Monday, 24 January 2011

Accountants value everything they account

The debate concerning whether value accounting or price-level accounting should prevail is not on point, because in the long run both should prevail.

Harvey Kapnick, Chairman, Arthur Andersen & Company, “Value Based Accounting – Evolution or Revolution”, Sax Lecture, 1976.

Economic items have economic value. Accountants deal with economic items all the time. They deal with economic values when they account economic items and prepare financial reports. Accountants value economic items when they account economic transactions and events. Financial reporting does not simply report on what took place in the past. Accountants are not just scorekeepers of what happened in the past. Accountants value everything they account in the economy.

The three fundamentally different basic economic items in the economy, namely variable items, monetary items and constant items, have economic values expressed in terms of money; i.e. the functional currency. Accountants account economic transactions involving these three basic economic items in an organized manner when they implement the double entry accounting model: journal entries, general ledger accounts, trial balances, cash flow statements, income and expenses in the income statement, assets and liabilities in the balance sheet plus other financial, management and costing reports.

Accountants value economic items when they account economic activity in the accounting records and prepare financial reports of economic entities based on the double entry accounting model. Accounting entries are valuations of the economic items (the debit items and the credit items) being accounted.

Many accountants still think that accounting is simply a recording exercise during which they merely record past economic activity. That is not correct. Accountants value economic items when they account them. Financial reporting (accounting) is, firstly, the continuous maintenance of the constant purchasing power of capital and secondly the provision of continuously updated decision-useful financial information about the reporting entity to capital providers and other users. It includes the valuing, recording, classifying, summarizing and reporting of an entity’s economic activity.

Copyright (c) 2005-2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.

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