of the transactions into 
which they enter. In this way, all the transacting 
entities of an economic system are classified into 
broad sectors such as productive enterprises, financial 
intermediaries and final consumers, and a series of 
accounts for each of these sectors is set up, in v/hich 
the separate entries represent economically distinct 
categories of transaction. Economic activity is 
represented by money flows and related bookkeeping 
transactions, actual or imputed, between accounts. 
The national income and other similar aggregates are 
obtained from the system by selecting and combining 
the constituent entries m the accounts. ^^ 

It is not essential that a system of social accounts 

should provide, at one and the same time, an accounting 

analysis of the economy such as would aid the planning 

process and also the economic aggregates required by 

politicians and economic theorists, any more than the 

measurement of income is a necessary feature of a business 

accounting system. The French Comptes de la Nation differ 

from the U. S. and most other non-Communist social accounts 

in that they constitute a disaggregated set of interrelated 

accounts; they do not show "gross national product" or 

"national income" and there is no financial statement 

- 192 - 

as such which is designed to reveal the national income 
or product, or capital formation. Indeed, the definitjons 
of flows used by French macro-economists differ from those 
of U. S. and U. K. macro-economists, and the aggregate 
"grcsG dcmcctic product," for example, is obtainable froip. 
the Comptes de la Nation v/here the aggregate "gross na.tional 
product" is not. 

The fundamental problem, as the welfare economists 
have pointed out, is "Who shall value the national income?" 
Income is a personal concept relating to consumption, wh.ether 
present or anticipated future; it quantifies being "better 
off," in Hicks' phrase, and must relate to an identifiable 
individual who can be said to have changed his state in 
this way. Profit, or business net income, is the result of 
a substitution of revenues for costs, and must be xelaLed 
to a stage in a process of production, v/hether called an 
"entity" or a "profit center." Measurement, defined as 
expressing the degree of difference in distinguishable 
characteristics and bringing it into a certain relationship 
with a set of numbers (in this context, a monetary scale), 
is an observable social phenomenon in both cases. The 
sooial income can only be regarded as a measurable fact 
if we first "set up a theory from which income is derived 
as a concept by postulation and then . . . associate this 
concept with a certain set of primary facts. "^^ The social 

- 193 - 

accounts are believed to find their theoretical foundation 
in Keynes' General Theory, but closer inspection v/ill 
reveal that the model used is essentially the Walrasian 
systeraatization of a closed economy, which was adapted by 
Hicks and Hansen to cope v/ith some of Keynes' more man- 
ageable criticisms of that system's lack of contemporary 
realism.^"* On the other hand, the principal feature of 
current v/ork in the field of welfare economics is the 
meticulous demonstration of the inapplicability of neo- 
classical price theory to the development of propositions 
concerning human welfare; the virtual impossibility of 
bringing such propositions beyond a point of banal 
generality is the main product of these publications.^^ 
The transition from individual, or small group, 
personal income to national, or social, income can be 
made in at least tv70 ways. An individual dictator or an 
oligarchy can impose his or their values upon a society, 
so that the national income can be found from his or their 
subjective preferences; we have indicated in our remarks 
on the Soviet system that a modern economy is too complex 
for this. Alternatively, we can appoint specialists to 
carry out this task on behalf of the population as a whole, 
as we delegate so many of the important tasks of our 
society to committees of experts. These men would have 
to be experts in valuation, however, not in statistics; 

194 - 

they would need to be chosen from the ranks of those whose 
rationality was buttressed by a knowledge of men and af- 
fairs. In the last analysis, the measurement of the 
national income turns out to be a political action, as 
the measurement of business income turned out to be a 
business judgment; on no account can it be a purely sta- 
tistical exercise based upon the summation and consolidation 
of money flows. 

To this the national income accountant may reply 
that his aggregates, while derived from money flows, are 
surrogates for the "real" income and product which we would 
prefer to know, but fail to grasp. The use of the word 
"real" here is the source of much difficulty, because of 
a duality of interpretation of the manner in which it is 
contrasted with "m.onetary." The adjustment of money values 
by means of a price index so as to express them in terms 
of a common base can never improve the usefulness of 
national income statistics beyond making them more com- 
parable; it is a pure smoothing exercise, and any defi- 
ciencies of the initial observations are transferred intact 
to the adjusted figures. This version of "real" national 
income, i.e., current national income adjusted by means 
of a price level index ^ is different from the concept of 
"real" national income as the goods and services which, 
measured in physical quantities, are to be multiplied by 

c, ^ _ 

- 15 5 

prices in arriving at an index of welfare, or production. 
It is this latter concept for which money national income 
is to serve as a surrogate. 

If monetary measurements of national income are to 
be used in this way, then the implications of our hypothesis 
are that separate systems of accounts must be set up for 
investment (including production) and for consumption, 
since the bases of valuation adopted in the two areas of 
human activity are fundamentally distinct. Whereas money 
as a medium of exchange and as an asset takes precedence 
over its other functions in the consumption area, in the 
investment area we are interested in money as a unit of 
account and as a measure of value. Once this is accepted, 
then it becomes unnecessary to answer the question: "Who 
shall value the social income?" for the social income be- 
comes a simple aggregate of payments. The valuation 
problem relates solely to the national product; the monetary 
transactions v;hich constitute the national income, and which 
are a function of the national product together with inter- 
personal money transfers, present virtually no separate 
valuation problems to confuse the analyst who is concerned 
with developing models for planning and control. 

We must distinguish clearly between our two 
conceptually distinct but transactionally related areas 
of accounting for investment and consumption. The national 

- 196 

product is defined as a representation in money of the 
social output of goods and services for a given period, 
divided into consumption and investment goods and services. 
The valuation of these objects is a critical problem, 
depending as it does upon expectations and other subjective 
considerations at. the time of investment, and the possi- 
bility that these may change during the period of production. 
The national income is defined as an aggregate of the means 
of payment made available to the population in a given 
period, derived from the sources designated "factor shares" 
in distribution theory, and which may be used for consumption 
or financial investment (saving) . The preparation of a 
national product account calls for an im.age of the organi- 
zation and processes of production of a society; with this, 
the analysis can be assimilated to that of the individual 
production unit. This is shown in the matrix of Figure 11, 
where the colum.ns are those of Figure 9, extended to include 
transfers of the proceeds of distribution (e.g., dividends, 
donations, subsidies and subventions) and the rows represent 
a tolerably realistic sumjnary of the many facets of a modern 
economy; the rest of the world sector is included to con- 
vert the model into a closed system."^ 

The national income account would show the factor 
and transfer payments on the right-hand side and acquisi- 
tions of goods and services from, investment sources on the 

- 197 - 


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W Q 






















•H 4' 

3 C 

W £ 


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M e 





















a c 

OT o 
C •'^ 

(0 JJ 














-< c 
















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•H -H 














i*-i -0 



















































in XI 

































-^1 Ul 

jJ y-i 


JJ (1) 




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- 198 - 

left; the retained earnings of corporations would not be 
included with the former, or sales of investment goods 
(or inventory changes) with the latter. The difference 
between incomes and acquisitions constitutes saving, 
which can thus fail to equal investment ex post; this 
would convert the national accounts from an identity to 
a set of behavioral equations and provide the analyst with 
an invaluable tool for planning and control decisions. 
We suspect that many of the false problems which have 
preoccupied national income statisticians would also 
disappear, such as: how to account for "investment" in 
consumer durables; what happens to the national "incom.e" 
v/hen the economist marries his housekeeper; or whether the 
national income can be truly said to have increased because 
a rocket launch at Cape Kennedy had to be aborted.''''' 


The statement that the social accounts of the 
non-Communist countries are conceptually deficient, because 
they have been constructed on the basis of a Ricardian 
image of a preindustri al society, implies that their use- 
fulness is highly suspect, quite apart from any v/eaknesses 
to which the data may testify and which arise out of sta- 
tistical problems of collection and presentation."® Recent 
work of the United Nations on its system of national 

- 199 - 

accounts, which demonstrates both the articulation of the 

full system and its representation in matrix form, still 

fails to distinguish between investment and money flows, 

which are combined in the various accounts in a manner 

wholly at variance with economic realities. ^^ We have 

put forward suggestions for fundamental changes which we 

regard as necessary for the modernization of the system, 

and an econom.ic theorist may well object to so radical an 

approach on the grounds that the existing system is based 

upon a well-understood conceptual framev/ork which, while 

incomplete, is nevertheless better than nothing. If the 

constituents of these theories can find their counterparts 

in the social accounts, then the latter can be used for 

testing and refining the theories. To this V7e can only 

reply by quoting from the seminal report of 1947: 

In so far as the entries in the working system fall 
short of some theoretical ideal, either because a 
compromise has been made for lack of data or because 
the ideal is not expressible in terms of operations 
which permit of measurement, they will be misleading 
if they are used for purposes other than those for 
which they have been constructed. It is thus important 
to examine the definitions employed in order to see the 
limitations on the legitimate use of the system. Thus, 
for example, the concepts of consumer's expenditure 
and capital formation which seem appropriate from the 
point of view of distinguishing between the two prin- 
cipal components of the national product do not neces- 
sarily coincide with consum.ption and additions to 
wealth and such differences must be made explicit. "*" 

Our proposal to separate product "flows" from 

income "flows" would make necessary the preparation of 

- 200 - 

national balance sheets and wealth statements, since the 
dynamic elements of the former can only be considered in 
relation to changes in the states disclosed by the latter. 
It would be unwise to underestimate the difficulty of this 
task in the light of studies which have already been made 
in this area,**^ although a regionalization of the task 
would undoubtedly help to render it more manageable. We 
may point out that our separation effects a massive sim- 
plification, since capital goods fall to be valued only in 
the investment accounts, and the balance sheet items of the 
consumption accounts are limited to financial assets and 
liabilities. On these items, as on the constituents of 
the proposed Social Product Account, data are readily 
available, although they could obviously be improved con- 

We are prepared to acknowledge a limited usefulness 
of the social accounts prepared by free economies at the 
present time; there is the overriding necessity to experi- 
ment in this field, which transcends quality judgments, and 
there is a demonstrated use in international negotiations, 
as, for example, in determining appropriate contributions 
to the United Nations, NATO and other paranational organi- 
zations. International comparisons of income, wealth and 
v/elfare are another matter entirely; one need only consider 
the case of the U.S.A. whose national income and gross 

- 201 

national product appear to have doubled during a period 
when its urban societies have all but collapsed, its 
public services have been demonstrably inadequate to cope 
with the needs of the population, and enormous money incomes 
have been made available to individual and corporate land- 
owners to induce them not to produce goods which are 
nevertheless scarce in relation to individual needs. 
We submit that our suggested schem.e would throv; some light 
on the nature of the problem posed by these anomalies, since 
it would be possible to demonstrate, if such were the case, 
that money incomes of $900 billions had been made available 
at a time when the social product had a value of, say, 
$500 billions. The implications of such information for 
the attack on inflation are obvious. VJhether the infor- 
mation can be regarded as useful, however, is in the last 
analysis, a philosophical question; if we believe that all 
planning of a social nature is contrary to the interests 
of the individual, then social accounting is clearly an 
exercise of exquisite futility. We prefer to take a 
position somev/hat more favorable to the endeavor, by 
stating that a limited amiount of planning has proved 
possible even in a free society, and that the potential 
benefits of such planning can be determined only by 
experiment and the evaluation of evidence. 


1. S. C. Yu, "An Appraisal of Macroaccounting, " in 
Aspects of Contemporary AGCounting (Florida, 1966), 
p. 25. 

2. M. Gilbert and Richard Stone, "Recent Developments in- 
National Income and Social Accounting," Aaaounting 
Research^ Vol. 5 (1954), p. 2. 

3. Paul Studenski, The Inaome of Nations (New York, 
1958) , Chs. 2-10. 

4. Edward F. Denison, "Report on Tripartite Discussions 
of National Income Measurement," Studies in Inaome 
and Wealth, Vol. 10, Conference on Research in 
Income and Wealth (New York: National Bureau of 
Econom.ic Research, 1947) . 

5. J. Marczewski , Planifiaation et Croissanoe Eoonomique 
des Demoaraties Populaires , Vol. 1 (Paris: Presses 
Universitaires de France, 1956), p. 155. 

6. J. R. Hicks, "The Valuation of the Social Income," 
London, E'^onomiaa, Vol. VII, No. 26 (1940), pp. 105- 

7. First English edition, Oxford (1942). 

8. Personal communication from the author. 

9. C. G. Clark, National Income and Outlay (London: 
Macmilian and Company, 1937) . 

10. R. F. Harrod, Life of John Maynard Keynes (New York: 
Harcourt, Brace, 1951), pp. 497-503. 

11. Ibid., p. 498. 

12. Studenski, p. 153. 

13. See Gerhard Colm, "Experiences in the use of Social 
Accounting in Public Policy in the United States," 
Inaome and Wealth, Series I, International Association 
for Research in Income and Wealth (Cambridge, 19 51) . 

- 202 - 

- 203 

14. M. Yanovsky, Social Accounting Systems (Chicago: 
A3.dine Publishing Co., 1965), pp. 12, 216; and 
Jean Meyers Comptahilite d ' Entreprise et 
Comptabilite. Nationale (Paris: Dunod , 1969), 

p. 11. 

15. "The Valuation of the Social Income." 

16. A. C. Pigou, The Economics of Welfare (London: 
Macmillan and Company, 1920). 

17. Richard Stone, The Role of Measurement in Economics 
(Cambridge, England,- 1951), p. 3. 

18. See, for example, "The National Income and Product 
Accounts of the U. S.: Revised Estimates, 1929-64," 
Survey of Current Business (August, 1965), p. 6. 

19. Sam Rosen, National Income (Ne\\' York: Holt, Rinehart 
and Winston, 19 63) . 

20. Marczewski, p. 492. 

21. Adapted from J. Marczev/ski, "The role of national 
income accounts in the planned economies of the 
Soviet system," Income and. Healthy Series IV, 
Phyllis Deane (ed.) (London: Bowes & Bowes, 1955). 

22. Ihid. 

23. Ihid. 

24. Yanovsky, op. cit . , Ch. II; and The National Economic 
Accounts of the U. S. A.: Review ^ Appraisal and 
Recommendations , National Bureau of Economic Research, 
General Series 64 (1958), p. 28. 

25. Hicks, "The Valuation of the Social Income," p. 105. 

26. I. M. D. Little, A Critique of Welfare Economics , 

(2d ed.; Oxford, 1957), Ch. XII; and J. de V. Graaff, 
Theoretical Welfare Economics (Cambridge, Massachusetts, 
1957) , Ch. XI. 

27. See Hollis B. Chenery and Paul G. Clark, Interindustry 
Analysis (New York: John Wiley and Sons, Inc., 1959), 
pp. 157-78. 

204 - 

28. Wassily Leontief, The Structure of the Ameviaan 
Eooncmy^ 1919-29 (rev. ed.; New York: Oxford 
University Press, 1951). 

29. Raymond Goldsmith, A Study of Saving in the U. S. 
(Princeton, 1956), Vol. 3, Part 1. 

30. Studenski, p. 352. 

31. Ibid. J pp. 22-3; and Michael Kaser, "A Survey of the 
National Accounts of Eastern Europe," in Income and 
Wealthy Series IX, ed. Phyllis Deane (London: Bowes 
and Bowes, 1961), pp. 143-144. 

32. Measurement of National Income and the Construction 
of Social Accounts 3 Report of the Subcommittee on 
National Income Statistics of the League of Nations 
Committee of Statistical Experts, United Nations 

(1947), p. 7. 

33. Richard Stone, Measurement in Economics ^ p. 9. 

34. The Geyieral Theory is sufficiently obscure in places 
to be quoted, like the Scriptures, for a variety of 
purposes. VJe claim its support for our attempt to 
bring investment into the center of accounting theory, 
as Keynes attempted to direct attention to the impor- 
tance of investment in economic theory. The particular 
point at issue appears from a study of J. R. Hicks, 
"Mr. Keynes and the Classics," Econometrioa^ New 
Series, Vol. 5 (April, 1937), pp. 147-59; and Alvin 
Hansen, A Guide to Keynes (New York: McGraw-Hill, 
1953) , pp. 3-35. 

35. Little; Graaff; William J. Baumol, Welfare Economics 
and the Theory of the State (London, 1952) . 

36. E. Fuerth attempted someting on these lines in "A 
Flow Chart for Social Accountants," Accounting Re- 
search, Vol. 4 (1953), pp. 214-238, but without 
sectorization; he did not bring out the dependence 
of income upon investment. 

37. See Measurement of National Income and the Construction 
of Social Accounts 3 Chs. II-IV, and similar official 
publications . 

38. See Oscar Morgenstern, On the Accuracy of Economic 
Observations (1st ed,; Princeton, 1950), Section IV. 

- 205 - 

39. A System of National Aacounts (New York: United 
Nations, 1968), espec. Chs. II and III. 

40. Measurement of National Income and the Construction 
of Social Accounts ^ p. 25. 

41. R. W. Goldsmith and R. E. Lipsey, Studies in the 
National Balance Sheet of the U. S., National Bureau 
of Economic Research (Princeton, 1963) ; and Pleasuring 
the Nation's Wealth, Vol. 23, Studies in Income and 
Wealth, National Bureau of Economic Research, Washing- 
ton (1964). 


France presents us with a well-documented example 
of the use of accounting for economic development. As with 
any social, experiment, it is impossible to associate cause 
and effect so as to support a conclusion that the French 
accounting experiment contributed to the economic recovery 
of that country after World War II; ve can only point to 
the fact that there has been, and still is, a widely-held 
belief on the part of competent French officials that ac- 
counting does have a significant part to play in the 
economic development of the modern state. 

In Chapter I we drew attention to the fact that 
the French economy had been devastated by war, and that 
its first postwar government, faced with the task of 
stimulating a rapid recovery to something like the prewar 
level of social output, decided on measures aimed at 
creating a strong accounting profession. It may be asked 
why, in a country versed in the arts, sciences and tech- 
nology, whose people had made notable contributions to 
accounting theory and practice during the 19th century, 
it was necessary for government intervention for this 
purpose. The answer to this question is to be found in 

- 206 - 

- 207 - 

the observation that, by the 1930s, accounting had become 
dominated by the law; not only was the French accountant 
engaged largely in satisfying the requirements of the 
country's company and tax laws, but his professional ac- 
tivities were as closely regulated as those of the other 
professions in France, and accounting was taught in law 
schools rather than in faculties of economics or business 

The civil servants to whom was entrusted the 
postwar reconstruction appear to have appreciated the need 
to use accountants for planning and control, rather than 
for the passive description of juridical observations. 
They introduced special legislation in order to create an 
organ of state which would be an alternative source of 
influence over the accounting profession. The aim of this 
agency was to foster the study of relationships between 
the firm and its environment, and between the various 
disciplines which contribute techniques to the management 
of investm.ent and production, and which use accounts as 
an analytical method. 

History and Organization 

The French commercial code and the company lav/s 
of 1867 were the principal sources of accounting regulations 
prior to World War II. In 1945, the Ministry of Finances 

208 - 

and Economic Affairs set up a Comraittee for the 
Rationalization of Accounting, v/hose task was to propose 
a national uniform system of accounts and to make recom- 
mendations for its application and utilization for the 
benefit of the national economy. The first national chart 
of accounts, or Plan oomptable qSti Si'' a I, appeared in 1947,^ 
and in the same year the Committee v/as replaced by the 
Conseil Superieuve de la Comptabilite , charged with super- 
vising the introduction of the Plan. In 19 57 the name of 
this body was changed to Conseil National de la Comptabilite . 
The chart was to be applied in all state agencies of an 
industrial or commercial type, of which nationalization 
had created a good number, and in "mixed" enterprises, 
those firms in which both public and private interests 
participated. The chart was accompanied by a model balance 
sheet and profit and loss account, together with detailed 
instructions for the operation of the accounting system and 
the preparation of period financial statements. 

The Plan of 1947 appeared at a time when dirigisme , 
or direction from above, was the dominant influence on 
French politics, and its authors envisaged the eventual 
compulsory application of the national chart of accounts 
to all public and private enterprises in France. A series 
of ministerial orders applied the chart, with modifications 
of detail in each case, to government agencies, public 


enterprises and firms operating with state backing, or 
subject to state control. The last situation could arise 
through the acknov;ledged interest of a broad section of 
the population (e.g., the agricultural cooperatives), or 
because the finus in "uestion had received substantial 
fiscal benefits through revaluation of assets. After ten 
years' experience with the chart it was found advisable to 
make its application voluntary in most of the private sector, 
and a revised version of the Plan was introduced by minis- 
terial order dated May 11, 19 57.^ This is a volume of some 
250 pages, including a detaiJ.ed chart of accounts, sup- 
porting the summary chart we have reproduced in translation 
on p. 210 f together with a series of model financial and 
statistical reports. It also contains the texts of the 
ministerial orders mentioned above, a manual of operatirig 
instructions, some definitions of technical terms, and a 
variety of ideas on financial and accounting problems. A 
second revision is in progress at the time of writing this 

The Conseil , v/hich is responsible for these 
initiatives, has been assigned the following goals: 

1. Coordination and synthesis of theoretical and 
technical research in accounting, together with 
practical applications. 

2. In cooperation with other interested parties: 

- 210 - 








































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- 211 - 

a. To centralize knowledge, initiate studies 
and disseminate information on the teaching 
of accounting in schools and colleges. 

b. To advise on accounting regulations or 
recommendations before any promulgations by 
government agencies, public comniissions , or 
committees controlled directly or indirectly 
by the State. 

c. To propose any measures relating to the rational 
use of accounts by firms, or in the form of 
public budgets or social accounts. 

3. Developm.ent and adaptation of the Plan aom-ptabte 
geneval . ^ 

The interdisciplinary character of the Conseil has 
been purposely achieved in order to combine representatives 
from the law, economics, business administration, statistics, 
scientific management and the accounting profession for the 
attainm.ent of these objectives. The president of the 
Conseil is a senior civil servant, and there are five 
vice-presidents representing, respectively, the Ministry, 
government accounting, the leading professional institute 
of accountants {I'Ovdre des experts aomptabZes et oomptabtes 
agrees), business firms and higher education. In addition, 
the Ccnseil comprises representatives of those institutions 
which have accounting as their object (schools of account- 
ancy, publishers of accounting and ancillary works, auditors 
of public enterprises, etc.), other accountancy societies, 
organizations of chief accountants and industrial engineers, 
trade unions and employers' associations, together with 
civil servants selected because of their accounting 

- 212 - 

experience and other persons chosen for their knowledge of 
the law, economics and finance. 

The Conseil meets in plenary session to define its 
policies and to draw up its program. The detailed work is 
delegated to Seations , whose activities are coordinated by 
an administrative department under seven rapporteurs 
(discussants). The sections cover: 

Section 1, 

Section 2 

Section 3. 
Section 4 , 

Section 5 , 

Section 6 . 

Section 7. 

Documentation, public relations, 
dissemination of information. 
Studies relating to the professional 
education of accountants, and courses 
in schools and colleges. 
General problems arising out of the 
application of the Plan. 

Principles and techniques of financial 
accounting. Rules for drawing up a 
balance sheet, profit and loss account 
and appropriation account, particularly 
in relation to public enterprises and 
"mixed" firms, where the procedures 
are complicated by legal considerations. 

Managerial and cost accounting. 

Agricultural accounting, including 
agricultural cooperatives » 

Government accounting and accounting 
for government agencies. 

Social accounting. 

Relations between business, government 

and social accounts. 

Efficient accounting methods. 
Budgeting and business planning. 
Statistics for management. 
Accounting equipment. 

- 213 

The Period 1947-62 

A decree of 1962 (No. 62-470) revised the conditions 
under which the application of the Plan was to proceed, and 
called for progress reports, the first of which was pub- 
lished in 1963.'* The report noted that the Plan had been 
adopted by virtually all public enterprises (coal, elec- 
tricity, gas, air and rail transportation, etc.) and by a 
large proportion of the "mixed" firms. While' it was more 
difficult to draw firm conclusions concerning its application 
in the private sector, progress was satisfactory for a number 
of reasons: 

1. Fiscal lav;s had favorized the Plan's adoption. 

2. Teachers had taught the form and contents of the 
Plan to many who were now practicing accountants. 

3. The intrinsic qualities of the Plan had recommended 
it to many firms as both practical and convenient. 

The benefits which flowed from, the adoption of the 
Plan were given as: an established terminology which 
elim.inated ambiguities; precise and logical rules for 
classification and analysis; principles aiding the deter- 
mination of values; a common language facilitating communi- 
cation between the manager and the accountant. These 
benefits were largely restricted to the area of financial 
accounting, and experience had revealed the need for sub- 
stantial research on an industry basis in order to estab- 
lish norms in the area of cost accountina. This was 

- 214 - 

one of the reasons underlying the 1957 revision, which had 
replaced the obligatory cost accounting provisions of the 
1947 Plan with more flexible rules which gave firms vir- 
tually complete freedom in this area. 

The new Plan modified the previous one by 
suppressing all regulations which called for sanctions in 
the event of noncompliance, and replacing instructions by 
recommendations throughout. It also laid down the rule that 
all parts of the Plan dealing with bookkeeping methods and 
records were to be regarded as recommendations for financial 
accounting only; even those undertakings which were under 
statutory obligation to apply the chart were granted vir- 
tually complete freedom as to the form and content of their 
cost accounts. 

This change in policy is all the more remarkable 
when it is recalled that one of the factors which led to the 
introduction of the original Plan V7as widespread tax evasion 
through the falsification of accounts. The explanation lies 
not only in the swing to the right which French politics 
experienced during this period, but also in the great 
measure of support which the first Plan received from com- 
merce and industry, and its v;ide voluntary acceptance. 
For example, over 45,000 copies of the first Plan were 
sold to the public, and also large number of textbooks by 
individual writers which undertook its exposition.^ 

- 215 - 

Nevertheless, it was acknowledged that: 

a minimum of accounting discipline may be imposed v/here 
businesses call for financial aid from the State, or 
tender for its business.^ 

It is also interesting to note the disappearance 
of the phrase "gross profit" from the model profit and loss 
account. The authors of the Plan stated: 

Many accounting practitioners will doubtless regret 
that the account does not reveal a gross profit. This 
point has been the subject of great argument. It has 
appeared that opinions differ seriously concerning the 
meaning of this expression, and that it would not be 
possible to use the gross profit as a basis for cal- 
culating 'break-even' points unless all so-ca.lled 
'variable* expenses were deducted from sales, irre- 
spective of their type or function (purchasing, pro- 
duction, distribution, administration).'' 

trogvess Si-noe 19 6 2 

A major result of the 1962 decree was the 
establishment of professional committees for industries, 
with the objective of producing uniform accounting systems 
compatible with the Plan for each industrial grouping. 
Such systems would, it was expected, lead to the adoption 
of charts of accounts which, while basically homogeneous 
with the Plan, could reflect the particular features of 
the industry concerned; at the same time, solutions adopted 
by one industry to problem.s experienced also by others 
would be analogous and consistent. Thus, for example, the 
definition of "purchases" in one industry should correspond 
with the definition of "sales" in the industry from which 
they are bought. 

- 216 - 

Guidelines were laid down for these committees 
by a special subcommittee of the Conseil, composed of the 
ra-p-porteurs des sections and representatives of the employers' 
associations and government agencies involved, together with 
professional accountants. First priority was given to propo- 
sitions concerning financial accounting, but in the light of 
the significance of the cost accounts for certain elements 
of the financial accounts, the study of cost accounting 
should be undertaken before the completion of work on 
financial accounting. For its studies of financial ac- 
counting, the professional coramittee should be constituted 
on the widest possible basis, because of the influence of 
size on the problems posed by this area. The study of cost 
accounting problems should be delegated to persons familiar 
with managerial uses of accounting information, and this 
work would be coordinated by the professional committee, 
and not by the Conseil. Finally, the taxonomic problem 
was resolved pragm.atically : the optimum level in the 
pyramid of industrial structures should be the highest 
level at which uniform accounting could be achieved 
rapidly. All attempts to classify a priori were, there- 
fore abandoned in advance, and replaced by a preliminary 
study of the possibilities of the situation, vide 
Mary Parker Follett. 

- 217 - 

An initiative tending to inform accountants and 
industrial organizations of the plans being laid was the 
circulation of a paper outlining the objectives of the 
Conseil and of the measures being taken to constitute 
professional comi-nittees . It was known that some work was 
already being done in a few industries at different levels, 
so that it was decided to establish contact with them as 
representative industries: metal-working, heavy electrical, 
textiles, chemicals. By July, 1953, the following classi- 
fication had been adopted, and most of these industries had 
submitted adaptations of the Plan for approval by 196 6 at 
the latest. 

Vowev. (Coal, electricity, gas, atomic energy, certain 
domestic oil companies.) It was found advisable to set up 
separate professional comiriittees for oil research and 
exploration (production of hydrocarbons) and for refining 
and distributing. 

Building aonstruation . It was found advisable to set up 
separate comjnittees for public works and other building 
construction, the latter to pay particular attention to 
the needs of small firms of craftsmen. In the event, a 
joint Vlan was adopted. 

Building materials . Because of the complexity of this 
industry, no progress was reported through 1965.® 

Metal-h.wrking , The close ties between the metallurgical, 
mechanical and electrical industries rendered the task of 
classification complicated. 

a. Iron and steel — the committee's work was delayed 
by problems in valuing fixed assets. 

b. Mechanical and metal-working — 

- 218 

1. First transformation of steel, and iron-founding. 

2. Non-ferrous metals (except for bauxite, the bulk 
. of these are imported) . 

3. Fabrication. 

4. Automobiles and cycles. 

5. Other mechanical and metal-working. 

c. Electrical — ^heavy electrical and electronics. 

Chemiaats . 

Textiles. A basic problem arose through the fact that the 
historic organization of the industry is on the basis of 
the materials used, whereas technology is now of prime 
importance. It would have been preferable to classify the 
industry into spinning, weaving, knitting and so on, but 
in the event it was decided to form two committees, one for 
those industries which start with the raw material, and one 
for those which transform the products of the first. These 
also produced a joint Plan. 

Pvinting and graphic arts. 

Wood-working . 

Leather and furs. Separate Flans adopted for tanneries and 
for shoemakers . 

Transportation. No initiatives v/ere reported in respect of 
maritime transport, although two of the largest French firms 
had adopted the Plan in its original form; difficulties were 
experienced with inland water transportation, which was 
operated largely by the public sector. Read transportation 
was likewise difficult to organize. 

Banks and insurance . These were already subject to legal 
regulations prescribing the form and content of their ac- 
counts, v/hich antedated the first Plan, and it is ironic 
that the greatest obstacles in the way of the adoption of 
the Plan lay in the fields of credit and finance. 

Food. The retail butchers were among the first to adapt 
the Plan for their use. Other branches were: wholesale 
grocery, perishable foodstuffs, multiple retail stores. 

- 219 - 

Adaptations were foreseen for the clothing, pharmaceutical, 
paper and boxinaking and furniture industries, and proposals 
were under consideration for agriculture, forestry, various 
branches of food manufacture, ship and aircraft manufacture, 
defense contractors, rubber goods, rental housing and apart- 
ments, hospitals, and a variety of other trades and in- 
dustries. ^ 

Tke PsychoZogioal and Techn-icat Problems 

Psyohological Problems 

Although in general favorable, reactions to the work 
of the Conseil have been unfavorably influenced by certain 
factors, notably fear of the way in which government might 
make use of information obtained as a result of the work of 
the professional committees. Fear of fiscal consequences 
is the most commonly expressed, in particular, of the pos- 
sible outcome of a situation in which the tax laws and the 
prescriptions of the Plan conflict. For its part, the 
Conseil has expressed to the Minister the view that no 
fiscal regulation should affect either the terminology and 
rules of the Plan, or the normal methods of keeping accounts, 
and whatever the advantages of fiscal measures imply a 
divergence between the tax laws and accounting norms, these 
advantages should be obtained in the form of measures af- 
fecting assessment to tax and not in the form of modifications 
of the process of profit determination. 

Representatives of those industries to which 
government is an important customer also experienced some 

- 220 - 

hesitancy in providing information which might be useful 
for the regulation of their markets, particularly when the 
committees proceeded to discuss cost accounting. They re- 
quired to know in advance what rights the Ministry would 
acquire for investigating their cost accounts during the 
course of negotiations, in contract determination, and in 
post-audit. The Conseil was only able to assure the parties 
that its interventions were designed to facilitate the 
resolution of disputes which might arise from problems of 
accounting, a frequent occurrence in this area. It is 
obvious that the regulation of such markets would be 
greatly helped by uniform cost accounting, as recent 
developments in the U.S.A. bear witness,^" but it is 
equally clear that, in order to pursue its objectives of 
improving the quality and flov; of accounting information 
generally, the Ministry would seek to avoid conflict by 
relying on the findings of the professional committee. 
A difficulty might arise through a government agency 
laying down definitions and rules before the relevant 
adaptation of the Plan appeared, so that it would be 
advisable to promulgate such regulations as temporary 
guidelines pending the completion of the professional 
committee's work. 

Another fear, more rarely expressed but frequently 
manifested in one form or another, was that the extension 

- 221 - 

of the Vlan to all trades and industries would lead to a 
degree of uniformity rendering the Plan difficult to apply 
in particular firms (the "my firm is different" syndrome) . 
The danger foreseen is that the inflexibility of a uniform 
system would impede the development of accounting as a 
managerial information system. The form which this fear 
might take was the attempt to set up a professional committee 
within an industry or branch, where no technical reason was 
apparent. Again, it might lead to the desire to remake the 
Flan aomptable general, that is, to reopen issues concerning 
definitions, principles and choice between alternatives. 
Both of these manifestations of insecurity required tactful 
handling; the former in the professional committees them- 
selves, and the latter by the Conseil, which was able to 
point to its efforts to collect the observations and sug- 
gestions made in these circumstances with a view to the 
periodic revision of the Plan. 

The reticences displayed by members of the committees 
as a consequence of these fears were supplemented by others: 
the "wait and see" attitude; the disappointment of those who 
believed that the adaptation of the Plan was a simple 
technical problem, only to discover its concealed diffi- 
culties of definition and interpretation; the misunder- 
standing of the nature and potentialities of cost accounting 
in particular, and managerial accounting in general. It is 

222 - 

apparent from the two Reports cited that the French 
experiment did not benefit from any special advantages in 
the field of human relations, other than a v/illingness on 
the part of the officials concerned to face important 
psychological problems, and to overcome them. 

Teahnioal Problems 

We have already drawn attention to two technical 
problems faced in this experiment: the identification of 
an industrial classification under which professional com- 
mittees could be formed, and the ascertainment of those 
particular features of a trade or industry, whether of 
structure or of size, having effects upon the accounts 
themselves. In respect of the former,, experience has con- 
firmed the wisdom of the decision taken, and a considerable 
assistance was obtained from other government agencies 
engaged in regulation in carrying out the necessary research, 
Indeed, the reports of the Conseil emphasize the importance 
of this taxonomic function in arriving at the formation of 
committees which do not contain elements capable of ob- 
structing the work of adapting the Plan because of their 
essential heterogeneity. It is notev/orthy that although 
only a small number of industries were subject to this 
danger, the risk was regarded as too great to be taken. 

The work of the committees revealed that in many 
cases the search for a solution of a recognized accounting 

- 223 

problem led to the discovery of other problems which had 
remained hidden, or incapable of clear statement. These 
problems may be divided into two classes: problems of 
general interest, and problems specific to the industry. 
Among the former, it is necessary to decide as and when 
they arise whether they require immediate solution, or 
whether a solution has to be deferred until the PZan can 
be reconsidered as a whole. Among the latter are many 
which present themselves in a similar fashion in other 
industries, so that the degree of specif icness of the problem 
becomes an issue; the representatives of the Conseil have 
the task of seeing that exceptions remain exceptional. 

One example of this situation may be cited. 
Technological change causes firm^s to acquire equipment and 
installations of a high degree of specialization, and a 
question sometimes arises concerning their conformity to 
one of the "fixed asset" classifications v;ithout qualifi- 
cation, i.e., under which of the headings of the Plan should 
they be included? In the case of oil production it was 
decided to open two new accounts specially defined for 
the particular case, viz: 

213 Specialized installations. 
217 Long distance pipelines. 

Subsequently, analogous situations arose in other 

industries, which showed that the account for specialized 

installations could be used in a variety of adaptations 

- 224 - 

of the Plan; even the pipeline account proved useful for 
equipment which, while not identical, was sufficiently 
similar to be classified under this account number. 

The existence of "free accounts," corresponding 
to matrix cells containing zeros, permits a considerable 
degree of variation within the Plan, and as long as these 
are not preempted by the Plan comptable general they can 
be used for purposes specific to the industry, even though 
other industries are using them in quite different sub- 
classifications within the main class. The use of these 
"free accounts" appears to be one of the points at which 
pressure on the Conseil builds up. 

The existence of firms occupying more than one 
industrial classification, called "polyvalent," raises the 
problem of compatibility; there must be a high degree of 
uniformity between the Plans of the various industries 
even though the firm may opt to adopt any one of them. 
This situation concerns financial accounting rather than 
cost accounting, where the solution is facilitated if the 
activities in question are carried out in different 
establishments. Nevertheless, the financial accounting 
problem is acute where the same account has to be allocated 
to different purposes at the same time, and if the firm is ^ 
big enough it may be necessary to consider it as a subject 
for a special secondary adaptation. Where the "polyvalences" 

- 225 - 

present a certain regularity, as in the case of mechanical 
and electrical engineering, or chemicals and pharmaceuticals, 
the solution can be worked out in advance, but not where 
there is a time-lag in the completion of the work of the 
relevant professional committees. In the oil industry, 
for example, the production committee completed its work 
while the refinery coirimittee was still sitting; liaison 
was effected by having a representative of "refining" on 
the "production" committee, but the latter 's choices must 
impose themselves to some extent on the former's delib- 
erations. In view of this and the preceding problem, the 
Conseil sees additivity as restricted to the three-digit 
accounts , reducing to two digits for inventory and purchase 

Accounting for research and development was 
considered at length by the oil production comrriittee. 
While all such expenditures could have been charged to 
Account No. 22, the Plan laid down two restrictions: 
fictitious values in respect of research which is known 
to be abortive should not be shown as assets, and items 
previously treated as operating expenses should not sub- 
sequently be shown as sources of profit. The solution to 
this problem was originally envisaged in the form of a 
depreciation adjustment, which could amount to 100% of the 
amount capitalized, but opposition from accountants, based 

- 226 - 

on a suspicion of potential abuses on the part of both 
managers and the tax authorities, led to a reconsideration 
of this issue, which appears not to have arrived at a 
satisfactory conclusion. 

^To one v/ill be surprised to learn ti'at int'^r'^*~it on 
capital presented another insoluble problem, particularly 
in the iron and steel industry, where this iterri assumes 
considerable importance. Should some of these costs be 
capitalized, either as fixed assets or as organization 
costs? and at what accounting cost, since the administrative 
work involved cannot be reduced to a simple formula? In 
spite of these apparent obstacles , we believe that the 
committees will eventually reach satisfactory solutions to 
these delicate problems of valuation, because the model 
with which they are working is fundamentally sound. 


This brief description of the French accounting 
experiment shows the application of the accounting model of 
the firm to a wide range of commercial and industrial 
activities in a manner tending to the elimination of those 
elegant variations and unnecessary proliferations which 
confuse the analyst and arouse the teacher's ire. The 
similarity of the chart reproduced on p. 210 to our Figure 9 
in Chapter V is apparent; the differences of detail suggest 

- 227 - 

a higher level of disagreement than the models in fact 
contain, and we prefer the chart in Figure 9 merely on 
grounds of convenience for presentation and explanation. 
We are thus confirmed in our view that Figure 9 represents 
an acceptable image of reality, and one on which a new 
theory of accounting can safely be constructed. 


1. Decree No. 47-2051 dated October 22, 1947. See 
Bernard M. Berry, "Uniform Accounting in France: 

Le Plan Comptable," London, The Aoaountant , Vol. 140 
(February 26, 1949), pp. 157-61; and (March 5, 
1949) , pp. 176-80. 

2. Plan aomptahle general (Paris: Imprimerie Nationale, 
1957) . 

3. Pvemiev Rapport Sur I ' Appliaation Progressive du Plan 
Comptable General (Paris: Ministry of Finances and 
Economic Affairs, July 1, 1963). 

4. Ibid. 

5. Kenneth S. Most, "Uniform Accounting in France," 
London, The Aoaountant (November 23, 1957), pp. 594-6. 

6. Plan comptable general, p. 9 (our transl.). 

7. I& 

§. Deuxieme et Troisieme Rapports Sur I ' Application 
Progressive du Plan Comptable General (Paris: 
Ministry of Finances and Economic Affairs, 
December 31, 1965). 

9. Ibid. 

10. See Feasibility of Applying Uniform Cost Accounting 

Standards to Negotiated Defense Contracts , Comptroller 
General of the U. S., Government Accounting Office, 
Washington (January 19, 1970). 

- 228 


In the first chapter of this work we started with 
a postulate that the behavior of individuals in a society 
may be studied in relation to both consumption and investment, 
which, being distinct modes of behavior, must be kept sep- 
arate in any formal analysis. We are, therefore, postulating 
a conflict of needs underlying the problems of resource al- 
location, but of a somewhat different nature from the con- 
ventional economic classification into consumption and 
saving. The form of this classification is given by 
Marczewski as follows:^ 

1. Individual present needs = Consumption 

2. Individual future needs = Private capital for- 


3. Collective present needs = Current production of 

consumption goods 

4. Collective future needs = Current production of 

investment goods 

By elevating the discussion to a higher level of 
abstraction, we can treat the financial concept of private 
capital formation as personal saving, and arrive at a 
purely subjective classification of goods into aonsunption , ' 
and investment . Production refers to processes and not 
resource allocations. Marczev/ski ' s classification then 

- 229 

230 - 

becomes: individual present and future needs (consumption 
and saving) , and collective present and future needs 
(investment) . The conflict between private and public 
consumption, saving, investment and production, is seen 
to be a second order question, to be resolved, in a free 
society at least, on issues of efficiency and economy. 

In order to relate accounting theory to economic 
development, we shall assume a State in which_ the ideo- 
logical conflict between private individual needs and public 
individual needs is replaced by the economic question of how 
shall given needs be satisfied at the lowest social cost, 
defined as sacrifice of resources. It is further assumed 
that, in order for needs to be placed in a hierarchy for 
purposes of decision, they can be quantified by means of 
a system of money valuation. It may be shocking to some 
if we suggest that human needs can be represented in money, 
but observation reveals that we do arrive at money values 
for a wide range of noncomiTiercial situations — student 
bourses, accident compensation, artistic performances, 
charitable services — and that these valuations are no dif- 
ferent in kind from any others, being subjective judgments 
made objective by interpersonal agreement. VJere we to 
adopt any other method of establishing priorities, it could 
lay claim to no higher degree of acceptability than this. 

- 231 - 

Three liberating events which are nowhere celebrated, 
but which underlie the benefits enjoyed by free men every- 
where, are,, in order of occurrence: 

1. The valuation of personal services, in the form 
of wages, whereby men were enabled to separate 
their work from their personalities, and thus 
escape from slavery. 

2. The valuation of ability to perform contracts, in 
the form of credit, v/hereby able men were placed 
in possession of resources to which their birth 
and position gave them no rights. 

3. The valuation of impersonal services, in the form 
of depreciation and amortization generally, which 
extended the scope of money valuations t.o virtually 
all problems concerning the allocation of scarce 
resources . 

In the year 2,000 A.D., when money as a means of 

payment will have lost its significance, and when property 

rights as the 19th century knew them, will have virtually 

disappeared, the twin functions of accounting will finally 

assume their full importance: the attest function, which 

has been described as "telling managers what they already 

know," and rendering valuations objective for the benefit 

of third parties, which comes under the general heading of 

financial reporting. In order to see why this should be 

so, we shall review our theoretical formulations. 

A New Tkaory of Aacounting 

We have based our nev/ theory of accounting on the 
observation that men use accounts for purposes of prediction, 

232 - 

planning and control. We have, therefore, directed 
attention away from the conventional list of assumptions 
required by accounting theorists — ^profit maximization, 
income determination, double-entry bookkeeping, the going 
concern, the entity, attaching and matching — and toward the 
account, use of which distinguishes accounting from all 
other forms of planning and control. 

The account displays the following characteristics: 

1. It is in two parts, one for in-flows, one for 
out-flows . 

2. It is a complex cf form, and content. 

3. It contains observations concerning value and time, 
expressed in a given language and manipulated with 
the aid of arithmetical techniques. 

It follows from this that the concept of a "stock" 
account is redundant; all accounts deal with flows in the 
sense of changes between one point in time and another. The 
balance sheet, which is an account for the business at a 
particular point in time, simply abstracts from time, since 
a point has no dimension, but it does not thereby convert 
flows into something else, or arrest the process of change 
which accounts are designed to represent. To attempt to 
construct separate models for stock variables and flov/ 
variables is another of the logical errors to which we have 
drawn attention in this work. 

The purely technical features of the account, 
including the way in which a multitude of accounts can be 

- 233 - 

manipulated as a system, are generally understood; they 
have been converted into algebra by Ijiri, Mattessich, 
Cooper and others, and into vectorial notation by Mattessich. 
The results are clumsy, and there are, in fact, no mathe- 
matical processes which can accomplish what accounts can 
do, namely, quantify and date movements of values; the 
best that mathematics can do is to make drastic simplifying 
assumptions, such as, that everything happens at the end of 
the month, or that events take place with some form of 

The obscure feature of the account, and the one 
which underlies the criticisms of accounting summarized by 
Mattessich,^ is valuation. We have emphasized the sub- 
jectivity of valuation, v;hich permits "historical costs" 
to become "opportunity costs" if the interested parties 
so agree, and v/hich converts "arbitrary" allocations into 
"allocations, the reason for which I fail to understand." 
We have also indicated that the valuations usable in ac- 
counts are restricted only by imagination and ability 
to agree, so that the criticisms of accounting as too narrow, 
or lacking in behavioral functions, can be dism.issed as 
criticism of accountants. 

Before drawing our conclusions on the subject of 
valuation and the additivity of values, we wish to point 
to the implications of the accounting theory outlined above 
for the teaching of accounting, and for accounting textbooks 

- 234 - 

in particular. The acceptance of our emphasis on planning 
rather than control will lead to the preparation of text- 
books in which budgeting precedes financial and cost ac- 
counting for transactions, rather than the other way round, 
as is now invariably the case.^ The abandonment of unneces- 
sary assumptions, and the acceptance of the subjectivity of 
valuation, must effect a radical change in the contents of 
these texts, to appreciate the enormity of which it suffices 
to state that they will omit such timeworn propositions as: 
that revenues are receipts from sales; that costs are money 
payments; that liabilities are amounts ov^ed; that assets are 
things owned having value to the owner; that costs attach; 
that costs are to be matched with rex/enues; that profit is 
business income; that cash flows. 

Value and Additivity 

The contents of this study suggest strongly that 
economists and accountants may have been mistaken when they 
assumed that their subjects were akin to those physical 
sciences in which mathematical logic has been used with such 
striking success. It is more probable, we think, that ac- 
counting can be compared with ecology in that it depicts a 
complex of relationships between man and his environment, 
any one of v/hich may, at a particular moment in time, assume 
a critical importance for the achievement of his goals. 
Ecology is unlikely to produce the spectacular discoveries 

- 235 - 

which other departments of science have accustomed us to 
expect, yet it is indispensable to man's survival. Ac- 
counting appears pedestrian to some, but it may likewise 
be indispensable to the formal acts of planning and control 
which modern industrial man has found it increasingly useful 
to undertake. 

The difference between the two approaches to science 
is best revealed by the contrast between measurement and 
valuation which was brought out in Chapter V, where we 
identified the subjectivity of value as a critical elem.ent 
in accounting methodology. Values are made objective by 
interpersonal agreement, of which the formation of prices 
in m.arkets is simply a special case. The subjectivity of 
value has long been recognized in security markets: 

There is no such thing as a final answer to security 
values. A dozen experts will arrive at 12 different 
conclusions. It often happens that a few moments later 
each would alter his verdict if given a chance to re- 
consider because of a changed condition. Market values 
are fixed only in part by balance sheets and income 
statem.ents; much more by the hopes and fears of 
humanity; by greed, ambition, acts of God, invention, 
financial stress and strain, v/eather, discovery, 
fashion and numberless other causes impossible to be 
listed without omdssion.'* 

The adoption of accounting methodology for planning 

and control, which this feature of valuation makes possible, 

depends for its usefulness on the systematic representation 

of real processes whereby needs can be satisfied, and in 

Chapter V we presented a model within which investment and 

the processes of production can be analyzed, both in the 

236 - 

private and public sectors. In Chapter VI we attempted to 
show how this model can be extended to social accounting, 
so that the system can be related to the consun\ption needs 
of a society as well as its investment and production 
processes. It appears to us that there is a definite limit 
to the use of accounting methodology in the area of con- 
sumption, and that logical and procedural problems, which 
are not capable of being solved in the present state of 
human knowledge, must arise if the attempt is made to extend 
the use of accounts in this area beyond the conceptual 
boundaries of acquisition and disposal. 

In the Soviet system of social accounting, which 
reflects a policy of giving priority to the collective over 
the individual on purely ideological grounds, the basic 
materials of the planner are data on physical resources, 
divided into labor, materials and productive capacity. 
The relation between disposable and allocated resources 
uses techno-economic coefficients, recalling Leontief's 
^ik coefficients; the latter, however, are simply static 
interindustry deliveries as parts of total output, both 
at constant prices. The differences between the Soviet 
balances de ressouroes en nature and Leontief's inputs and 
outputs are as follows:^ 

1^ The former relate to a single, well-defined, 
factor or product, in the form: 

- 237 - 

Opening balance + current production + imports 

= disposable 


Investment + consumption + exports + reserve 
= allocation. 

Leontief is concerned principally v;ith outputs, 
although these become the inputs of succeeding 
industries and sectors. 

2. They are measured in physical units, where Leontief 
uses money measures. 

3. They are prepared for three successive years (past, 
current and next) . 

4. Labor resources include all those of work age, 
including students, who are allocated to edu- 
cational institutions. 

5. The Soviet balances are analyzed by regions and 
not simply by industries and sectors. 

We do not envisage the adaptation of the Soviet 
system to the planning requirements of a free society, not 
only because V7e regard planning in this sense as incom- 
patible with the freedom of the individual, but also because 
we have serious doubts whether values can, in fact, be 
broken down into quantities and prices , the two elements 
being inseparable in the majority of valuation situations.^ 

This leads us to a consideration of the additivity 
of valuations « Many accounting theorists and practitioners 
have criticized financial statements inter alia on the 
grounds that they contain measurements of different qualities 
("direct" and "indirect" valuations, for example) or in 
dollars of different epochs, representing different 

- 238 

purchasing power equivalents. These critics assume that 
the additivity of accounting data would be improved by the 
adoption of a homogeneous class of valuation models,' or 
by price level adjustments using indices. Morgenstern, on 
the other hand, has suggested that a balance sheet (by 
which he presumably means a complex of financial statements 
based upon balance sheet concepts) is a cell containing a 
"single hard core or kernel of accurate figures to which 
the ordinary ideas of errors apply, surrounded by succes- 
sive layers of figures gradually farther and farther away 
in character from the core because of the manner in which 
they are conceived, although in outward monetary appearance 
indistinguishable in their presentation, even down to the 
last decimals. An aggregation from several balance sheets 
is, therefore, the summation of such information: only 
the arithmetic sums of the kernels can have a claim to 
'accuracy' to which the customary notions of error can be 
applied."® He thus saw a serious statistical problem in 
the development of a theory capable of handling such data, 
and in a subsequent edition of the same work, on the basis 
of an assumption that current cash realization equivalents 
are the measurement to be approximated, he proposed a 
probabilistic structure of assets in which mathematically 
expected values can be stated together with standard error 
measurements . ' 

239 - 

Since we see the accounting use of money as a 
measurement of value and a unit of account, and not in the 
first place as a means of payment or an asset, we can see 
little usefulness in financial statements prepared on the 
basis of current cash equivalents, except in the case of a 
business or a part of a business for which liquidation is 
imminent. We regard accounts as sets and subsets of values, 
so that the possibility of performing mathematical oper- 
ations other than simple aggregation is a function of the 
homogeneity of the observed realities underlying the values 
which an account or accounts contain.^" The degree of 
homogeneity which permits simple aggregation is dependent 
on interpersonal agreement to that end, and cannot be 
rendered objective in any other perceptual sense. An ac- 
count for land and buildings, for example, may aggregate 
valuations of real properties in different locations, subject 
to different legal restrictions, and available for dif- 
ferent economic uses; their expression in homogeneous 
physical quantities (square or cubic feet, quantities of 
brick, timber or concrete, or quantifiable descriptions of 
operating machinery) does not permit us to assume that 
their values are additive. One man may aggregate these 
values for his purposes without let or hindrance; a group 
of interested individuals m.ay add some and exclude others, 
or simply fail to agree on any additivity whatsoever . ^ ^ 

- 240 - 

We are in substantial agreement with Shackle on 
this point, who rejects the applicability of probability 
theory to investment valuations . ^ ^ In his view, the 
formal theory of investment in economics involves an as- 
sumption of certainty, so that there is no risk of a non- 
receipt, or, at worst, a measurable risk which we may call 
"certainty equivalence." The nature of investment decisions 
is to deal v;ith a range within which there is. "complete and 
unqualified indeterminancy" ; if the expected earnings of a 
piece of equipment constitutes a range of equal possibili- 
ties, with no probability assignment possible, then an 
individual will choose the largest estimate as a working 
hypothesis, because this is most attractive to him. We 
would simply add to this that a group of individuals who 
wish to reach agreement on value for the purpose of an 
investment decision in which they are all interested may 
choose a value below the largest estimate, which will be 
the highest to which they can all, in good conscience, agree, 

The Importance of Accounting in National Planning 

The modern state v/hich seeks economic development 
experiences a dilemma from which there appears, at first 
sight, no escape. Forced to compete at one and the same 
time with the most advanced nations in its industrial 
markets, and with the most backward or underpopulated with 

- 241 - 

its agricultural products, its leaders may conclude that 
only by keeping industrial wages low and by collectivizing 
agriculture can the country produce at a cost which will 
permit exports to finance the necessary imports of plant, 
machinery and raw materials. The key to this policy, how- 
ever, which is the restriction of personal consumption 
through keeping down disposable incomes, is constantly under 
pressure from another aspect of modern international rela- 
tions, the rapid flov; of ideas. Radio, television, films, 
books, magazines and personal contacts stimulate the tastes 
and appetites of the poorest and least energetic of the 
world's populations as well as those of the wealthy and 
thrusting. The people desire costly distractions, consumer 
durables, fashion garments, exotic foods; either the drive 
to higher vzages and imports of noninvestment goods frustrates 
the development policy, or else the country collapses into 
a totalitarianism from which, as far as we knov;, there may 
be no return. 

There is, however, one solution which may offer some 
hope to those developing countries which have not yet sur- 
rendered to the tyranny of the corporate state. The indus- 
trial and agricultural nations with which they must compete 
are frequently inefficient in their methods; great wealth 
leads them to overinvestment or uneconomical production; 
or the large scale of their productive apparatus renders 
them, inflexible and insensitive to changes in demand; 

- 242 - 

or a preoccupation with considerations of prestige and 
vainglory causes them to squander their resources in search 
of "the bubble reputation." The developing state, aware of 
these possibilities, will seek to foster its competitive 
advantages by specialization in those areas where 
flexibility is at a premium, and by eliminating waste in 
both private enterprises and government agencies. 

If, as we have suggested, accounting is a planning 
and control methodology, then it is reasonable to see in 
the attention which some developing countries have paid 
to founding or strengthening their accounting professions, 
a recognition of this fact.^^ The need to value, which 
lies at the base of all investment decisions, including 
current decisions relating to ongoing production, leads to 
the choice of a planning model in which values are explicit 
variables; the time constraint which is imposed by changing 
consumer expectations leads to the choice of accounts, 
which make time an explicit variable. As long as the 
model is used scientifically, with the correspondance 
betv/een the abstraction and its underlying reality con- 
tinually verified, it can be a useful tool for economizing 
in the voider sense of the word, that is, for minimizing 
the input requirements for any given output. 

In those developed or industrialized nations where 
investment is delegated, by conscious political choice, to 
the level of society at which cost and benefit can be most 

- 243 - 

clearly perceived, we can see many useful purposes being 
served by a social accounting which proceeds from the 
identification of the plans of the various sectors, indus- 
tries and branches of the population. The presentation of 
these plans as a consolidation of accounts permits the 
establishment of divergencies between aims and achievements 
in terms of society as a whole, and allows the regulatory 
agencies of government to intervene rationally and consist- 
ently in order to remove those obstacles which stand in 
the way of the fulfillment of individual economic_ goals. 
Even the consolidation of "historical" accounts divorced 
from a comparison with "planned" accounts can yield results, 
in the form of questions, the answers to which may aid in 
the resolution of social conflicts, and information which 
individual planners can rely upon as points of departure 
for their personal projections and decisions. We do not 
believe, however, that the full potentiality of even this 
restricted aspect of social accounting is capable of 
achievement with the models in use at the present time. 


In conclusion, we may restate the preoccupations 
which have rendered necessary this new approach to ac- 
counting theory in order to determine the relevance of 
accounting to the economic development of the modern state. 

- 244 - 

Economic activities of production and distribution are no 
longer characterized by regular exchanges in markets. 
Many of them require long periods of time to elapse between 
inputs and outputs, frequently several years and in some 
cases much longer. Many of them by-pass markets entirely 
for long periods of time, as for example, the integrated 
production and marketing operations of the international 
oil corporations; the production and distribution operations 
of public institutions transact only on input markets, and 
obtain many of their inputs from nonmarket sources. Some 
huge defense contracts are negotiated under conditions 
which make reference to markets meaningless. The tendency 
for economic activities to be concentrated in large public 
and private production units, with clearly separated finan- 
ciers and managers and well-defined hierarchies within each 
of these categories, renders psychological assumptions ap- 
plicable to tenant-farmers or town locksmiths of dubious 

"Betv;een the inhumanity of the marginalists and 
the inhumanity of the marxists, is it impossible to con- 
struct an economic science truly that of man?" asked 
Marchal.'''* He thought so; we would gladly prove him wrong, 
and to that end this study is humbly dedicated. 


1. J. Marczewski, Flanifieation et Croissayioe Eaonomique 
dee Demoaj-'aties Populaires , Vol. II (Paris: Presses 

■2. Supra, Ch. II. 

3. R. N. Anthony, in Management Accounting (Homev/ood: 
Richard D. Irwin, Inc., 1956), has acknov7ledged the 
logic of this position, on p. 2. 

4. Gerald Loeb, The Battle for Investment Survival, 
quoted by 'Adam Smith,' The Money Game (New York: 
Dell Publishing Co., Inc., 1967), p. 22. 

5. Marczewski, II, p. 450. The problem is demonstrated 
mathematically by him on pp. 453--67. 

6. Robert R. Sterling, in "Elements of Pure Accounting 
Theory," The Accounting Review ^ Vol. 42 (January, 
1967), pp. 62-73, suggests that "historical cost" 
accounting can be explained on the grounds that 
quantities and prices are separable phenomena. 

7. E.g., Edgar 0. Edwards and Philip W. Bell, The Theory 
and Measurement of Business Income (California, 
1961) . 

8. Oscar Morgenstern, On the Accuracy of Economic 
Observations (1st ed . ; Princeton, 1950), p. 31. 

9. Ibid. (2d ed . ; 1963), pp. 76-79. 

10. G. E. M. de St. Croix provides evidence that Greek 

accountants regarded the values they recorded as sets, 
e.g., the building accounts of the Parthenon, 434- 
433 B.C., V7hich contain observations in different 
currencies. See "Greek and Accounting," in 
Studies in the History of Accounting , ed. A. C. 
Littleton and B. S. Yamey (Homewood: Richard D. 
Irwin, Inc., 1955) at pp. 23-4. 

- 245 

- 246 

11. The published consolidated financial statements of 

General Motors, Inc., for example, do not add together 
the real properties of the raanufacturing corporation 
and its divisions with the real properties of General 
Motors Acceptance Corporcition, although the latter is 
a wholly-owned subsidiary of the former. 

12. G. L. S. Shackle, "The Nature of the Inducement to 
Vol. VIIT, No. 1 (October, 1940), pp. 44-8. 

13. "Relations between an underdeveloped country and the 
rest of the world are not generally favorabie to 
spontaneous industrialisation." Marczewski, II, 

p. 435 (our transl.). 

14. J. Marchal, Cours d'Eao-nornie Politique (Paris: 
Librairie des Medicis, 1952), p. xi (our transl.). 


Werner Sombart. Dev Moderne Kapitalismus . 3d ed. Munich 
and Leipzig: Duncker and Humblot, 1919, Vol. II, 
1st half. Chapter X, "The Birth of the Capitalist 
Enterprise," pp. 110-3 6 

Translated by Kenneth S. Most 

III. The Business as Aaaounting Entity: The ratio (account) 

1. The historical development of accounting . — ^The 
introduction of accounting was of the greatest significance 
for the full development of the capitalistic enterprise. 

We know that the artisanal organization of medieval 
trade (and anything like bookkeeping was unthinkable for 
other branches of business life) found its expression in an 
incomplete and highly personalized bookkeeping. The sparse 
and confused collection of notes v/hich characterizes the 
German trade books of the 14th and 15th centuries had, as 
sole object, to recall to the m.emory of the business manager 
particular events and conditions in his business. The books 
were memoranda in the most primitive sense of the word. 

The public household was the place where an organ- 
ized or "objective" bookkeeping, comprehensible to third 
parties took root. 

Naturally, the Italian city communities took the 
first steps. From the 13th century on, perhaps even ear- 
lier, orderly business management starts to appear. In- 
ventories of m.ovable and real property are taken, the tavcle 
delle posseasioni in Florence, in two copies; special of- 
ficials (nctai) are appointed to provide annual reports on 
the public debt (Milan, Pisa, Florence) . Strict supervision 
of communal receipts and payraents is introduced. In 1225 
the Milanese Fodesva orders a monthly check on the govern- 
ment cash and requires officials to submit monthly accounts. 
All statutes contain bookkeeping regulations: the Breve 
pisano of 1286, for example, requires two separate books, 
one for receipts and one for payments; in Venice monthly 
audits and surprise cash checks shall take place. Balance ■ 
sheets were constructed for the Italian states in the 14th 
century: we have them for Florence from the years 1336-38, 
for Treviso from 1341, for Rome from 1358, for Milan from 

248 - 

- 249 

An earlier accounting regulation v/as forced upon 
the papal household, thanks to its extraordinarily high 
receipts, and also on the French and English royal house- 
holds . 

In the private profit sector the bankers were 
probably the first to keep accounts systematically, because 
of special features of their business. The laws of cities 
such as Pavia, Piacenza, and Novara, indicate the exacti- 
tude of their accounts. In the 14th century, city admini- 
strations were told to keep their books in the manner 
customary in banking circles. What was that? and how did 
bookkeeping grow into a highly organized system? 

The history of accounting must begin with the 
sentence: in the beginning was the account: the ratio. 
We rightly refer to the study of bookkeeping, even today, 
as accounting, and both the French and Italian languages 
use this word: accounting, to designate the whole subject 
of bookkeeping: aom-ptahilite , vagione'^ia . IVhat is true 
of the entire system is true to an even greater extent of 
its beginnings; accounting grew by means of constructions 
using accounts; by putting them into accounts, the writer 
of an unanalyzed and personalized collection of notes broke 
them into two parts and built them into a firm sequence of 
thoughts, on which all subsequent accounting could be based. 

We can accept on the basis of the ev'idence available 
to us that accounting constructions were developed in 13th 
century Italy, and that, in France in the 14th century, real 
accounts were to be found side by side with personal accounts, 
which originally existed on their own. [Evidence cited.] 

The second step in the development of accounting was 
double-entry: the German Doppik or the French loi ^digraph- 
ique , whereby every item is recorded on opposite sides of 
two accounts, so that one account is debited with the same 
amount with which the other is credited, on which double- 
entry bookkeeping, la pavtita doppia, la aomptabilite a 
parties doubles is based. Through double-entry bookkeeping, 
the entire accounts of a business are tied together, as a 
bundle of sticks with string. 

The time when this step V7as attained appears to have 
been the second half of the 14th century. The city admini- 
stration of Genoa v/as already keeping its books of account 
on the double-entry basis in the year 1340, and according 

- 250 

to H. Sieveking, the old account books of Soranzo, which 
fall within the 14th century, were kept on the double-entry 
basis. It is well known that double-entry bookkeeping was 
later known as the "Venetian style," and v^e can deduce from 
this that it first saw its construction (or use?) in Venice. 

However double-entry, the loi diagraphique , 
characterizes accounting, the use of this principle does 
not suffice to complete the system. True, the essential 
nature of double-entry bookkeeping, which undoubtedly con- 
sists in following the complete circular flow of capital 
through a business and measuring and recording it, is not 
apparent until the system of accounts is complete. We know 
that this is not the case until, side by side with the other 
accounts, a profit and loss account and a capital account 
enter the picture, to which the balances of the other ac- 
counts are carried; without this, the accounts remain dis- 
connected. The circular flow of capital which double-entry 
bookkeeping is designed to embrace can only be shown in full 
when these accounts are put in place: from the capital ac- 
count to the transaction accounts through the profit and 
loss account and back into the capital account. 

Historically, this completion of double-entry 
accounting took place in two steps: the first led to the 
introduction of the profit and loss account; the second, 
finally, to the creation of a capital account. The 
Soranzo 's new ledger, which belongs to the 15th century, 
has a profit and loss account but no capital account; the 
account book kept by Andrea Barbarigo in 1430/40 has a 
capital account at the end. 

Here, not only are the goods accounts regularly 
closed to the profit and loss account, as in the Soranzo 's 
new ledger, but the profit and loss account is also for- 
mally closed out to the capital account: the accounts of 
1430 and 1432 feed the account of 1434. The balance of 
this account is credited to the capital account "Andrea 

In the beginning of the 15th century, then, came 
the first scientific system of double-entry bookkeeping, in 
the theoretical framework of V7hich all subsequent practical 
achievements were to be fully accoirmodated. The system of 
Fra Luca (Pacioli) published in 1494, which has kept its 
fame in spite of all researches into the history of ac- 
counting, earned for him the title of first bookkeeping 
theorist, iZ prima autore di ragiomvia . 

- 251 - 

[Bibliographical note, in which Sombart points out 
that Pacioli's double-entry did not grow out of single-entry 
bookkeeping, the latter being a crippled version of the 
former, and of later date.] 

Even though the system of double-entry bookkeeping 
was virtually complete in Pacioli's version, it was far 
from being the highly-developed and organized system we know 
today. One shortcoming, visible in Pacioli and in the 16th 
century writers, was overcome simply through practice: the 
process of balancing the books; only by means of this pro- 
cess can the latent interrelationship of the individual ac- 
counts be made manifest. Pacioli does not mention balancing 
or annual closing. Simon Stevin (1608) was the first to 
require that the books be closed annually, besides at the 
merchant's death and when the business was liquidated. Even 
with this, however, a real problem remained. 

This real problent, it is known, is that the profit 
or loss calculated from the balances of the other accounts 
is fictitious and not true, because two conditions have been 
disregarded vjhich materially affect the size of the actual 
profit or loss: 1. the fact that during the accounting 
period, part of the overheads cannot be exactly determined; 
2. the fact that, from the moment of their entry into the 
business, values may (and in most cases do; diminish. If 
profit or loss is to be accurately determined, then all 
values must be reported as at the moment of balancing, and 
this is the purpose of the inventory. "Thus, the final trial 
balance is dependent upon an operation external to the book- 
keeping system, namely, the inventory." 

If the bookkeeping theorists of the 17th century 
called for the books to be closed annually, and a yearly 
balance sheet, it was for essentially bookkeeping purposes; 
as in the case of de la Porte, it was a purely mechanistic 
function or, as Schar correctly states, "an accounting trick, 
an equivalence of identities." When was the need for an 
inventory recognized? It was long thought that the idea 
of a closing inventory appeared about the end of the 17th 
century — at the same time — otherwise the French Ovdonnanae 
of 1673 could not have made such an inventory a legal obli- 

Article VIII of Title III of the Ordonnance lays 
down, in fact: Seront aussi tenus tons les Marahands de 
faire dans meme delai de six mois, inventaire sous leur 
seing de tons leurs effets mobiliers et immokilievs ^ et de 
teuTs debtzs aat-ives et passives , te quel seica recolle et 
renouvelle de deux ans en deux ans . 

- 252 - 

It is tempting to ascribe this idea to the two 
Savarys, who were known to have fathered the 1673 Ordon- 
nance de Commerce^ and who provide a very detailed com- 
mentary on this regulation in their scientific works, Le 

par fait negociant and Dictionnaire de commerae. 

On closer examination, however, it appears that the 
view that the two Savarys, in their works or through the 
provisions of the 1673 law, saw the closing inventory as a 
complement of double-entry bookkeeping, is false. The 
inventory which they called for and for which an exact 
valuation was required, applied only to retailers, who did 
not keep double-entry books and for v;hom this inventory was 
designed to act as a substitute. The usage of the time 
restricted the word "marchands" to retailers ,. and the 
Savarys always refer expressly in their works to "marchands 
en detail." Businesses which kept double-entry books re- 
tained the purely accounting balancing operation: the 
opening balance sheet, when the books were closed*, at the 
end of the year, was buried by the new balance sheet: it 
took the place of the inventory: quand un marahand ou 
negociant tient ses livres en parties doubles, le bilan 
d' entree lui sert d' Inventaire , qu'il porte au oommenoemsnt 
du nouveau Journal et du nouveau grand livre . (J. Gavary, 
Dictionnaire de Commerce , 2, 438.) 

Nor do we find in the 18th century a requirement to 
ascertain values by taking an inventory. Not even Biisch 
requires an inventory but leaves goods in the balance sheet 
at their purchase prices. G. H. Buse (1804) compares the 
quantities in inventory v/ith the differences between pur- 
chases and sales, but uses purchase prices only. 

Can it be true that the age of early capitalism 
ended without establishing the idea of a non-accounting in- 
ventory as a necessary element in the complete system of 
double-entry bookkeeping? The question will have to be 
answered by research specifically directed to that end. 
We are content here to have established that the system of 
double-entry bookkeeping was fully developed during the 
early capitalist period. Let us see what basic signifi- 
cance this new form of business organization had for the 
creation and expansion of the capitalistic enterprise. 

2. The Significance of Accounting in the Development 
of Capitalism. — Order increases our strength, not least in 
economic affairs. "Order and clarity increase the desire 
to save and to acquire wealth. A person who manages his 
affairs badly feels well in the dark; he does not want to 

- 253 

add together the bills he owes. The good manager finds 
nothing more pleasant than to check the totals of his 
growing wealth daily. Not even an unfortunate accident 
frightens him, for he knows immediately the advantages 
which he can place on the other side." This generalization 
is applicable to all economic conditions; to the farmer 
as well as to the craftsman, to the capitalistic enter- 
prise as well as to the housewife. The conviction that 
order strengthens the economic mind leads to the vivid 
realization that the very special organization of busi- 
nesses through accounting is inherent in the development 
of capitalism. It is hard to imagine capitalism without 
double-entry bookkeeping: they belong together like form 
and content. And we may well question whether capitalism 
found in double-entry bookkeeping a tool with which to 
apply its forces, or whether the spirit of double-entry 
bookkeeping first gave birth to capitalism. 

Double-entry bookkeeping! No textbook of this 
science or art can fail to quote the proud words (not 
Goethe's, however) of Wilhelm Meister's brother-in-law: 
"It is one of the most beautiful discoveries of the human 
spirit and every good housekeeper should introduce it into 
his economy." I believe that one can truly understand this 
observation of Werner the businessman only if one does not 
read the second phrase: "Every private household would do 
well to use double-entry bookkeeping," but rather under- 
stands him to explain double-entry bookkeeping as one of 
the most grandiose and consequential inventions — ^rather 
creations — of the human spirit. If its significance is to 
be correctly understood, it must be compared with the 
"knowledge" which scientists have built up since the 16th 
century, concerning relationships in the physical world. 
Double-entry bookkeeping came from the same spirit which 
produced the systems of Galileo and Newton, and the sub- 
ject matter of modern physics and chemistry. 

By the same means it organizes perceptions into a 
system, and one can characterize it as the first cosmos 
constructed on the basis of mechanistic thought. Double- 
entry bookkeeping captures for us the cosmos of an economic, 
more precisely, a capitalistic world by the same means that 
later the great natural scientists used to construct the 
solar system and the corpuscles of the blood (or captures 
us, v/hich means the same thing). Double-entry bookkeeping 
is based on the methodological principle that all percep- 
tions will be manipulated only as quantities, the basic 
principle of quantification which has delivered up to us 

254 - 

all the wonders of nature, and which appeared here for the 
first time in human history in all its clarity. Without 
too much difficulty, we can recognize in double-entry book- 
keeping the ideas of gravitation, of the circulation of the 
blood, of the conservation of energy and others which the 
physical sciences have discovered. And even — I v/ould say — 
on a purely aesthetic plane we cannot regard double-entry 
bookkeeping without wonder and astonishment, as being one 
of the most artistic representations of the fantastic spir- 
itual richness of European man. 

More important to us here is to measure the influence 
which the new system had on the course of European economic 
life. I would like to put this thought into the foreground: 
that because of double-entry bookkeeping, conditions v/ere 
created which permitted the essential ideas of the capital- 
istic economic system to be fully developed: the creation 
of wealth and the idea of economic rationality. 

The idea of creation of wealth is developed in 
double-entry bookkeeping to the point where the "wealth 
producing sura," that is, the am.ount invested for the pur- 
pose of obtaining profits , is separated from all natarai 
objectives of human vrelfare. In double-entry bookkeeping- 
there is only one objective: the increase of a sum of 
money, expresL^ed in purely quantitative terms. He v/ho 
buries himself in double-entry bookkeeping forgets all quan- 
tities of goods and work, forgets all the organic limita- 
tions of the necessity to satisfy human -v/ants , and satisfies 
him.self solely with the idea of wealth: he cannot do other- 
wise if he is to understand this system: he may not see 
shoes or ships, corn or cotton, but only sums of money which 
grow bigger oi" smaller. 

[Quotation fromi Seidler.] 

This manner of looking at things first led to the 
concept of capital. One can thus say, that prior to double- 
entry bookkeeping there was no such category as "capital," 
and that without it, capital would not exist. We can in 
fact define capital as the property of wealth which a double- 
entry bookkeeping system embraces. 

In close connection to this lies another thought: 
that it led to the first full rationalization of economic 
life, insofar as one of the external signs of this ration- 
alization is the tendency to make people accountable for 

- 255 - 

all stages of the economic process. Here we see the close 
relationship between the overriding wealth-creating prin- 
ciple and rationality; both dissolve the economic world in- 
to figures, one to state its objective as the increase of 
wealth, the other to aid in its achievement. How very much 
accountability is affected by double-entry bookkeeping is 
obvious: the latter recognizes no economic processes out- 
side the books of account: quod non est in librisj non est 
in mundo '. to get onto the books, a thing must be capable 
of expression in terms of money. But money is represented 
by figures, so that every economic process must correspond 
with a figure; production and consumption become calculation. 
In accordance with this viev;point, auxiliary expressions, 
are created. Thus we see the class of concepts known as 
"exchange value" take shape, which are handled extensively 
only within the framework of an accounting system. 

But rationalization of the economy is aided toward 
the other two directions in which, as we have already seen, 
it seeks to operate: double-entry bookkeeping serves also 
the purposes and plans of management. 

It has been correctly pointed out that it provides 
the first full insight into the shortcomings which miay af- 
fect an economic organization, so that it is also a con- 
dition precedent for a progressive, systematic improvement 
of the operations of a business. Through the separate treat- 
ment of the individual departments of an undertaking, every 
single element of success or fortune can be shown in the 
various accounts. It has also been correctly remarked that 
the far-reaching planning activities of the undertaking are 
also assured by its bookkeeping. "L 'importmice de la Com- 
tabilite aonsiste non seutement dans t' etude de I'activite 
eooulee d'une entveprise , mais enaore dans les indiaations 
qu'elle fournit pour la direction future. D'apres I 'obser- 
vation et I'etude des causes et consequences des eve^iements 
accomplis, elle donne la possibilitS de prejuger I'activite 
future et de trouver des bases sures pour raisonner les ac- 
tions a venir." (L. Gcmberg , La science de la comptabilite 
et son systeme scientifique , 1901), p. 36). 

In pursuing its objectives,, it creates the conceptual 
framework, or helps to create it, with the aid of which we 
are accustomed to grasp the nature of a capitalistic econ- 
omy: the classes of fixed and circulating capital, costs 
of production and other concepts arise from the use of the 
basic ideas of double-entry bookkeeping, and without them 

- 256 - 

would probably not have arisen, or would be much less clear; 
the scientific equipment of micro- and macro-economics, 
insofar as they relate to capitalist economies, has (often 
unconsciously) been taken over, in great part, from the 
storehouse of double-entry bookkeeping. 

As double entry bookkeeping first created the concept 
of capital, so it simultaneously created the concept of 
the capitalistic enterprise as that economic organization, 
that institution, v/hose object is the evaluation of a 
particular capital. Indeed, here at the birth of the 
capitalistic enterprise, the creative cooperation of double- 
entry bookkeeping appears most obvious. We have estab- 
lished that the essence of the capitalistic enterprise as 
an assemblage of property m.ust be seen to lie in the 
separation of the business from its owners. The book- 
keeping system substantially aids this separation of the 
business . 

It operates this separation in two respects; by 
liberating the accounts and with them the management of 
the business from the person of the businessman, and by 
ordering them in accordance with pure].y material consid- 
erations". The preparation of the accounts becomes ob- 
jective and mechanized. Objective because the procedure 
is generalized and made independent of the accidental 
characteristics of the businessman's person; made repre- 
sentative, customary, so that wherever it may be used, 
it is comprehensible to all. In the trade books of the 
Middle Ages only the proprietor of the business could 
(and should) find his way; every qualified person can 
understand a systematically kept set of books. For this 
reason, the founders of double-entry bookkeeping laid down 
the principles of clarity and comprehensibility . Thus, 
Luca Pacioli in Chapter 12: "Close each journal entry by 
drawing a line from, the end of the last word of the 
explanation of the entry to the figures obtained. You 
will do the same in the Memorandum, drav;ing a single 
diagonal line through each entry in this manner, "//" 
showing that the item has been entered in the Journal. 
Should you not wish to draw this line through the entry, 
mark through the first letter at the beginning of the 
entry, or the last letter at the end. In any event, use 
som.e sign by which you understand that the item has been 
transferred to the Journal. 

"Although you may use various expressions and 
signs, you must nevertheless attempt to use those common 

257 - 

to otiier b'asinessmen, so that yovi will not appear deficient 
in the usual bu^inesB customs ." 

[From the translation by R. Gene Brown and Kenneth S. 
Johnston^ New York, McGrav;-Hill Book Co., Inc. (1963).] 

Moreover, by laeans of double-entry bookkeeping, 
accounting is net only riiado objective, it is mechanized. 
Once begun, account j-.n-g can jJs camev_<. on in a pari_iCuj-ar 
direction. Schar characterises this feature of double- 
entry bookkeeping well, saying that it converts accounting 
into an "eutoraatic system." {Zwanyslaufigea System), 

As business management ceased in this way to be 
a highly personal affair, in the place of personal 
management v;e find the substitution of impersonal manage- 
ment; the business replaces the entrepreneur as an in- 
dependent entity, moved by its own internal laws. Further, 
it does so in two senses: in that the business, repre- 
sented by its capital, appears as an entity, through its 
incorporation in the accounting system; and in that the 
person of the entrepreneur is shown clearly to be separate 
from the entity "the business," and appears more as its 
creditor than as its owner. 

The separation of the business by means of its 
accounts is the essential contribution of double-entry 
bookkeeping, and is often stated to be so. Particularly 
happy is Goi^crg's phrasing, which I again use: En 
organisant la aomptahilite d'u?ie entreprise quetconque j 
on ne pour suit pas le but de detevmimr le vevenu de 
son pvoprietaive 3 du capitatiste lui-rneme , qui peat avoir 
des gains et dss pertes provenant des sources etrangeres 
a I'entreprise en question; rnais on veut raisonner sur 
I'avantage de I ' exploitation de I'entreprise donnee. 

(p. eeS 

II 'n.e f'aut done pas aonfondre I 'entreprise avee 
le capitaliste J so7i proprietaire . Ces deux sont separes 
par la aomptahilite j qui aonsidere le proprietaire de 
t 'entrepriss comrr.e une personne tierae, comme son oreanoier 
pour le capital qu'il lui a remis. 

"Entrepreneur and enterprise are separated from, 
each other by double-entry bookkeeping": that is the 
kernel of the matter. [Sombart considers tb.e juridical 
aspects of this separation.] 

- 258 - 

[Sombart examines the etymological origins of the word 
Firma (firm) and its Italian counterpart, Ragione . The 
Latin r-atio meant "account" as in Cicero: par est ratio 
aaoeptorum et datorum.] 

This etymology is no more than a welcome 
confirmation of the view represented here: that book- 
keeping produced the concept of the independent business 
and that the capitalistic undertaking developed from 
this accounting entity. 

The very illuminating close relationship between 
the development of the legal concept of the firm and 
the development of accounting appears to be also demon- 
strable with reference to the wide dissemination of a 
legal rule attributable to Bartolus: in deciding ques- 
tions of liability, the court may examine the business 
books of account. This view was confirmed by all sub- 
sequent Roman law jurists, including those of the 16th 
century. This practice meant that lega], opinion neces- 
sarily kept step with bookkeeping practice, and was 
materially aided thereby in arriving at the concept of 
the independent business. 

3. The growth of systematia huainess management . — 
We have up to now traced the development of the 
system of double-entry bookkeeping, and established that 
it was essentially completed by the beginning of the 
16th century, but that certain complemeJitary details were 
probably not introduced before the end of the early 
capitalist period. From this, however, we know nothing 
about its application in practice. We would particu- 
larly like to have information on this question: to what 
extent, and hov; thoroughly, did business management 
operate, during the last centuries of the early capitalist 
period, in conformity with the teaching and instructions 
of business theorists? 

We could only give a definitive answer to this 
question if we had statistical data concerning the books 
of account actually kept by businessmen. These we do 
not possess. We cannot even find enough typical examples 
of bookkeeping practice to infer from them the general 
state of bookkeeping in their time. Most of the business 
account books V7hich have survived belong to the 15th 
and 16th centuries — perhaps two dozen in all — and 17th 
and 18th century account books have been made available 
until nov; in extremely small numbers. 

- 259 - 

So for the time being, until more authentic source 
materials are supplied to us — and it is hoped that business 
historians will soon make good the omission — we must rely 
on interpreting signs in order to decide on businessmen's 
knowledge of the art of business management and its appli- 
cation in the new capitalistic undertakings. 

The picture which emerges from carefully examining 
the evidence is somewhat as follows: the fact that most 
of the well-kept account books known to us from the 14th 
and 15th centuries are Italian is certainly no accidental 
result of research into business history; Italy was at 
that time, without any doubt the leading mercantile 
community. We need only compare the Italian account 
books of those centuries with contemporary German examples 
in order to determine the disparity between these two 
countries. Generally, the Italian mind was further along 
the road to rationalization and mechanization. We can 
see hov7 the modern state began to take shape in Ital.y 
in the Middle Ages. We can assume that a taste for the 
exact and calculating mind took deeper and deeper root 
in Renaissance man. Recall that the beginnings of land 
surveying and town planning can be traced to the Italian 
republics in the 14th century, that statistical method 
began to take shape there, that official measurements of 
time made tremendous steps forward in this period. 

The history of m^easuring time and the growth of 
the use of clocks provides us with evidence of the variety 
of causes underlying modern life. l^ile the precise 
division of time, which undoubtedly influenced rational- 
ization, was originally the exclusive achievement of the 
religious ccmm.unity — in the Middle Ages it V7as necessary 
to measure time and divide it up only in the monasteries, 
which alone had clocks, had to have cJ.ocks — ^the modern 
division of time (into equal equinoctial hours) which 
permitted complete rationality, in contrast to the church 
and monastic division of time (into canonical hours, that 
is the variable hours of antiquity) was the v;ork of modern 
princes. It was they who, set upon achieving improvements 
in city adm.inistration, particularly in Italy, v;anted 
public striking clocks, which were invented at the be- 
ginning of the 14th century, and striking clocks were 
only possible if the day was divided into equal hours. 
Thus, the invention led to a change in mental attitudes; 
striking clocks, and v;ith them the modern m.ethod of 
dividing up time , v/ere imposed by the laity upon the churches 

- 260 - 

and monasteries, on which (because the church tower was 
usually the best place to put them) they first appeared. 

[Sombart lists the places where clock towers appeared in 
the 14th century, with dates.] 

We are particularly interested in seeing how the 
art of accounting developed and expanded. This v;ill 
serve on the one hand as an expression of the general 
attitude of businessmen, and on the other hand, as a 
thermometer for measuring the state of business manage- 
ment techniques, which resulted from the combination of 
bookkeeping and commercial arithmetic. These were 
separate subjects, so that the development of accounting 
required a simiultaneous development of commercial arith- 
metic and its dissemination among businessmen, which 
must have taken place through school instruction. It 
is therefore iraportant to establish that in Italy, at 
a relatively early date, i.e., by the 14th century, 
arithmetic was taught in schools. Giov. Villani informs 
us that in Florence in 1340, 8-10,000 boys and girls were 
learning to read, and 1,000 to 1,200 boys in six schools 
were learning arithmetic. 

[Sombart provides the bibliographical references and 
discusses the authenticity of the estimates.] 

In Paris there were also numerous primary schools 
i-n the Middle Ages , which were attended by several 
thousand pupils in the 15th century. 

What did they learn in arithmetic lessons? We 
can answer: essentially the contents of the Liter ahaeoi 
of Leonardo of Pisa. This book taught the four basic 
operations underlying comiriercial arithmetic, and also 
the rule of three, and contained a large quantity of ex- 
amples concerning matters of interest to businessmen: 
weights, coinage, dimensions, exchange equivalents, etc. 

[Sombart lists the relevant chapters.] 

To this the following centuries saw the addition 
of the abacus, and in Italy in the 15th century pupils 
were already being taught interest and discount calcu- 
lations. About the and of the century, the final version 
of the rule of three made its appearance. 

261 - 

We must beware of drav/ing exaggerated conclusions 
concerning the level of businessmen's education from the 
level of the extensive and intensive development of arith- 
metic and systematic business management at the time. 
Even in Italy, throughout the entire Middle Ages and later 
well into the period of early capitalism, patriarchal 
systems flourished, even in large businesses. We know a 
great deal about the clans and their thoroughly uncapi- 
talistic business administration. Even the manner in which 
the books were kept was often rough and ready. The books 
of the Soranzo and the Barbarigo are full of inaccuracies, 
discrepancies, obscurities. It appears to have been the 
exception to have a well-kept set of books. According 
to bookkeeping experts, such an exception is provided by 
the account books of Giac. Badoer. (G. Brambilla, Stovia 
della ragioneria I tali ana , (1901) pp. 55 et seq.) 

Sometiiries anecdotes provide the best picture of 
the general attitude or style of a period. Thus, I would 
like to introduce here a few words from, the family records 
of the Albertis which appear to me to throw light on 
conditions in the business comraunity of Florence during 
the late Middle Ages. 

Leon Battista recounts: 

Maestro Benedetti Alberti was fond of saying: it 
suits the efficient businessman to have ink always on his 
£ingers , He explained that it is the duty of every mer- 
chant, as indeed, of every businessman who has transactions 
with many people, to write everything down, every contract, 
every receipt and every payment, and to check so often, 
that he seems always to have pen in hand. 

From this anecdote v/e learn: 

1. that it v7as not a universal custom among the 
business community of Florence to keep books. 

2. that the head of a "v7orld-wide" trading concern 
kept his books himself, at least in part. 

3. that he was as clumsy as a schoolboy who \>:rites 
with ink for the first time, and gets it on his 

This picture is confirmed when we learn that 
Domenico Man:^oni, who re-worked Pacioli ' s chapters on 

- 262 

bookkeeping and amplified them with numerous examples, had 
a collection of twelve lettering models in his mercantile 
library, in the year 1564. 

We must also remember that the Arabic numerals 
introduced by Leonardo of Pisa had to fight a lengthy 
battle before they overcam.e. I recall that even in 1299, 
the use of Arabic numerals was forbidden. As late as 
the 16th century we can still find Latin numerals used in 
theoretical works on bookkeeping as well as in many 
Italian books of account. It has been correctly pointed 
out that Latin numerals did not render double-entry book- 
keeping impossible, but it cannot be denied that they 
placed severe restrictions on the free evolution of the 
principles of accounting and on accountability in general. 

If, then, we see in Italy only a slow dissemination 
of systematic (i.e., capitalistic) business management, 
it will be well to place its beginning and growth in other 
countries appreciably later in time. We know that in 
the 16th century German merchants were still learning 
arithmetic in the Italian cities; they even brought book- 
keeping a la Venezia back with them. But these are merely 
particular cases. Knowledge became more general when 
German writers published books on double-entry bookkeeping 
and the related commercial arithmetic. This took place 
during the 16th century. But the first works of this kind 
to appear in Germany, such as those of Magister Henricus 
Grarnmateus (1518), of Joann Gottlieb (1531) etc., are well 
behind Luca Pacioli in their system.ization . Only gradually 
were the heights of the Italian theory attained and its 
application was correspondingly slow. Account books of 
the 16th and 17th centuries provide evidence of our halting 
development of business accounting. Adam Riese's country 
seems, however, to have taken over the leadership in this 
field of learning in the 16th century. 

In the other countries north of the Alps, the new 
system, of bookkeeping and commercial arithmetic made slov; 
but steady progress. 

The books of Andr. Ryff (end of the 16th century) 
and the account books of Froben and Episkopius show that 
double-entry bookkeeping was as yet unknov;n in Sv/itzerland. 
Ryff admits that his agents, and the necessity to settle 
accounts with them periodically, imposed upon him the need 
to keep books rigorously. On the other hand, Geering 

- 263 - 

asserts that by the beginning of the 17th century, all 
large trading concerns in Switzerland kept their books in 
the Italian style. 

In England, the first author of a text on double- 
entry bookkeeping was Hugh Oldcastle (1543) . But James 
Peele, in the preface to his 1569 book on accounting, 
remarked that the art was new in England and that business- 
men and their apprentices took lessons from him. 

At any rate, throughout the 16th century business 
life in England was also virtually untouched by these 
changes. We find in the books, even of the great trading 
companies of the time, a quite medieval and artisanal 
type of record-keeping. Improvement is noticeable at the 
beginning of the 17th century; for example, the concept 
of capital enters into the books of account, doubtless 
under the influence of those merchants who came into con- 
tact V7ith Italians, as members of the Levant Company. 

What som.e bookkeeping conditions were like even 
at the beginning of the 18th century can be seen from the 
follov/ing story: Zetner of Strasburg was invited to 
England by an industrialist "who had a large manufactory 
of woollen goods in Exeter, to obtain an accounting from 
the manager of the factory, who had nob submitted one 
for twenty years" {Zetners Reiss journal , E, Reuss (1912) 
p. 75) . 

The new art first found entry into Holland and 
France through a translation of Luca Pacoli into Flemish 
and French, by Jan Ympyn (154 3) . 

Holland developed its own culture in the field 
of bookkeeping theory and practice. The path-breaking 
bookkeeping v;orks of the northern Netherlands v;ere the 
1583 publication by Nicolaas Petri Van Deventer, Pvactique 
om te leeren reeekenerij ayphersn ende boekhuden (met die 
Reget ooss) ende geometvie , seer ■profitetyaken voor alle 
aoopluyden-j and in 1588, Boeckhouden op de Italiaensahe 
maniere . The best known Dutch teacher of this subject is 
Simon Stevin, whose Hypomnemata Mathematiaa appeared in 
1605-8 as an aid to the Prince of Nassau's educational 
schemes . 

In the 17th century, more than 60 books on accounting 
were published in the Dutch language. [Sombart notes that 

264 - 

the growth of foreign exchange banking and currency 
arbitrage in Kolland stimulated interest in bookkeeping, 
in order to be able quickly and accurately to calculate 
profit or loss. The Dutch produced specialist tests on 
this subject before anyone else.] 

Leadership in coitimercial arithmetic, which certainly 
lay in Italy at the start, was now taken over by Holland. 
Holland was the exemplar, not only for all middle-class 
virtues, but also for arithmetical precision. In the 18th 
century for example, the discrepancy between the American 
and Dutch arts of commerce was noticed. Benjamin Franklin 
tells the story of the widow of one of his associates, a 
Dutch woman by birth; how she sent him regular and exact 
accounts which her husband (an American) when alive, never 
did. "... the knowledge of accounts" he adds, "makes 
a part of female education" in Holland [Memoir, I, p. 150 

From what we know of French account books of the 
16th and 17th centuries, the state of the art of book- 
keeping there was extremely variable; the number and types 
of books of account differ from case to case. 

[S. mentions French sources, one of which 
(Maillefer) acknovrledged double-entry as a novelty in the 
middle of the 17th century.] 

In the 17th century, hov;ever, France apparently 
b'ecame, with Kolland, the country in which commercial 
arithmetic reached an unusual degree of advancement. [In 
a note, S. complains of the absence of decisive evidence 
and hopes that his efforts will stimulate historical re- 
search in this area.] We may conclude this from the 
unusually large number of excellent "businessmen's books" 
in the French language, such as the Savarys ' , the two 
Ricards", and so on. 

We may also take as a sign of highly developed 
business techniques the fact that France was the first 
country in Europe to enact legislation urging every 
businessman — -wholesale as well as retail — to keep books of 

The Ordonnance of 1673, Title III, Article I, 
states: Les negociants et marchands tant en gros qu ' en 
deta-il auTont un L-ivve qui eontiendva tout leuv 'Segooe, 
leurs lettres de change, teurs dettes aatives et passives , 
et les deniers employes a la depenses de leuv maison. 

- 265 - 

They were admonished, not obliged. L ' Ovdonnance 
enjoigne aux Mavahands et Negooians d' avoir des Livres 
SUV les quels its eoriront toutes leurs affairesj 
neansmoines its ne sevont point fovcez d'en avoir-, oeZa 
de-pendra de teuv volonte. There was only an indirect 
element of force in that an accusation of fraudulent 
bankruptcy could be refuted with books of account. Thus 
comments Savary, father of the Ordonnance {Le par fait 
negoaiantj I, p. 248). 

To be legally recognized, books of account had to 
be certified by a consul or mayor. Les livres des Negooians 
et Marahands tant en gros qu'en detail, seront signes sur 
te premier et der-yiier feuillet, par I'un des Consuls dans 
les villes ou il y a jurisdiction aonsulaire et dans les 
autres par le ma.ire ou I 'un des Eahevins , sans frai ni 
droits, et les feuillets paraphes et cottes par premier 
et dernier de la main de aeux qui auront ete aommis par 
les Consuls ou maire et echevins , dont sera fait mention 
au premier feuillet (Article II, line 3). 

These provisions undoubtedly represent a step 
forv/ard in the direction of organized business management, 
which however already existed in France, since before the 
Ordonnanoe of 1673 it was the custom for wholesalers tc 
keep books of accounts, as Savary assures us {Le parfait 
negociant, I, p. 249). 

Again, we must recall that we refer only to the 
beginnings of accounting. For what the Ordonnanoe calls 
for, and what Savary found to be "nothing new" in France, 
was a simple journal, in which all business transactions 
were set down in chronological order. Of course, some 
businesses also kept double-entry books; but certai.nly 
not the majority. 

Did England then become, not only the greatest 
trading nation, but also the most advanced country in 
business management techniques? We do know that at the 
beginning of the 19th century, German businessmen looked 
to Holland and England as the countries of advanced 
commercial training, which at that time appears to have 
reached its apogee within Germany in the city of Hamburg. 
One knov/ledgeable observer of the 1830s wrote the following 
words on the relationship of these countries to each 

- 266 - 

To such free and clear views of business affairs as 
have Englishmen, businessmen through and through, the 
Hamburger arrives rarely, or late; that decisiveness, 
independence which the former displays, the latter 
is almost completely lacking in this connection. In 
spite of this, one can hold up the commercial accuracy 
of the Hamburger as an example to the rest of Germany; 
it is almost equal to that of the Dutch, although 
significantly more generous than the fearful Mynheer 
(Lud. Schleicher, das mevkantilische Hamburg (1838) 
p. 75) . 

Hamburg did most in the 18th century for the 
cultivation of the arts of business, of which Joh. Biisch 
was the outstanding representative. 

If we survey the entire period of early capitalism 
we arrive at the conviction that throughout the whole of 
Europe, business techniques began to be based on new 
principles, that everywhere and in consequence of this, 
capitalistic enterprises arose, but that in no case before 
the second half of the 17th century had more than a small 
proportion of firms taken the steps which led away from 
unsystematized and highly personalized management, so 
that the general type of business, even in the last cen- 
turies of early capitalism, represents a transitional 
phenomenon. V7e shall be confirmed in this viewpoint when, 
in the following chapter, we study the development- of 
capitalist forms of business enterprise ^ 


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Kenneth S. Most was born on February 4, 1924, in 
Leeds, England. After serving articles (apprenticeship) 
with a public accountant, he qualified by examination as 
a Chartered Accountant in 1946, and was admitted to the 
English Institute of Chartered Accountants, first as an 
Associate and, from 19 60, as a Fellow. After twenty years 
as an auditor and financial consultant, during which period 
he graduated Bachelor of Laws as an external student of 
London University, he joined the London Polytechnic in its 
School of Management Studies (1960) , where he taught finance 
and accounting for four years. In 1964 he became Head of 
the School of Accounting in the Singapore Polytechnic, 
later in the University of Singapore. Since 1967 he has 
pursued work at the University of Florida for the Degrees 
of Master of Arts with a major in Accounting (1958) and 
Doctor of Philosophy with a major in Economics. 

He was a Simon Research Fellov; in the Department of 
Economics of the University of Manchester during the session 
1958-59, and has been visiting professor at a number of 
European schools of business administration. At the 
University of Florida he has taught both accounting and 
finance; he was av/arded an Earhart Foundation Scholarship 

- 281 - 

- 282 - 

for 1968-69 and 1969-70, and elected to Phi Kappa Phi 
and Beta Alpha Psi. 

Mr. Most has written several books and many 
articles on accounting and finance. He is married and 
has three children. 

This dissertation was prepared under the direction 
of the chairman of the candidate's supervisory committee 
and has been approved by all members of that coirimittee. It 
was submitted to the Dean of the College of Business 
istration and to the Graduate Council, and was approved as 
partial fulfillment of the requirements for the degree of 
Doctor of Philosophy. 

June, 1970 


Dean, Graduate School 

Supervisory Coirimittee; 



I [ U, )>^//^i^^^MPk 

17 ¥i