American Accounting Association The Accounting Review

Elements of Pure Accounting Theory Author(s): Robert R.
Sterling Source:
The Accounting Review, Vol. 42, No. 1 (Jan., 1967), pp. 62-73 Published
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Elements of Pure Accounting Theory
Robert R. Sterling
Standards. They list "Costs Attach" and "Effort and Accomplish- ment" as
s" of accounting.2 These are now known as the "matching" and "attaching"
present
T HE purpose of this paper is to abstract a general statement of present literature, however, errs in combining and confusing two things
accounting
nd Littleton separated. "Costs Attach" has an understood prepositional
theory. It is an attempt to describe, in quasi-formal fashion, what accountants do when
t mean that they attach to something. Thus, when we match costs with
they account. It is an attempt to connect what previous theorists have said about
must also be matching the something- to-which-they-attach with revenues.
accounting. It is not an attempt to present a new theory of accounting. Most of what
cannot benefit the future; it is the something to which the costs attach
follows could be stated much more formally in either the notation of symbolic logic or
about the benefit. "Initially, cost incurrence produces an asset or provides a
mathematics. Such a presentation would have the advan- tages of brevity and rigor. It
enefits of which are expected to produce present or future revenues.' '3 I
would also have the disadvantage of being unintelli- gible to a large segment of
orrect interpretation is that the "assets or services produce reve- nue" and
accountants. For this reason, I have used only the bare minimum of symbols.
attach to those assets or services. Paton and Littleton, although not
Nevertheless it is hoped that the result is sufficiently formal so thatarthis
andstatement
consistentcan
(1) be used to test the present theory, and (2) be used as a relief for proposed
theories of accounting.
I Paul Grady, Accounting Research Study No. 7 (American Institute of Certified
s; 1965), pp. 99 and 228.
Unexpired and Expired Costs. 2 W. A. Patton and A. C. Littleton, An Introduction to Corporate Accounting
an Account- ing Association, Monograph No. 3, 1940).
Much of the accounting theory in recent years has been stated
99. in terms of
expired and unexpired costs. The recent Inventory of Generally A ccepted A ccounting
Principles makes repeated reference to the notion.' Costs are said to "benefit" and
the distinction between them is temporal: costs that are expected to benefitRobert
the R. Sterling is a Visiting Research Fellow in the Economics
future are defined as "unexpired," and those that have no future benefit
Yale Uare defined
niversity.
as "expired."
This notion plays a basic role in Paton counting Review, January 1967
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Sterling: Pure Accounting Theory 63
on this point as one would prefer, state it explicitly when they write: " . . . all costs incurred should be viewed as ultimately clinging to
definite items of goods sold or service rendered."4 When speaking of the concept of "measured consideration," e.g., when they are
arguing for the "price-ag- gregate" (cost) method of valuation they write: "Accounting uses money-price only because it is a
convenient common denom- inator by which diverse objects and services are expressed homogenously and because it is the
common mode of expressing bargained exchanges. It is not "money" that is significant; it is not "price" that is significant. "Service" is
the significant element behind the accounts, that is, service- potentialities . . . "I
Thus, service-potentialities are the significant elements; money-price is used only because it is convenient. Vatter develops
this concept further and makes service- potentials the basis for his definition of assets. He carefully draws the distinction be- t ween
assets and the method of valuing them.6 Many other writers have drawn the same, or a similar, distinction. "Costs benefit" is a
confusing phrase which neither describes what accountants do nor how they think. Conversely, a sharp distinction between (1)
service potential and (2) valuation of service potentials facilitates the development of a model which reflects the current state of
accounting theory and ex- plains a great deal of accounting practice. For this reason I emphasize the distinction and will discuss the
two concepts seriatim.
Units and Definitions
The concept of service-potentialities is well established in accounting. They are thought to be the "homogeneous sub- stance" and
the "significant elements" of assets. Thus, assets may be thought of as a set, the elements of which are service-potentialities (for
brevity, "potens" henceforth). A characteristic common to all
potens is that they "have the ability to satisfy human wants." Economists use "utility" to describe want satisfaction and "util" to
describe a unit of utility. Thus, a poten may be described as a unit of potential utility, a potential util.
(1) x = a poten, a unit of potential utility.
There is a universal set, X, which contains all potens.
(1.1) X= x: x is a poten}
The universal set may be partitioned in any convenient manner and the subsets identified and named. One such method of
partitioning results in "objects."
(1.2) XiCX; i= i. r
Although this conception has theoretical usefulness, the number of potens contained in any object has not been operationally
defined. The difficulties encountered in the attempts to measure utility are well known. There is at least equal, and probably greater,
difficulty in the measurement of potential utility. In all likelihood, this difficulty is the explanation for the virtual abandonment of
"potens" and the development of the "concept of capacity."
The concept of capacity, although only relatively recently named, has been used in accounting since, at least, the advent of
depreciation. Assets are thought of as "bundles of services" and the number of services in most assets declines over time or use.
This is ordinarily expressed as
Net cost of total services
Number of services
-Amortization or value per unit of service
This is a ubiquitous expression. It is used for amortization of all kinds of assets, e.g., depreciation of fixed assets, depletion of
4Paton and Littleton, p. 15. 5 Paton and Littleton, p. 13. 6 William J. Vatter, The Fund Theory of Accounting (University of Chicago Press; 1947), pp. 16-17.
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64 The Accounting Review, January 1967
wasting assets, assigning unit costs to inventory lots whether by purchase or man- ufacture, interest amortization, expense
accruals of various kinds, etc. It can be expanded to include many other accounts if it is restated as
Value of things (1.4) . = Value per thing Number of things

This now includes income accruals, equity averages such as income per share, book value per share, etc.
Given the omnipresent nature of this expression, it is obvious that the "things" are an important part of accounting. I prefer to call
these things "caps," representing an abbreviation for "units of capacity." Thus, "cap" is the generic term for all the various units of
measure that are used in accounting. For example, ton-miles for delivery equipment, space-time for buildings, units of output or
hours used for equipment depreciated on a use basis, units of time for equipment depreciated on time, units of time for interest,
insurance, etc., shares of stock for net worth, and so forth. A cap, then, is any "physical" unit that is utilized in accounting. It is used
as a substitute for potens since the quantity of caps, presumably, can be determined and the number of potens cannot. Thus, a
cap is a representation of an undefined number of potens.
Each object possesses at least one "physical" dimension. Let pi denote the appropriate measure function for Xi. It
may be that Xi possesses more than one dimension, e.g., both weight and volume. However, when it is measured by the jth
measure function it will be considered as belonging to the jth class of objects. That is, the measure function applied to an object or
set of objects determines the class within which that object falls. The application of a measure function to an object or set of objects
results in a quantity denoted by
qi.
(1.5) q; = a quantity of caps of the ith category representing a collection of potens contained in an object.
(1.6) qi = lsi(Xi)
The concept of "account" is best described as a homogeneous collection of caps. Different accounts will contain different kinds of caps
and the accounts may contain different physical representations of the caps, but each account will contain only one kind of cap. For
example, the account "Delivery Equipment" may contain pickups, stakes, semi-trailers, panel trucks, etc. The element common to all is
the caps-ton-miles-that each contains. "Buildings" may contain many structures of various shapes and sizes but the common element
is space-time caps that they furnish. Reclassification and combination of accounts is similar. "XVork-in-process" is a collection of
fractional units of product which was transferred from "materials," a collection of, say, board feet; labor, a collection of hours of effort;
and overhead, a collection of ancillary services to the fac- tory. That is, "materials" is transferred into work-in-process by changing
the conception of the caps from board feet to units of product.
The quantity of caps in an account may vary over time. The temporal location of the quantities will be indicated by adding a
second subscript and the following symbols used.
(1.7) qit = the quantity of caps in the ith account at the tth moment.
(1.8) Aqit = qit-qit-i; the change in the
number of caps in the ith account from t-1 to t.
(1.9) A+ it = Aqit; Aqit > 0; a cap increment
in qi.
(1.10) A-qi = Aqit; Aqit<O; a cap decrement
in q.
The process by which the quantities change is a transfer of objects from one ac-
nction. It may be that this function is unique, and therefore an independent mea-
each exchange is required. Conversely, the function may be constant for
count class to another. That is, an object in the ith account, and therefore
measured in ith caps, may be put in the jth account and measured in jths caps.
between may given accounts. If the latter is true, this is a similarity
This two
, and the number of caps in either account, but not both, may be
be viewed from two directions: as a cap increment in the jth account or a cap decre-
y a mathematical operation. A homely example is the similarity
ment in the ith account. This process is called an exchange and is here denoted by
of feet to inches. A transfer from an account in which the caps are inches
in which the caps are feet may be accomplished by measuring either the
decrement and then multiplying by 12 or 1/12 and then assigning the
(1.11) A+qit @ A-qjt
other account. I n this case 12 or 1/12, as appropriate, is the similarity
n.
The exchange is the only way in which quantities of caps can change.
Thus, for every decrement there is an increment. Occasionally the exchange
Homogeneity of units is a necessary, although not a sufficient,
relationship may be between more than two accounts, e.g., arithmetical operations. In order for the sum of the numbers assigned to
nts to have descriptive correlates, meaning, the units must be
(1.12) Ahqit ) ? qjt, A qkt s. The simplest way of accomplishing this is by use of a similarity
n. The similarity transformation appropriate to accounting will be called a
That is, there may be a simultaneous transfer from the jth and kth accounts to the ith
efficient." It should be emphasized, however, that valuation coefficient
account. Ordinarily it is possible to segregate such transfers and consider them as two
"valco" henceforth) in this context is purely a mathematical operation and
separate exchanges. For this reason, and also for ease of exposition, the exchange
do with axiology or prices.
relationship will be spoken of as if it involves only two accounts unless specified
otherwise. A valco, p, is defined as a positive real number that is assigned
n each exchange such that
The transfer in (1.11) above is from the jth account to the ith account and
therefore involves the transformation of caps of thejth category to caps qit + ofpjtA-qjt
the ith = 0
category. Such a transformation, however, does not necessarily require a change in
physical form. It may be accomplished by applying a different measure function. For (A+qit ? A-qjt)
example, the caps in the jth account may be in volume units and the caps in the ith
m of (1.13) is implied by the accounting axiom that debits equal credits.
account in weight units.
ere are an infinite number of valcos which will meet the zero sum re-
The functional relationship between the quantities of caps ine an rulesexchange
for selecting a particular pair of valcos will be discussed below.
may be determined by a measurement operation or by a similarity transformation. We
may independently measure both the increment and decrement and thus atdetermine
the valcostheof accounting
will eventually be given a dollar sign.
Note, however, that (1.13) is common to similarity transformations in general, and thus there is nothing peculiar about dollar valuation
in this context. The essential characteristic is the exchange. For example, suppose that 36 inches of material is transferred from one pile
to another. In the second pile the material is measured in feet.
(1.14) A+(x feet) + A-(36 inches) = 0
Solving for x yields
(1.15) 3 + (1/12)(-36) = 0,
which confirms our previous knowledge about the similarity transformation of i nches to feet. The term "exchange" im- plies a zero
sum. It is, in essence, a "con- s ervation law" and may be likened to the conservation laws (energy, mass, momen- tum) of physics.
A situation more analogous to dollar- c ost valuation follows. Suppose that we have a bar of metal that is now being mea- s ured in
both cubic inches and pounds. That is, we know that there are 36 cubic i nches and that there are 2 pounds per cubic inch. Suppose
we transfer this bar to an oven, melt it down, and indepen- d ently determine that we have 4 gallons of molten metal. The caps are the
cubic i nches and gallons; the valcos are the pounds per cubic inch and the pounds per gallon.
(1.16) p,(A+ 4 gallons)
+ 2(/- 36 cubic inches) = 0
Solving for p0 yields
(1.17) (18)(4) + 2(-36) = 0
This is more analogous because almost all accounting exchanges are stated as dollars per cap. In fact, this example is the logical
isomorph of the ubiquitous expression given in (1) above. This example also em- phasizes the conservation assumption. The
pounds per gallon figure could be determined independently and it may or may not equal 18. (Perhaps some evaporated and
thus in order to apply the law of conservation of mass, the experiment would have to be in a closed, isolated system in which the
vapor could be accounted for.) O n the other hand, in accounting the caps are independently determined but the valcos are
always treated as similarity transformations, i.e., the valcos are determined in pre- cisely the same way as the pounds per gal-
lon in the above example.
The point of this discussion is to indicate that valcos-similarity transformations- are not peculiar to accounting and that they may
be viewed as a physical device or a logical concept. In this way disputes over valuation methods may be segregated from the
body of the theory. The "cost" valco presently in use is discussed below.
The number of caps in an account has been referred to as a "quantity," the valco as a "coefficient" of that quantity. The product will
be called a "value."
(1.18) Avit = pi/qit; a value increment(dec-
rement) in the ith account at
the tth moment.
(1.19) vit = E Avid; the value of the ith
j=1
account at the ith moment.
Matrices
The above definitions may be viewed as five mXn matrices. Each row is the account classification and each column is the
temporal location.
(2.1) AQ = (zAqit)
(2.2) Q = (qit)
(2.3) P = (Pit)
(2.4) AV = (Avit)
(2.5) V=(Vit)
The five matrices are related in the following ways: each element of Q is equal to the
2.8) Vit A tij
row sum of AQ.
j=-1
(2.6) qit = E AEqi Since the caps are heterogeneous, the column sums of AQ and Q have no
escrip- tive correlates.
j-w
Each element of AV is the product of the elements of AQ and P.

2.9) Aqit = undefined
(2.7) Avit = Pittit
Each element of V is equal to the row sum of AV. 2.10) qit = undefined
i=1 caps with a positive sign (and thus potens with a positive sign) which have
a valco at the time of exchange in accordance with (1.13). They may be
And because the sum of each exchange is zero, each Avit is offset by anofequal
a class things which have the ability, either directly or indirectly, to satisfy
value c hange. These can be paired off and summed. Therefore,
m(2.11) E 'Avi = 0 vit > 0

i=1
[a,
(2.12) Eit = 0
.~-1
a21
Lai
In other words, values are created (recorded) only at exchange and since the sum of
*
each exchange is zero, the sum of all values is zero.
Each element with a value less than zero will be defined as the value of an
Balance Sheet t. These are quantities of caps with a negative sign (and thus negative potens)
eviously assigned a valco in accordance with (1.13). Negative caps may be
The financial statements may be formed by various operations on the value
some ma-or group of people's claim on, restriction of, or owner- ship in the
person's
trices. A balance sheet is an array of values at a point in time. Thus, it s.7
is simply a col-
umn vector of V.
(3.1) Vt=[vr] ; vit < 0
An account was previously defined as a homogeneous collection of caps. This is a

a sufli- cient, condition for the definition of equity accounts. Different people have different kinds of
Ve contains all the elements of ally defined) on the assets. These different claims are collected into homogeneous sets and this
a balance sheet at time t. However,
r classifying the negative caps into different equity accounts. Compare John B. Canning, The
the elements with opposite signs are segregated. Each element with a value greater than
untancy (Ronald Press Co.; 1929).
zero will be defined as the value of an asset account. These asset accounts are quantities of
ertinent. Thus, AV must be examined and the fund exchanges or the non-fund
xchanges identified. That is, the statement may be formed by including all fund
xchanges or excluding all non-fund exchanges. Follow- ing the usual procedure, I will
efine it by exclusion. Let
(3.5) Et= @ ei
he formal balance sheet is the juxtapo- sition of At and Et. Since the
T
sum of Vt is zero it is obvious that the sums of At and Et are equal in absolute value.
3.9) Afa = A i Avij; Avi, '-(- ? AAt;
(3.6) At = - -EEt
Vij - Afij
Flow of Funds Statement

~AO,
The flow of funds statement summarizes an array of value changes that are
+ Ot AGt.
related by exchange to a group of accounts for a given period of time. The pertinent ac-
counts depend upon the definition of "funds." Sometimes it includes only the cash
The column vector AGt contains all the values, .gt, necessary
account, sometimes net quick assets; most often it is net working capital. Let these
te- ment. However, the elements are rear- ranged as follows:
accounts be denoted by fi.
(3.7) fit = Vit; Vit is a fund account.
(3.8) Afit = Avit; vit is a fund account.
Only the value changes related by an exchange to a fund account are

ent
(3.13) s, = Agt; Agt > 0; source of funds
The income statement is also concerned with value changes related
(3.14) u, = Age; Agt < 0; use of funds t o a certain account. Thus, it is similar to the funds statement. The pertinent
his case is retained earnings. Let Yit denote the value of the retained earn-
and Ayi, denote changes in its value (dividends are excluded).
(3.10) st 2
(3.15) St L;1
t o a certain account. Thus, it is similar to the funds statement. The pertinent
(3.16) UffL4 t o a certain account. Thus, it is similar to the funds statement. The pertinent
The income statement from time s to t may be defined as follows:
The formal flow of funds statement is a juxtapositon of Ft, 8 St,
and Ut. It is obvious that
(3.17) 8 St + E Ut= Ft-ZE Fi

Then,
The method of segregating accounts into entities is accomplished
the purpose of the accounts. They are then collected by common
(3.18) Ahit= ,I Avij; !Avij@ AYi; us, an entity may be defined as (1) a collection of asset accounts that have
d together for a common purpose and (2) the related equity accounts.
j8
Avii -- Ayij
ternal Exchanges
column vector l7t contains all the values necessary for the income
'Ah (3.19) H= A\h2 The
statement. Again, however, they need to be segregated by sign. The transfer of caps from one entity to another is defined as a
hange." The transfer of caps from one account to another within the same
(3.20) ri Ahzi; Ahi h> 0; revenues ed as an "internal-exchange." The previous definition of an exchange can
ated by entity.
(3.21) c, Ahi; Ah, < 0; expenses
(4.0) A+qitk- (I A-Daz
? A qit
(3.22) RI
(4.0) is an internal exchange involving the ith and jth accounts in
. (4.1) is a market exchange between the kth and gth entities involving a
ps of the ith category. Note that this exchange is of homogeneous caps and
s a transfer,
(3.23) Ct LCbJ + L-fqit0 0
The income statement is the juxtaposi- tion of R and C and sfer

their of capsItwhich
sums. is does not involve a change in the measure function is, by
obvious that e, summed to zero. However, this is a reciprocal exchange in which
receive something and both give up something. Thus, the com- plete
a market exchange is
(3.24) jRI + Ct = Yit-yis
Aq itg = ?+qjtg + A qjtAk
Entities
corded within each entity in the same form as an internal exchange.
The above remarks should be construed as pertaining to one "entity." There is
a collection of entities which have the same or similar account classes. k
Thus, when the
? A-qjtk; A qjtv ? &-qitv
entities are added the various matrices take on a third dimension. That is, the elements
ow eneeds
of the universal matrix are partitioned to form the entity matrices. The ntity will be
to assign a valco to both terms. In short, a market exchange
indicated by adding a third subscript. For example, Vijk represents the value
ifferentofaccount
the ith classes and two different entities.
account, at the jth moment in the kth entity.
Cash, Monetary, and Real Accounts
There is a set of asset accounts that have the ability to satisfy human wants directly by the process of consumption. There is
another set of asset accounts that have the ability to satisfy human wants indirectly by the process of producing consumer
goods. These two sets will be defined as ''real accounts."
Real accounts also have the ability to satisfy human wants indirectly by the process of exchange. Both producer and con-
sumer goods can be exchanged for other p roducer and/or consumer goods which have the attributes mentioned above.
However, it is usually inconvenient to exchange real accounts for real accounts. For this reason, an artificial good-cash and
monetary accounts-has been created. The ordinary market exchange will consist of one entity receiving real accounts and
giving up cash or monetary accounts and vice versa for the other entity.
Cash, in addition to its convenience as a medium of exchange, has the attribute of being a non-temporally determined, general
command over all goods offered in the market. That is, cash can be used in exchange for any good offered in the market at any
time. Thus, it may be thought of as a "store of value" in the sense that one can delay the exchange into the indefinite future. In
addition, it may be thought of as a "standard of value" since the ratio of exchange between all goods offered in the market is
stated in cash units (dollars). The latter attribute is defined as "price."
Of course, the price of cash is unity. The prices of other accounts are determined by forces which are not relevant here. It
should be emphasized, however, that these forces change over time and therefore the prices are temporally variable.
Cash has t he ability to satisfy human wants only through exchange. It has desirability only by virtue of its command over
goods. Since the prices change over time, a con-
stant amount of cash does not ensure a command over a constant number of caps. Monetary accounts are claims against or
promises to pay cash at a future time. Thus, cash is a claim against goods, and monetary asset accounts are one step further
removed from goods by being a claim against cash. Monetary equity accounts are promises to pay cash. Thus, monetary assets and
monetary equities in the econ- omy are equal in magnitude but have opposite signs. There is another significant distinction between
cash and monetary accounts: the monetary assets are claims against specific entities, while cash is a general claim in the market.
The distinction between monetary equities is usually the temporal location of the cash settlement. Monetary equities are exchanged
for cash at a specific time; other equities are exchanged for cash or other caps at the time of a specified event, e.g., income for
dividends or liquidation of the entity.
Monetary accounts may be exchanged for cash prior to the due date although it is relatively uncommon to do so. They are usually
"collected," i.e., cash is exchanged for the monetary account at the due date with the specific entity that has the claim. However,
there is a money market in which the claims may be exchanged.
Valuation Rules
It was pointed out above that cash has a price of unity. It is also assigned a valco of unity. The caps of the cash account are
known as "dollars" and the unity valco is a ssigned to each dollar independently of o ther considerations. The caps of mone- t ary
accounts are also dollars but they are usually stated as the number of dollars that will be paid or received in the future. The
number of dollars which they can be e xchanged for in the present is normally l ess than the agreed number of future dol-
e considered a general case. The recording is
lars. The valco assigned to monetary accounts is also unity. However, Dr. theAsset
value of. $10,000
......
monetary accounts is the valco of unity times the present number of dollars, not the
Cr.future
Cash .. $10,000
number of dollars. y be broken down into six distinct operations:
Thus, both cash and monetary accounts are independently valued 1. Abycashthedecrement is observed. 2. The amount of the cash decrement
assigna- tion of unity to each dollar. As noted above the usual market exchange
ed. Theinvolves
dollars are valued by a valco of unity. 3. The thing acquired
cash or a monetary account. Given the require- ment that the value of each exchange
the cash sacrifice is identified. The quantities are related. 4. The total
must sum to zero, the valco assigned to the real account is determined. That is, given
asset is set that
equal to the value of the cash decrement. This is the
of a dead-level exchange. 5. The quantity of caps contained in the asset is
(4.5) pitA+qit + pjtA-qjt = 0 ntly determined. 6. The value assigned in (4) is divided by the quantity
in (5) to determine the valco ("cost per cap").
and that, say, qj is cash, then
The valco determined in (6), assumed to remain constant, is
all future exchanges involving this particular asset. If this is a depreciable
(4.6) Pi --qjt ue or unexpired cost declines with the decline in q. Suppose the asset is
have a five (=q) year life. The depreciation schedule would show the
A+qit
ts as p(5), p(4), p(3), and so forth for each succeeding year. The same is
ntories. The number of units (= q) would be determined periodically and
The valcos of all accounts that are acquired by market exchanges are assigned in this
the constant p to get the value of the inventory account.9 This p is also
manner.8 Once the valco has been assigned, it remains constant.
8 Some of the readers of the preliminary draft of this paper have objected to the use of valco.
Accounts so valued may now be exchanged internally. In all internal ex-
ted that "valco" is the same as "price." In some cases this is true, but in the vast majority of cases there is no
changes, one account will have a previously assigned value. Thus, the value andinvalco
that we use accounting. For example, inventory is usually purchased by lot; we gather the costs of the
of the other account is determined. by the number of units to get the valco. It would be a rare case for the price of a unit of inventory to equal
other cases a valco is determined for a cap that is not traded in the market. In cost accounting we assign a
This rather abstract statement of accounting valuation may betalclarified by an units-something seldom traded in the market. In general, the valco per cap is
costs by equivalent
example in more familiar notation. Sup- pose that a "thing," an "object," isorac-
price, quired
there is no market for caps and hence no price.
by an entity in exchange for cash. This thing will be called an "asset." There is noI This method yields an average and assigns an equal valco to each cap. However,
erpreted that this restricts the method to straight-line depreciation or the "average" cost
reason to acquire an "expense." Thus, any acquisition could be first recorded as an
ory. Gellein has called this the "constant-charge" method and says that it "assumes that the same
asset and then, by internal exchanges, recorded as an expense. The same be is true for
an equity "payment." The creation of an equity was originally by acquisition of an asset
by promising to pay cash. Thus, the acquisition of an asset in exchange for cash may
used for the transferred portion of the asset. The value increment in Cost transferred from one account to another. This process is called an exchange
of Goods Sold,
caps are of the same category, it has a natural zero sum. There are rules by
Depreciation Expense, Work- in-Process, etc., is the constant p times the A +q.
geneous capsFor may be stated in homogeneous units. However, the caps do not
another asset, the same process is lose their
used.
W e iden-
still tity. Instead, a coefficient called a valco is attached to caps.
acquisitions of cash in exchange for
assign a unity valco to cash, keep any previous valco constant, and set the valueValuesof the are the product of a quantity of caps and a valco. These
other account(s) equal. For example, in the following entry arrayed in various ways to form financial statements.
Dr. Cash ................. $25,000 The elements of present accounting theory are three: caps,
d
Cr. Asset. .... $20,000 Cr. Retained Earnings. 5, 000
the difference between the independent valuation of cash and the previous valuation of
the asset is taken to Retained Earn- ings where the caps are shares andike unit
the(whether
valco isa unit of time, product, or some other factor) in the series with which benefits
asset or service can be identified. Straight-line and units-of-production methods of depreciation are
earnings per sh-are (on this exchange). les of this concept."
These examples have been an attempt to demonstrate the fidelityHeofalso theshows that interest methods of depreciation are based on a constant-charge
important, he notes that the so-called decreasing charge methods are constant-charges with a
valuation rules. The demonstration is admittedly incomplete and there are many
merator. Gellein writes: "A common theoretical justification for such methods is found in the
exceptions. Exceptions include lower of cost or market, values for goldce the and
repaircertain
and maintenance costs for some depreciable assets will rise in later years of their
agricultural products, donated assets, the accounting rule for trade-ins, discovery
offset such increases with decreasing depreciation charges and thus achieve the approximate
values, quasi- reorganizations, and standard costs. The characteristic -line

commonapportionment (constant charge concept) of combined maintenance and depreciation
to all
Gellein, "The Decreasing Charge Con- cept," Journal of Accountancy, August 1959, p. 57.
these exceptions is that they are independently valued. All, except standards, are
The quantity of caps is still used as a divisor, but the dividend has been expanded to
valued at market and obviously historical cost valuation is not present
ce costs inmarket
addition to the original outlay.
valuation. Thus, these exceptions to the valuation rules are also exceptions The sameto is true for inventories. Total inventory costs of a specific quantity are divided
historical cost accounting. f the total inventory costs for a specific quantity vary then the valcos will varv. These different
gated by Ffo and Lifo methods of costing. The moving- average method expands the numerator to
one inventory lot.
Sunmmary and Conclusion The fact that valcos vary over inventory lots presents a problem. There is a certain valco assigned to
y these q's are homogeneous else they would not be in the same account. However, the valcos vary and thus
n different tlots
There exists a set of service potentials which are units of potential want satisfac- ion.vary.
These That is, there are different values for identical items, this is an enigma. Some
service potentials are impossi- ble to measure but they may be representedolve it bybindentfying
y various the caps that were sold and insisting that the originally a ssigned valcos be used. Specific
most obvious example. ThosL who reason from a cost- f low basis evidently conceive of the valcos as being
units of capacity called caps. Dollars are defined as one category of caps. Caps of one
mong the caps.
category are collected to form an account. Asset accounts with a
common purpose and their related equities are collected to form an
pplicable to a given situation than others.
valcos. The isolation of these elements provides a rather natural division of the The un-process of determining the accounts related by exchange. Our textbooks
resolved areas of accounting. sually m ake this relation for us by a statement like "Purchase of 1,000 widgets for
2,000." This relates inventory to cash but it does not say anything about ancillary costs
The process of determining the quantity of c aps and the choice between different
e know, from previously being told, that transportation outlays are also related to
cate- gories of caps. It is trivial in most cases to determine the quantity of inventory
ventory butor cthat
ash purchasing
but outlays are not. However, there is no way to reason to t hat
unfortunately our textbooks discuss only these trivial cases. The more difficult problems of
onclusion; we must know. Each un- familiar exchange presents us with a problem
deciding what kind of caps (say, the choice between units of output or years of life) and then
itness the flap over stock options, leases, pension plans, and investment
determining the quantity are usually left to "profes- sional judgment." Perhaps estimates and
onally, settled relations are reexamined such as the direct coster's claim that
assumptions are inevitable in the face of uncertainty. On the other hand, explora- tion in this
verhead is related to retained earnings instead of inventory. So far as I can
direction might lead to some guidelines or a set of alternatives, some of which are more
determine, there is nothing in the extant theory that would allow us to resolve these problems. Heterogeneous units require valcos of some kind. Current costs or
disputes. Up until now we have relied on authority but this is intellectually unsatisfactory.
ve to be assigned to something and we need to be clear on what that
Perhaps ex- ploration in this direction would yield some criteria for making relations. Cost of the factors to reproduce an asset is likely to be different from the
ng the asset in a secondhand market. The sum of the selling prices for each
The rules for assigning valcos. Valuation disputes are beyond the
scope of this paper. The rules presented above were an attempt to describe, withoutis likely to be different from the selling price of the asset. Thus, the cap
et
prejudice, the extant historical cost rules. Whether or not these ought to be the rulesper- is tinent in other valuation schemes. Selec- tion of a particular valuation
another question. However, in this framework, these disputes can be sharply segregated criteria that have not yet been established.
ires

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Elements of Pure Accounting Theory Author(s): Robert R.

All use subject to http://about.jstor.org/terms

Elements of Pure Accounting Theory

Value of things (1.4) . = Value per thing Number of things

Each element of AV is the product of the elements of AQ and P.

m(2.11) E 'Avi = 0 vit > 0

An account was previously defined as a homogene- ous collection of caps. This is a

Flow of Funds Statement

(3.7) fit = Vit; Vit is a fund account.

(3.8) Afit = Avit; vit is a fund account.

Only the value changes related by an exchange to a fund account are

(3.17) 8 St + E Ut= Ft-ZE Fi

(3.23) Ct LCbJ + L-fqit0 0

The income statement is the juxtaposi- tion of R and C and sfer

values, quasi- reorganizations, and standard costs. The characteristic -line

You might also like

American Accounting Association The Accounting Review

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

American Accounting Association The Accounting Review

Uploaded by

Copyright:

Available Formats

Elements of Pure Accounting Theory Author(s): Robert R.

All use subject to http://about.jstor.org/terms

Elements of Pure Accounting Theory

Value of things ​(1.4) . = Value per thing ​Number of things

Each element of AV is the product of the ​elements of AQ and P.

m​(2.11) E 'Avi = 0 vit > 0

An account was previously defined as a homogene- ​ous collection of caps. This is a

Flow of Funds Statement

(3.7) fit = Vit; Vit is a fund account.

(3.8) Afit = Avit; vit is a fund account.

Only the value changes related by an ​exchange to a fund account are

(3.17) 8 St + E Ut= Ft-ZE Fi

(3.23) Ct ​LCbJ + L-fqit0 0

The income statement is the juxtaposi- ​tion of R and C and sfer

values, quasi- ​reorganizations, and standard costs. The ​characteristic -line

You might also like

Value of things (1.4) . = Value per thing Number of things

Each element of AV is the product of the elements of AQ and P.

m(2.11) E 'Avi = 0 vit > 0

An account was previously defined as a homogene- ous collection of caps. This is a

Only the value changes related by an exchange to a fund account are

(3.23) Ct LCbJ + L-fqit0 0

The income statement is the juxtaposi- tion of R and C and sfer

values, quasi- reorganizations, and standard costs. The characteristic -line