Gaffikin (2008, p - Cardiff Business School

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Gaffikin (2008, p - Cardiff Business SchoolP

The prevalent Accounting Equation: Sign or referent in determining

    an entity’s real wealth?

    By Sudhir C Lodh*


    Michael JR Gaffikin**

    Paper for inclusion in the IPA Conference 2012

    11-13 July, Cardiff, UK

    * Corresponding Author: Dr Sudhir Lodh | Senior Lecturer | School of Accounting and Finance | Faculty of Commerce | University of Wollongong NSW 2522| Australia ( +61 2 4221 3731| *

    ** Emeritus Professor Michael J. R. Gaffikin, School of Accounting and Finance, University

    of Wollongong, Australia


The prevalent Accounting Equation: Sign or referent in determining

    an entity’s real wealth?


    This paper explores a general validity of the prevalent Accounting Equation in determining the real wealth and accountability discharge through contemporary financial reporting. In so doing, an augmented accounting framework is developed in order to indicate the gaps that may arise in the Accounting Equation; which is inherent in the system if compared among different layers sign to alleged to referent

    (Baurillard 1983, 1994; MacIntosh 2000, Ijiri 1986, and Mattessich 2003). We argue that this augmented framework will help in enhancing our understanding, at least at the level of pedagogy within the domain of fair value accounting and for corporate governance and discharging social responsibility, about the missing elements and the nature of financial reporting and therefore, reduce the blame games of maintaining objectivity and neutrality about information provision for an augmented reality of wealth (economic or otherwise) for an entity.

    Key words: The Accounting Equation, Financial Reporting, Accountability, Real Wealth, Augmented Accounting Framework; Accounting Measurements, Fair Value.



    The (prevalent) Accounting Equation [A=L+E or A-L = Wealth] is a derivation of the

    double-entry bookkeeping system (cf. Pacioli 1494) first expressed in its algebraic th century (cf., Sprague 1880). This duality form by Charles Sprague in the late 19

    check applying such an equation is to explain or to account for changes in the net

    balance in wealth accounts based on the underlying causes that are responsible for the change (Ijiri 1989). Over the last century several authors have elaborated on the double entry bookkeeping for financial reporting and/or preparation of financial statements, for example, Chatfield (1974), Littleton (1933, 1968), Patton and Littleton (1940), Sweeny 1936, Littleton and Yamey (1956), Hatfield (1930) and Ijiri, (1986, 11989). It (duality check) essentially ties in with the comparison between wealth and income using a collection of flows that have occurred in past events which are considered to be transparent, transaction based and objectively measured. Financial reporting including the preparation of financial statements, is primarily an outcome of such an application, its purpose, according to Statement of Accounting Concepts SAC 2 (in Australia the objective of general purpose financial reporting ) being to provide users with information about a reporting entity which is useful for making and evaluating decisions about the allocation of scarce resources. (Financial Reporting Handbook 2009, p.3) When, for example, the general purpose financial reports (GPFR) can meet this objective it will then ultimately be indicative of discharging the accountability to those users by the management and the governing bodies of the reporting entity. (Financial Reporting Handbook 2009, p.3) But, in recent years several authors have cast doubt on whether the conventional accounting framework (expressed formally in various Conceptual Frameworks) is able to display the absolute economic (and social) reality and accountability in totality in a dynamic environment through such conventional financial reporting (viz, Miller and Napier 1993, MacIntosh et al. 2000 and Baker 2006). There are many reasons for such a view. For example, Miller and Napier (1993) argue that ―accounting changes in both

    content and form over time; it is neither solid nor immutable‖. (p.631) MacIntosh et

    al (2000) argue that: (m)any accounting signs no longer refer to real objects and events and accounting no longer functions according to the logic of transparent 2representation, stewardship or information economics‖. (p.13) Baker (2006) argues

    that ―the form of an accounting display has no relationship with the economic ‗reality‘ which the display purportedly represents‖ (p.678)

    In a Presidential Scholar address at the AAA meeting August 2008, Palmrose (2009) explored the fundamental question of whether accounting is at a crossroads of its own conception. She argues that:

    We may need to draw on paradigms other than the traditional ones, like economics and psychology from social sciences… In centuries past, the guiding lights of double-entry accounting were people well connected to the larger scientific communities of their times. So perhaps, once again, science can inspire, as we take stup the challenge of reconsidering the foundations of accounting in the 21 century.


     1 The purpose of this paper is not to deal with the historical development of single-entry or double-entry bookkeeping system however.

    2 In order to advance this thesis they used Jean Baudrillard‘s theoretic on postmodernity.


Palmrose further emphasises that the (US) Conceptual Framework is not particularly

    helpful for students (of accounting) when considering how to understand GAAP and they apply to answer real-world questions. (p289) She argues that it was necessary to

    find such answers and face the reality of financial reporting which will ultimately reflect a fair representation and usable for decision usefulness. For her ‗we need to

    understand the basics‘ including the Accounting Equation. She further claims that ―we

    have lost touch with our accounting foundations somewhere along the way‖ (p 292) It

    is the complexity (measurement gaps) and invisibility (as far as the accountability gap is concerned) which has been a major theme threading through the truths of inconvenient accounting. Clarke and Dean (2007) also argue that ―financial disclosure in accord with conventional accounting generally fails to disclose a company‘s wealth and progress and that the newly heralded IFRSs (International Financial Reporting Standards) will do little to remedy that‖. (p12)

    These contradictions give rise to a question as to whether or not the application of the conventional accounting equation only will lead to fully capturing the dynamic nature

    of accounting realities and their underlying consequences. In order to exemplify the dynamic nature of accounting and its duality check to assess the underlying reality in

    measuring wealth as well as forces (Ijiri 1986, 1989) and fair (or otherwise) values

    allegedreferent emphasis added) we argue that there is a at three layers (sign??

    necessity to develop an augmented framework that can exemplify the missing 3elements.

    We have used three language sets or metaphors (ie, sign, alleged and referent) to

    develop an augmented framework in order to show the missing portions of the Accounting Equation that should be considered in determining economic reality (wealth) and discharging accountability at these comparative layers in a dynamic environment. In particular, we have considered two of these language sets sign and

    referent - from Baudrillard (1983; 1994a, 1994b) which have already been used in the accounting literature (cf. MacIntosh et al, 2000 and Mattessich 2003). The third

    lleged (or imaginary), which is taken metaphor or language set we have used here is a

    from the existing accounting literature (cf. Ijiri 1986, 1989, Mattessich 2003, and Ravenscroft and Williams 2009). The uses of these metaphors, we believe, at least will enable us to open up the debate and/or the ‘black box‘ (Latour 1987) at least at

    some level of appreciation as to what makes the gaps as far as the missing portions of the accounting equation‘ is concerned and to develop an augmented framework. In

    particular, the use of these three metaphors sign, alleged and referent - is to create

    arbitrary positions to show a comparison of wealth and accountability determinations for these layers and their plausible pervading interdependencies that can shed light on the historical roots of the development of accounting as well as the prevailing gaps/differentials that are inherent in the conventional accounting equation in 4representing economic reality and discharging accountability at different ―layers‖

    (Mattessich 1987, 1989, 1995, 2003).

     3 We are not attempting to provide here the determination of the missing elements at all micro levels, rather we make an attempt to elaborate plausible missing elements at an aggregate level in the prevalent accounting equation in determining the absolute economic (or otherwise) wealth through a duality check, if needed. 4 Mattessich (2003, p446)) reiterated his earlier work (Mattessich 1995) in ―The Onion Model of Reality) (OMR) and argued that ―The OMR belongs to the same family as the ontological theories of Hartmann, Campbell, and Lorenz, but with some differences. It regards the layers of reality as dependent on and inclusive of each other, like those of an onion. It also conceives of these different levels from a multidimensional perspective that includes time and other dimensions, instead of seeing


Ravenscroft and Williams (2009) argue that:

    Root metaphors are particularly significant to any discipline, because such metaphors delimit the implicit assumptions of what is real, what is significant, how things relate, what can be known, and how it can be known. The root metaphor thus informs and reflects both the implicit epistemology and metaphysics of a discipline. (p 772)

    For example, Ravenscroft and Williams (2009) further argue that the adoption of an information metaphor has thrust on accountants the responsibility of making an imaginary (alleged) world which can reflect economic wealth better, or, at least, can be useful to the users of financial reports. We believe the usage of the above metaphors will be helpful in making sense about the inequality in the extant Accounting Equation (of course, at the aggregate level) if ALORE (Asset, Liability, Owners equity, Revenue and Expense) items are measurable at various ‗layers‘

    (Mattessich 1995, 2003) of comparison; provided the realer (Bougen and Young

    2011) can make all ALORE items real‘ at the referent level (emphasis added) in the

    preparation of financial statements. To reiterate, it is obvious in our view, differentials between ‗left‘ and ‗right‘ side of the accounting wealth determination, as

    always, can arise due to either inadequate measurement tools or expectation differences in the deliberations of accountabilities in a given context and space-time. However, instead of considering all the ALORE items individually here we would like to show how our concept of an augmented framework can be applicable to various facets of accountings‘ representations including the fair value accounting.

    Laux and Leuz (2009) argue that ―the fair value debate is far from over and much remains to be done‘. (p 833) There have been many attempts by the IASB to

    converge conceptual framework projects with the FASB in order to improve completeness and consistency (Whittington 2008). According to Whittington (2008, p 142), the most obvious gap is about the development of guidance on measurement. But, we will argue that, in addition to the measurement gap, there are obvious gaps in relation to discharge of accountability to users of financial reporting and the greater community. Therefore, in considering both measurement and accountability gaps an example of the debate on fair value determination will be undertaken at our selected three layers: sign, alleged and referent. It should however be mentioned that it is not

    claimed that this paper attempts the identifications of all detailed elements of the plausible gaps of measurement and accountability discharge of financial reporting that may arise in reality. Rather, the intention is to indicate the missing portions of the

    Accounting Equation, and thus, the urgency is the development of an augmented framework. To make this framework workable in practice, we argue that there is a need for advanced systems to be developed to identify the missing elements (ie, gaps) depending on the layers and contexts under consideration.

    The organisation of the rest of the paper is as follows.