Friday, 27 November 2009

Accounting model maintains value - Part 1

“What advantages does the Merchant derive from Book-keeping by double-entry? It is amongst the finest inventions of the human mind.” Goethe

Capital as we know it today only exists as a result of the double-entry accounting model.

Not the traditional Historical Cost Accounting model, but, simply the double entry accounting model. Measuring financial capital maintenance in units of constant purchasing power is also a double entry accounting model. So are Current Cost Accounting and various others.

Without double-entry accounting there would be no capital which is a constant real value non-monetary item. Without double-entry accounting there would only be monetary items and variable real value non-monetary items.

"The very concept of capital is derived from this way of looking at things; one can say that capital, as a category, did not exist before double-entry bookkeeping.” Sombart 1953, p. 38.

Capitalism is based on double-entry accounting.

"Capitalism develops rationality and adds a new edge to it in two interconnected ways. First it exalts the monetary unit-not itself a creation of capitalism-into a unit of account. That is to say, capitalist practice turns the unit of money into a tool of rational cost-profit calculations, of which the towering monument is double-entry bookkeeping. . . . We will notice that, primarily a product of the evolution of economic rationality, the cost-profit calculus in turn reacts upon that rationality; by crystallizing and defining numerically, it powerfully propels the logic of enterprise." Schumpeter 1950, p. 123.

Kindest regards,

Nicolaas Smith