Money
and Accounting Complementary Relationships as a Key to Theory
Mieczysław Dobija
1. The aims of this paper
and methodology of research
One
of the basic accounting principles states that measurement in accounting
systems must be done in monetary units. Corresponding to this principle is a
fragment of the definition of assets, according to which measurability in
monetary units is a necessary condition for the economic means to be qualified
as assets. Inflation-inducing change in monetary unit creates further, as yet
unresolved theoretical problems in financial accounting, particularly for
financial and economic reporting and analysis, thus interfering with and
decreasing the reliability of financial statement information. One of the aim
of the present work is to provide a theory of a monetary unit, i.e. to explain
from where that unit receives its value and in which condition is it stable,
maintaining identical value through time. As such theory of monetary unit as
unit of account is an essential part of accounting theory. The last theory does
not exist, as is commonly known. This paper shows deep interrelations between
monetary unit, money in general, and accounting.
Though
this is not a place to develop the methodology in detail, it seems fair to
sketch the way we go about accounting theory. The main objective of the present
work is to develop primary models that would explain the nature of a monetary
unit. They are generalizations, formally stated, and showing interrelations
between significant variables explaining the nature of the phenomenon.
Generalizations of that kind cannot be obtained as a result of econometric
research, which was pointed out by Z. Czerwinski (1994). The scientific path
leading to models of the kind, with clearly determined objective, is that of
deduction. It is only because of logical deduction can universal principles be
revealed, if we aim at primary models rather than just econometric-type
generalities. The same reasons exclude so called positive research as a way
leading to formulating a general accounting theory. This methodology is highly
adequate at some sorts of research, but hardly can yield a theory of unit of
account.
A monetary unit is a general practical
experience so a simple verification of proposed models is always possible.
However, to verify all the deduced relationships based on empirical data will
only be possible if the revealed variables are measured in accounting systems
or national statistics. In particular, basis for the tests can be provided by
time clusters of exchange rates and additional data from national statistics,
which enable to determine the level of labor productivity. Simple verification
procedures are present in this work, while the inner logic of discourse is the
main founding principle of compliance between theory and practice. Keeping the
line K. Popper’s way of thinking we do not ask where a theory comes from. Instead of doing this we concentrate on
falsification of presented hypothesis. In this case, however, greatness of
ancient accounting is well apparent source of presented ideas.
2. Premises of Accounting
Theory
It must be recognized, writes A. Belkaoui (2000, p. 65), “... that no comprehensive theory of accounting exists at the present time. Instead, different theories have been and continue to be proposed in the literature. Many of these theories arise from the use of different approaches to the construction of an accounting theory or from the attempt to develop theories of a middle range, rather than one single comprehensive theory.... These divergence led the American Accounting Association’s Committee on Concepts and Standards (or External Financial Reports) to conclude that:
Ř
No single governing theory of financial accounting is
rich enough to encompass the full range of user- environment specifications
effectively, hence,
Ř
there exists in the financial accounting literature
not a theory of financial accounting but a collection
of theories which can be arrayed over the differences in user-environment
specifications....”
The recent achievement in a
field of accounting theory is S. Sunder's (1997) accounting theory and control,
which cover all important aspects of accounting activity in integrated
framework. Sunder used a contract model of organization for describing theory
of accounting. This fruitful approach explains how economic forces create
accounting standards and conventions in respect to business and non-profit
organizations. Thus, we know that the economic forces are the very source of
accounting. Following those ideas it can be pursued how economic activities
creates money as a by-product of accounting records. It forms new approach to
theory of money and it adds complementary links between economics and
accounting.
Existing
state of affairs in the field of accounting theory apply to present theory of
money as well. Let us ask about theory of money, whether it gives the
fundamentals for economic theoretical research. Let us ask about definition of
money remembering that theoretical recognition of a monetary unit is a basic
for accounting. What does it mean “money-measurement”?
There is no room here for broader analysis of money understanding in economic
literature as was done by M. Dobija (2001). It is sufficient to referee here to
only one example of theoretical analysis of money affairs. Let us put our
attention to monetary unit definition.
In the matter of money, we find a more
exhaustive explanation in the work by five German authors on the theory of
money and monetary policy (Duwendag D., et al., 1993). According to this monographic
work, "...”A
correct” definition of money is a subject of a long-standing controversy. It is
not the definition that is the chief issue here. The controversy is largely the
expression and aspect of the debate upon the results and the line of monetary
policy. That is the reason which determines the importance of the discussion
upon the criteria o defining money..." These statements provoke uneasiness. How is it possible to make
politics, efficiently, without a proper understanding of basic issues? The
category of money is the experience of all persons living in the condition of
goods and money economy, there is a real-life, complex object that exists; how
come the science does not offer a precise definition in that area? In this
state of affairs, can a wise and effective policy be run?
Further
on, the Authors say: „...Presently, it is commonly acknowledged among theorists that money
differs from all other assets (financial resources) by its liquidity. This
statement, however, does not suffice to formulate quantitative definition
money, essential for the theory of money and
monetary policy. It is necessary to develop criteria,
which shall enable also to cover under the definition of the quantity of money
any similar assets, which influence economic processes similarly as cash and
current deposits. That which functions
as money should be included in the definition of money. In scientific
discussions, many such functions were determined, including for instance a common
medium of exchange, a common medium of payment, a legal medium of payment, a
medium of capital transfer, resource (reserve) of liquidity, price measurement,
a medium of price comparison, calculation unit, means of settlements of
liabilities, measurement of deferred payments, medium of temporary storage of
buying power, medium of value storage, measurement of value medium of value
comparison...” We can assume the statement
„medium of
payment” as correct, however, it is worrying that the term „money”
is used both as money unit and money as such, understood as „my money”.
It is different to know what an acre is, than to have a plot of land of 25
acres.
Further explanations are the following: „...Not all these
functions, however, are constitutive characteristics of the term “money” in a
sense, that on hand they are the necessary condition for a good to be money,
and on the other hand – primary features, i.e. those that cannot be deduced
from other functions. The following functions of money are usually regarded as
defining ones: common medium of payment and medium of storing value. Money is
therefore defined as a commonly accepted medium of payment and medium of
storing value...” After all, a medium of exchange. A human being has
a right to be surprised here. And indeed it would be hard not to be surprised,
while living and working in the economic system of goods and money, in which we
constantly experience the following cycle: we work, and on that account we
receive remuneration (payment for work) manifesting itself as salary
receivables, and then we exchange this payment for necessary and available
goods and services, etc. Sometimes we receive also receivables on account of
interest. Moreover, these receivables for work have a life of their own as
notations in bank accounts, and we exchange them for good without anything
mediating.
The
Authors also notice a problem here, as they go on to write: „...By the term money we can therefore understand, on
one hand, a particular amount of money, which plays the function of a medium of
payment and storage of value, and, on the other hand, an abstract monetary
unit, used as unit of settlement (calculation). In the present work, the term
money will be used only in that first sense, i.e. as an amount of money...”
The
Authors quoted above, as well as a great majority of others, do not formulate
the need to explain the nature of monetary unit or to discuss its stability or
price in international dealings which, as we know, exist. However, they see the
complexity of the problem, and lack of clarity, as they state as follows: „...In order to
understand the basic economic significance of money, we have to explain why
money is used in economy at all. The function of medium of payment listed
before indicates that the use of money facilitates the exchange of goods. However,
to prove that the statement in theory is not as easy as it might seem. Although
microeconomics textbooks discuss numerous advantages of the exchange of goods,
which firstly enables a deeper division of work and specialized production, and
then leads to a higher level of wealth, the models used and premises applied in
the discourse are such as the most common problems which occur in the exchange
are precisely excluded from those considerations which could otherwise serve in
the analytic explanation of the basic economic meaning of money. It is
therefore characteristic that in typical microeconomic models, particularly in
general equilibrium models, money plays no important role, while to look for
the term “money” in any textbook’s index is, in most cases, futile...”
The above explanations are hard to accept. The
question of why the money is used in the goods-monetary type economy has an
immediate and simple answer. It is precisely the nature of this kind of
economy. In that system, whether socialist, capitalist, or Islamic, those who
work receive a pay for their work in
the form of accounting entry done by means of monetary unit and, subsequently
and according to their needs, they exchange those assets for other assets, and
nothing mediates in that exchange. There is nothing visible here which would be
mediating in that exchange. I give my assets (receivables for my work) for
other assets, as in a non-monetary economy I would give, for example, five
sheep for a cow.
Then, how we can expect any theory of accounting without theory of money? Isn’t monetary principle essential for accounting? Isn’t money the fundamental measure of economic variables? Isn’t theory of valuing a background of accounting? It must be recognized that not accomplishing any efforts to answer the fundamental problems we cannot expects of formulating accounting theory. Only accounting standards without strong theoretical background. Standards of inflation accounting are an example of such a totally failed work.
Process of creating the accounting theory requires of assuming a definition of this discipline. There is a lot of wise consideration of this subject in accounting literature. Let us pay our attention to Mattessich’s attempts to define accounting (1964, p.16-20). This much regarded author underlines a need of including macro-accounting aspects which should be integrated with micro-accounting one on the theoretical level. According to Mattessich (1964, p.17):”...A theory of accounting that tends toward a scientific-analytic, instead of dogmatic-legalistic foundation cannot renounce the potential of generalization and cross-fertilization which a unification brings about.” Mattessich’s definition of the accounting theory reflects important issues of accounting underlining a quantitative description and projection of economic variables related to income circulation and wealth aggregates explaining as well that concepts of income and wealth are applied to both micro and macro-economic level.
From
a scientific point of view, when we look at a given theory we expect it to play
at least three roles. Renown and respected scientist, Y. Ijiri (1999) lists
those three main roles as follows: to assist in understanding phenomena
occurring in the real world, to improve projections in relation to examined
phenomena, and to provide knowledge for possible action aiming at the change of
the examined fragment of reality. In the above triad, the first element, which
includes defining and classifying the categories describing the given
phenomenon, seems indispensable. Lack of one among the above qualities makes a
theory weak or even confusing one. Apart of that author explains us the
essential relation between accounting and theory of value pointing out a role
of the labor theory of value as an fundamental for accounting theory, costing
theory and historical cost principle.”...In contrast to labor theory of value,
which focuses on input, the utility theory of value focuses on output; hence,
it does not question how and through what process a product was produced as
long as the output possesses the same use value. Thus, cost principle would not
have a common linkage with the utility
theory of value as it does with the labor theory of value...” (Ijiri, 1999, p
185). Models presented further shows deep rightfulness of this opinions.
3. Learning of Ancient Knowledge
History
of accounting involves millennia. History of accounting starts at the point
when human beings first encountered the problem of how to work collectively, be
able to achieve advantages thanks to the specialization and co-operation, and
how to divide the effects of the work proportionally to the contribution of
individuals. Fair pay expectations and well-established money systems have been
included in any solution to the above stated economic agenda. Although little
is known about the ability of conceptual thinking within the civilizations that existed a few millennia
ago, archeological discoveries of sophisticated objects manufactured as early
as in the sixth millenium B.C., suggest that people at that time had already
developed a high level of abstract thinking. Thus, it seems feasible to examine the ways of solving the
fundamental economic issues in the most ancient civilizations, that the
researchers nowadays know about, and to attempt to draw some conclusions that
might be useful in the context of modern economies.
One of the most surprising facts about the
history of accounting and money is that at the very beginning of the
development of people’s economic activity money was indeed understood purely
intellectually. Truly speaking it is hard to imagine not intellectual approach
to accounting. It was meant to be information as opposed to a material object;
it was supposed to help compare the values of different goods or work of
different individuals, without constituting any value itself. The most ancient
economy that modern researchers know about understood the concept of money as
nothing more, and nothing less, than accounting information. That purely
intellectual idea of money was represented by seemingly primitive accounting
tools called tokens. The appearance
of tokens, about 8000 BC, coincided with the beginning of the domestication of
cereals in the Middle East (Schmandt-Besserat, 1987). Tokens were small
artifacts, modeled in clay into various forms either geometric or naturalistic.
Once established, the system of tokens changed little, as the economy
remained basically a rural agricultural one. Then, around 3300 BC, cities
started to appear, which brought about an increased need for accounting. In
consequence, tokens became more complex. Even though the development of the
token system is not the subject of this analysis, what is important about those
little clay objects in the context of the history of money, is that they
carried information concerning different amounts of manufactured goods and that
they constituted a real system of accounting. There was not only one type of
token carrying a discrete meaning but an entire repertory of interrelated types
of counters, each with a corresponding meaning. The system made it feasible to
manipulate simultaneously with information concerning different categories of
items, bringing a complexity of accounting never achieved before. Tokens made
it possible to store with precision unlimited quantities of information about
an unlimited number of goods. They played an important role as direct
predecessors of another accounting system, represented by pictographic tablets.
Prior
to the explanation of the system of pictograms, it seems worth to mention that
in the historical period that we refer to, writing was not yet invented, so
transactions could not be made credible by a signature. Therefore, according to
Ifrah (1990, p.101), stamps made from gemstones were used in the countries of
Sumeria and Elam in the case of all economic and legal activities. The symbolic
picture on the stamp was characteristic for its owner and the role it played
once placed on a clay tablet can be compared to the role of a signature
nowadays. This kind of signature was used and recognized in ancient Elam in
Mesopotamia until about 3200 BC, when the way of recording quantities of goods
was gradually influenced by the invention of writing, which first appeared in
the form of pictograms. Since that time, clay tablets would serve enabling a
full registration of a transaction: quantities and kinds of goods were placed
on the right side of a pictogram, and the total sum together with the reason
for the payment on its left.
The
system of pictographic tablets, developed and used in ancient Sumeria since
3100 BC, is the first evidence of abstract counting. It inherited from tokens a
code based on word signs, a basic syntax and their economic context. Each
pictograph was meaningful and communicated a specific kind of information.
Pictographic writing and abstract numbers were used to record entries and
expenditures of goods in Sumerian temples.
Why
are pictographs and the economy of ancient Sumeria worth mentioning? The answer
is that the pictographic tablets did not only carry information. It is
essential that the information they carried concerned the amount receivable for work of an individual. Money in
the form of coins or banknotes was not needed. According to Polanyi (1957, p.
21), the state authorities kept accounts of equities and liabilities of each
individual. The work of every citizen was precisely recorded and one was
entitled to take as many goods from the temple’s storage as his or her amount
recorded on an account allowed for. In this way, public authorities could
guarantee that everyone in the state would spend no more than what he or she
has earned. Tangible money represented by coins was not necessary thanks to the
existing system of overwhelming accounting. Sumerian economy enjoyed the
situation of zero inflation because the whole supply of intellectually
perceived money was equal to the sum of receivables for work of all citizens.
Value of goods was based on the value of work needed to produce them. Metals,
like gold or silver, served merely to facilitate calculations and exchanges.
One
example of such a transaction is described by (Ifrah 1990, p.58). The contract
is a document of a sales transaction that took place in Egypt New State
(between 16th and 11th century BC.) The contract states
as follows:
“Hay
gives to brigadier Nebsmen:
1 ox
which is equivalent to 120
debens of copper
In
return he receives:
2
pots of lard which is 60
//
5
skirts of fine cotton which is 25 //
1
suit of Southern linen which is 20 //
1
hide which is 15
//
The
above contract confirms that the ox was bought for 120 debens of copper but the
sum was paid in goods of equivalent value. However, as Ifrah points out, it is
not merely an evidence of the existence of barter but of a real monetary
system. Thanks to the metal benchmark, the goods were not exchanged according
to the preferences of the trading parties nor the tradition, but according to a
generally accepted system, in which all goods had their approximate and fair
price. What can be added in this context, is that the price was determined by
the value of labor input necessary to produce them, which was possible within
the system of ancient accounting.
With
the development of trade relations between different groups and countries, it
became necessary to find a way of measuring value that would be both universal
and acceptable by all trading parties. Metals were found useful in meeting
these requirements. The method of assessing the value of a product was by
weighing it and comparing its weight with the weight of a metal object. Ancient
Jews and Phoenicians used to evaluate things with a scale of shekels, which stood both for quantity
and weigh. The book of Genesis (Chapter
23) describes the transactions of Abraham,
who paid Ephron the Hittite 400 shekels of silver for a piece of land with a
tomb cave in Machpelah before Mamre.
Due
to the use of metals as a reference point for measuring the value of goods and
services, an actual monetary system was created, where money was understood in
an abstract and intellectual way, and not actually represented by any tangible
objects. Metals were treated as benchmarks that allowed to evaluate a fair
price of all tradable goods and services according to a generally accepted
system. At the same time, although it was possible to pay with metals, people
would avoid that in the fear of fraud. Ancient Mesopotamian society accepted
gold, silver or copper as the carriers of information rather than as means of
exchange.
Another
question related to monetary issues in ancient countries is the understanding
of capital. It is astonishing that the notion of capital was already recognized
in Sumeria and the value of capital was also estimated in metals, although it
was actually represented by natural products. An example of a contract, in
which capital is borrowed for a trade expedition is provided by Saggs (1973,
p.245). The contract reads as follows:
“Two
mines of silver, (the value of) 5 gurs of olive (and) 30 pieces of clothes were
borrowed by Lumeslamtae and Nigisanabs from Urninmark (as) capital of a
partnership for an expedition to Dilmun, in order to buy copper (there). After
a fortunate completion of the expedition he (the creditor) will not be
responsible for any trade losses (of the debtors). They (the debtors) agreed to
satisfy Urninmark with four mines of copper for each shekel of gold as a fair
price.”
A
question corresponding to the problem of capital is the percentage rate as an
amount due for the capital. The existence of loans is another feature of
ancient Babylonian economy. The payment of a certain percentage rate was
considered a fair price for the capital that a person would borrow. For this
reason, a percentage rate was guaranteed both by laws and contracts.
Nevertheless, it was not allowed to establish too high a rate for the capital.
According to Hammurabi’s law, taking a percentage rate of more than twenty
percent was forbidden. Such a practice was sanctioned with the loss of capital
belonging to the creditor.
Another
meaningful kind of loan known in ancient Babylonia was called chubutattu. Let us quote an example of a
‘chubutattu contract’:
“The
governor Shamashnasir received from Ilushunasir and Nannaibni 133 gur, 1 pi, 4
sutu of seeds as a chubutattu loan. No percentage rate will occur within the
first two years. If he does not give the seeds back in two years, a percentage
will be added’ (Saggs, p.260).
What has to be understood
about the above contract, is that it actually referred to the loan of 100 gur, with a rate of 33,3 % after two
years. Having translated this into an
equation
100 gur (1 + r)2 = 133 1/3 gur
one can find that the yearly
interest rate r was 15% in this case. This means that ancient people clearly
understood both the concept of capital
and the capitalization process.
The
examples mentioned above suggest that in ancient economies monetary systems
existed, although money was not represented by tangible objects but it was
treated purely conceptually. Metals served as a point of reference in
evaluating the prices of goods. The value of goods manufactured was based on
the value of work needed to produce them. The lack of coins and banknotes did
not disturb the existence of the notions of capital and percentage rate, which
were widely used in ancient contracts.
Since
the monetary system is undoubtedly an intellectual undertaking, it does not
surprise us that the historical development of the forms of money was
accompanied by the development of educational institutions. The graduates of
ancient schools were different categories of writers, ranging from simple
accountants to highly qualified state officers. The function of a writer first
appeared in the fourth millennium BC and it flourished on a large scale at the
beginning of the third millennium BC. In the middle of that millennium, there
already existed organized groups of writers and accountants working for
economic organizations concentrated around temples and towns. According to
Tyumenew (1969, p.70), accounting documents from the archives of the temple of
the goddess Bawa show the existence of a well developed system of economic records
conducted carefully and precisely. The condition of the documents is very good
and they can provide evidence of how the use of labor was registered in monthly
reports that were prepared for years. The content of some of the documents is
purely demographic and they refer to the registration of people’s migrations,
as well as their births and deaths.
Struve
(1969, p.127) provides an explanation of the measurement and labor registration
practices in Sumerian economy. He argues that the analyzed accounting documents
show that workforce was measured in time units (on a daily basis) and
productivity ratios. According to Struve (p.152), fractions smaller than one,
e.g. 5/6, 2/3, ˝, were applied to the measurement of working time. This led to
the establishment of a common calculation unit, and in this way created the
main function of money. Struve (1969, p.128) establishes "...that the Sumerian accountants had a
notion of man-day, and that the formula so
many laborers for one day used in primary documentation is not meant to
indicate the number of laborers who actually worked for one day but means the
number of man-days..."
Such approach could have a theoretical
premise in a physical well-known formula as follows:
Labor =
Power · Time of Labor
Since labor made by a
workers arrive at an expense of their life energy this formula can be applied
for measuring of cost of labor provided a pay system as relevant to its value
is preferred and designed. The above formula leads to an economic one as
follows:
Cost of labor = Coefficient of power • Time of labor
or
Cost of labor (standard hours) = Productivity of laborer • Time (hours)
According to this formula
clock-time of labor is recomputed to standard time of labor by using
productivity coefficient. Cost of labor was recorded applying double-entry; as
costs increasing value of products and as payables for work done as is later
explained on figure 1.
Coming
back to chronology, the category of accountant called dub-sar, which meant ‘a man
with a measuring table’ appeared in Mesopotamia about 2800 BC. In 25th
century BC the organization structure of a temple included numerous posts of
accountants divided into sections led by managers called ugulas, who were in turn managed by a leader called dub-sar-mah. The importance of the
ancient scribes (writers) is well illustrated by a poem devoted to the king
Shulgi, who was the emperor at the end of the great development of the
civilization of Mesopotamia (2045-2000 BC). The poem praises the king (Bielicki
1969, p. 156):
I,
king, was a hero before I was born,
I,
Shulgi, have been a powerful man since I was born
An
unknown author uses a comparison:
I am
like a writer taught by the goddess Nisaba.
My knowledge equals bravery and virility.
That king built an
administration center in Ur, where the government of the country was located
and where the incomes from taxes, workshops and gifts were registered. Shulgi
is also known of introducing a
homogeneous system of measurement, weigh and payment.
Even
though the system of economic administration is not fully understood, its one
feature is with no doubt prevalent. The accounting registration concerns mainly
the labor, that is, the work carried out according to a plan and norms of
activities. Although initially it might be surprising, it seems obvious in the
situation where money is an amount receivable for work. This in turn leads to
an alternative: either there is a good organization and control of work or
inflation. A good example of the accountancy conducted by the ancient
administrators comes form the city of Ur, from a loom workshop located there
(Die Wirtschaftspruefung, no. 14/1993).
A
lot of information about the position and role of an administrator can be found
in research about ancient Egypt. According to Bator (1993, p. 110), the only
way of becoming an administrator (officer) was through a long lasting process
of education, which included writing, accounting and the principles of
economics, accounting and management. The members of that profession were
supposed to meet very high ethical requirements. It should be emphasized that
the quality of life of an administrator was much higher than that of a simple
worker, and even today it could be wished by many. The above mentioned author
describes (p. 116) an old Egyptian workers district, in which the workers’
houses consisted of several rooms with the total surface of 70 to 90 m2. The administrators’ flats were much bigger.
However, the education process took until about 30 years of age and the
percentage of people successful in this field was quite small.
It
can be justified to say that highly qualified writers and officers constituted
a basis for the functioning of the monetary system and the whole necessary
economic and legal environment in ancient economies. Many issues still need to
be explained and they are not fully understood nowadays, perhaps because money
as an amount receivable for work, and not identified with metal or other
material objects, is an abstract category. For its effective functioning, a
certain intellectual space is necessary, including the concepts of salary equal
to the value of work, capital and percentage rate, receivables and equities,
and a fair price, with all these being based on law, organization and
accounting. All this can be found in the ancient economies, in which money was
not merely a material carrier of value.
The
role of administration as an indispensable component of the accounting system
in the ancient empires is highlighted by two outstanding researchers Polanyi
(1957) and Oppenheim (1957), who at the same time indicate little importance of
the market, which, in that situation, had to be balanced by a certain system of
state accounting. That economic system, which is not yet fully known, surprises
many researchers occupied with the ancient world. It seems that a wisely
elaborated set of labor coefficients, as discussed earlier, was an essential
part of that accounting system.
·
Mykenian
and Thebean Puzzle
A
well known Polish researcher of ancient Greece Aleksander Krawczuk (1990, p.
67), in his book about ancient Thebes made an astonishing comment on the
centrally organized economy in Mykenian times.
“Figuring out the tablets from the
Mykenian archives gave us a new view of that epoch. Of course, even prior to
that it had been assumed that the poetic imagination had given a lot of blaster
to its everyday prose. However, when the writing started to talk, it became
obvious that the very epoch which was a background of almost all Hellenic
myths, was primarily an epoch of extremely precise office activity; the highly
centralized economy was controlled by armies of administrators, who were
producing tons of accounting documentation. It does not matter whether it is
paper or clay that one writes upon. The method of recording does not matter
either. Just the opposite, considering the primitivism of the materials it has
to be said that with their care to include the whole economic life in their
accounting system, the Mykenians could compete with every system of controlled
economy”.
The
author even argues that one of the reasons for the fall of the Mykenian
civilization to be its extensively developed bureaucracy. On the other hand, he
provides an interesting conclusion:
“One thing has to be said to
justify the writers and the whole system: the Mykenian people did not know
coins, salaries were paid mainly in natural goods, therefore precise
registration of both the owned fortune and the receivables was necessary”.
It should be added: the receivables for work. The Mykenians, as well as
other ancient organizations of states-cities were able to solve, with a great
help of accountancy, the ancient economic problems of full employment and
payment relevant to the value of work. In order to do this, they needed an
accounting system which was not yet understood but which was a guarantee of the
economic stability, and of the fact that the receivables for work did not
appear merely as a record on a clay tablet. That is why an overwhelming
accounting system was necessary.
In
spite of their universality and ingenuity, the simple solutions described above
and applied to the problems of work, capital and percentage rate were given up
by next generations. It is hard to note in later history of civilization so
clear relationships between labor, accounting and money. They were not been
perceived yet in so purely intellectual and abstractive way as it was in
ancient economies. In our time we think about coined money when asking about
beginnings of monetary economy. So who should be conceived as more advanced?
Figure 1. T - Model of Ancient Accounting
Wage
Liabilities Account Worker
Account
·
What
Kind of Ancient Accounting Model Emerges?
As a
result of the above analysis, the following T - model of accounting in
prehistoric times emerges. The accounting scheme (Figure 1) describes three
entries as sufficient set of records concerning the division of work and
redistribution of goods within an ancient economy. The essential components of
the system are coefficients of labor productivity, which enable the calculation
of standard measures. Standard work hours play the role of an accounting unit,
that is, money. Journal entries make it possible to summarize the amounts of
receivables for work, and, at the same time, to calculate the product cost
value. An example recorded shows a worker whose productivity was estimated as
6/8 and he/she worked 10 hours so that his/her receivables amount 7.5 standard
hours, so this amount is recorded in state accountancy (banking system). This
worker took goods valued on amount 3.5 standard hours so that his/her stock of
money is now 4.0 sh (balance of payable account).
The figure 1 shows some logical accounting
system based on double-entry recording. It is however totally different than
contemporary accounting system. Present system operates in owners capital
environment and duality principle is focused on capital-assets relationships
(Ijiri, 1995). It is designed in order to protect owner’s capital and the
assets where this capital is placed. The above determined accounting system
with applying of double entry is however totally oriented on labor. Some
original feature of the above sketched
ancient accounting system is that it defines indirectly a natural
account unit, this mean money unit. Under this system it seems also clear that
every accomplished socially useful work was recorded as an authorization to
obtaining an equal value in return.
It seems that these labor-based systems have
ceased operations but not earlier as at the Dark Ages. Thus, at the fall of The
Heroes’ Age, the concept of brief relation between accounting and money system
was still pretty intellectual and value of money was based on the value created
by labor and precise accounting information was indispensable part economic
thoughts of that times.. This conclusion gives some answer to the surprise of
many authors who see ancient Sumerians as ”obsessive accountants” (Professor
Krawczuk shares this opinion in respect to Mykenian economy) or find the
developed accounting systems to be a potential reason for the fall of ancient
town-states as one of the authors previously mentioned thought. We represent a
different view of those times. Although the ancient system of state economy
with its predominant role of accounting appears to be very simple, it is on the
other hand, very sophisticated. All these meticulously conducted records were
necessary and justified in order for the system to operate well. In other
words, money treated as records of payables needed such an elaborate accounting
control.
In my opinion future
accounting theory will emerge as a result of joining these two approaches to
accounting. Accounting for capital integrated with accounting for labor will be
able to involve and to describe wider space of theoretical agendas than present
financial accounting system. The money-measurement concept can be an example.
How money affairs are interrelated with labor
is clear from a common sense point of view. It is well-known truth that
productive labor is a basis for healthy money. The truth is however more
apparent in practice than in theory of money. While productivity is an aim of
management and well-doing countries are successful with strong money, this
category is hardly ever apparent in theoretical models describing money as
introduced in economic literature. This is a topic of our latter
considerations. We should describe an essence of monetary economy firstly.
4. Dynamic Balancing of
Goods and Money in Monetary Economy
Money when conceived as an abstract category of
wage receivables is a key to understanding of monetary economy. Money when
conceived as produced from gold or copper leads merely to barter economy where
goods exchange for goods. The essence of the monetary economy is the existence
of two streams: of real products and of abstract money. The source of those two
streams is labor as described on Figure 2. The stream of products arises as a
result of a composition of labor costs and assets of various kinds, while the
source of the other stream is in receivables for work. A constant confrontation
take place in the market, between products composed of layouts calculated in
cost system, and stream of money, as a result the value of exchange is shaped.
In the process of the exchange, excessive costs “sediment” from the layouts;
moreover, the market accepts a certain level of risk costs, proportional to the
level of risk as discussed by D. Dobija (2000). Implementing principles,
according to which income in financial reporting are defined, adds to the
accounting system the category of a market value of the product, which leads to
the comparison between book (cost) value and the category known in the
labor-based value theory, namely the socially accepted amount of labor.
In
the process of exchanging goods and money, basic economic values are shaped
that characterize the economy of a given unit (a periodical performance) and
the economy, in particular the Gross National Product, labor productivity, and
inflation level. Measurement of these values is based on the performance
principle, therefore it is done in market value. When we look at it from the
point of view of accounting, we can talk about the dynamic balance of the goods
and money; it is economy, in which the above values are revealed as a result of
a given market configuration and the goods-money exchange. The exchange process
illustrates by Figure 2, which in turn enables the formulation of an exchange
equation.
Figure 2. Market mechanism equalizes stream of products and stream of
money
W- cost of labor, WP=GNP/W- labor
productivity
The bottom of the figure 2
shows that it is human being who set into motion labor process. This individual
includes some amount of capital denotes by letter H which can be precisely
measured in economic terms and right rate (r) of return on this capital
determines right pay (W) as discussed by (Dobija, 2000). There are no needs to
differentiate capital placed in humans. To people better serves strong
respecting capital laws, especially when pay systems are determined.
The left side of the scheme
shows process of producing goods and services. Labor composed with various
sorts of assets makes final products measured in historical costs before
confronting with money claims of payable holders. Relevance of the amount of
labor used in particular instance to the market accepted one is tested in the
marketplace. According to realization principle: sales of unit valued in market
prices is arrived at the moment and part of GNP as well. Process of production
is modeled by production function, which can also serves as a determinant of an
costing system.
The right side of
the scheme shows not material streams arising as a results of pay receivables
if considered from employees point of view or pay liabilities when considered
from state point of view. This is the responsibility of state, not of banking
system that exchange of money for products is running smoothly according to
expectation of money holders. Banking system role is creation of credit money
(coefficient k) in a way adequate to economy requirements. We shall see later
that that process should depend exclusively from real wage productivity. It
depends to some extent from parameter (a) which express society attitudes and
degree of poverty.
The upper box shows the constantly
accomplished exchanges: money for products and vice versa. This is an essence
of monetary economy that the records of wage receivables are exchanged for
goods. Despite of fact that these receivables change the owner and play a role
of the most required assets for them, they remain still as liabilities of the
state system. This process can be described by the equation of exchange.
The Equation of Exchange.
Assuming that a market mechanism does equalize
value of streams of money and products, the following multi-element equation
can be written and called ‘the wage equation’:
GNP = GNPR*(1 + i) = W*WP = MK = W*WK = M*V
The last expression refers to the Fisher’s
equation, thus M is money amount and V is money velocity. Letter (i) denotes
rate of inflation; GNP and GNPR denote nominal and real general national
product.
Let us observe that the above-presented process of
exchange can be described and explained using basic accounting concepts. The
two streams confront each others (matching principle). The equation refers to
the basic accounting equation in some way. The left stream represents assets
and the right stream discloses liabilities of the state and banking system for
the value of wage receivables (money). New accounting issues are involved too.
Human resource costing and accounting as a theory that quantifies and assigns
value of human and intellectual capital to individuals and determines the basis
for human capital wage theory is the starting point to the considerations.
Production function reshapes the usage of production factors into value of
products so the cost and managerial accounting as the tool of productivity
control and growth is distinctively involved.
Credit Money Creation Function
On the right side of the scheme there is a
stream of money that inflows to the market. Both streams (products and money)
confront each other on the market (exchange of money for products). During the confrontation the size of an
inflation or deflation variable is disclosed.
The money stream can also be quantified as the function of wages (W).
Wages paid to employees split into two lesser streams. The first stream has
measure aW (0<a<1) and tends directly on the market without banking
system. This means that the exchanges are done immediately. Parameter (a)
arrives at this part of wages that are exchanged for products directly, without
entering the banking system. The parameter can be interpreted as welfare level
and saving propensity. The second part of the original stream of wages (1-a)W
feeds firstly the banking system. Then amplified in banking system (credit
money creation) flies into market linking earlier with the first stream. Some
part of this stream (which is not disclosed on the scheme) is not used by the
banking system as a basis for credit creation because of mandatory reserves
system and requirements of current accounts conditions. Therefore only a part of that stream
quantified as (1-a)(1-b)W is the real basis for credit creation (b- is ratio of
reserves). Thus amount of the money MK that confronts the product
stream can be expressed as follows:
where k denotes a parameter of credit money
creation in banking system. The total stream of money is therefore equal to:
The problem of determining a right value of
credit money creation parameter k (that minimizes level of inflation) can be
solved by use a fragment of the equation of exchange as follows:
GNPR
(1 + i) = W*WK
Solving for variable (i) we obtain formula:
where RWP = GNPR/W is the real wage
productivity.
Assuming a condition i = 0 Ţ WK = RWP we
can find value of the parameter k that minimises inflation level. Using the equation:
we come up with the model:
Thus the wage multiplier is equal to:
The ultimate opinion is that the stream going
through the banking system can be increased to a level W*(RWP – a). The size of
credit depends on the wage level, welfare level and productivity level as well.
To keep control over the money supply should
only mean a wise wage system and cost control as well as a precise feasibility
study in respect to investment projects that involve debt financing in
particular. Wages should be derived on a basis of human capital value. To pay
less than average risk rate applied to human capital of an employee is a sin
against the individual but overpaying is a sin against society (inflation and
depreciation of wage receivables) is a clear conclusion of the consideration.
Problem of money creation is not properly conceived in present monetary
approach. Money arises in productive work of employees. They are accounting
records of wage payables. This statement should be credited with our attention
as a fundamental of goods-monetary economy. The above formulas only confirm the
fact that each amount of credit can be generated provided an entrepreneur is
able to multiply the invested capital this means to conduct a productive
activities. Non monetary policy is required apart of that and strong control
over the banking system.
Theoretical description of inflation
The inflation variable appears in the dynamic
model as an amount created by the market mechanism, which balances the stream
of products and the stream of money. Therefore, discussing inflation as a
purely monetary phenomenon, as well as taking actions directed solely towards
the money stream, is not correct. The essence of the problem lies in the
characteristics of the actual stream as well as in the quality and the
efficiency of the market mechanism. It is the productivity of labor that is the
external variable, which modifies the money stream. In order to achieve a
better understanding of the nature of inflation, let us consider a fragment of
the exchange equation to calculate variable PD (GNP deflator):
where: PD = (1+i), and ‘i‘ is inflation index.
Thus 
At this point, it is worth to digress in order
to better explain the causes of inflation. As it had already been said, wages
are linked to human capital through the relevant rate of return on this
capital.
W = u * H
where: H – value of total personal human
capital, u – rate of return.
The number of employees can also be introduced
to the denominator of equation (24), on the basis of the following
relationship:
where: GNPCR - real GNP per employee, N –
number of employees.
As a result, the value of PD
depends on the following set of variables:
The only constant of the above equation can be
seen in the rate of return on human capital. It approximates the value of rate
of return on average risk, and therefore it maintains the level of 8%. The H/N
variable exhibits a growing trend, which is the result of natural development
processes (growing education and experience), while the nominal productivity of
wages can vary, depending mostly on the precision of the management system.
Therefore, what follows from the latter formula, low inflation is a natural
expression of a developing economy, and, simultaneously, a function of
management. Such a natural inflation does not usually achieve double figures,
unless the process of management fails to achieve its functions correctly, or
unless it is stimulated by political activity. If we write the formula as
follows:
we see the significance of actual productivity
of wages in GNP creation. It stresses that, given the equal importance of all
variables, the key variable of real GNP growth is the value of WP/PD (actual
productivity of wages), and again it indicates the role of management wherever
remuneration is paid, and not only in enterprises. Labor should be planned,
regulated, and controlled, and the wages paid after the evaluation of desired
results. We should also note that low inflation is a natural growth-inducing
economic factor, while inflation of any level is a challenge to accountancy
theory, as financial reporting should present information unburdened with
distortions of any kind.
According to the above formula, in the
situation of zero inflation, the nominal labor productivity equals the real
productivity. In other words, all processes are managed in such a way that an
increase in wages always stems from the growth of labor productivity. The
creation of credit money is limited by the real productivity of labor as well.
The concept of inflation understood as a relationship between the nominal and
the real labor productivity describes the degree of chaos in a given economy,
and this chaos will not be remedied by a monetary policy. Appropriate
management systems are necessary in all organizational units of the private and
the public sector.
5. Value of Monetary Unit in International Exchange
Inflation explains value
of monetary unit only partly. Apart of
domestic market there is huge world market where money of various states are
exchanged. The prices of currencies among themselves are called exchange rates.
Then, why a particular money is more valuable in respect to another? Why one
currency is strong but the second is weak? These are question about theory of
value.
Law of One Price
Exchange
rate behavior is explained on a basis of theories such as: law of one price,
purchasing power parity (PPP), international Fisher effects (IFE). None of them
is fully accepted as far. Many efforts are being put in order to defend PPP
theory introducing productivity as an additional variable. The well known
approaches as described by (Rogoff, 1996) and others use a concept of
productivity limited to the traded goods sector. This approach is however not
sufficient to formulate a general model of exchange rate behavior. The general
productivity as defined for the wage equation of exchange use is an adequate
concept involving wages and GNP as the two most general variables.
Law
of one price is the strongest form of the PPP theory. It states that in the
presence of a competitive market structure and the absence of transport costs
and other barriers to trade identical product which are sold in different
markets will sell at the same price when expressed in terms of a common
currency. Shortness of this theory is confirmed by every day human experience
of people travelling abroad and additional evidence comes from BIG Mac index
(McDonalds, 1999) or (Pakko and Pollard, 1996). Truly speaking, the Big Mac
index was devised as a light-hearted guide to whether currencies are at their
correct level but assuming the prices of the currencies as market shaped, the
only possible conclusion is that the law of one price does not hold.
The
above opinion can be expressed in another way. The only pair of products which
fulfil the law of one price are products called “one dollar”, “one mark”, one
zloty”, “one yen” and so on. Each of these products is the best representative
of state economy and the value of each is supported by level of productivity of
the country. Law of one price does not apply even to cost of labor, which means
that it is not the right tools for determining the levels of wages.
Cost of labor in a context of law of one price
An
auxiliary question may be stated in respect to wages and salaries that
determines costs of labor. Is it right to use only the exchange rate to
determine what salary should be paid to two individuals doing the same job but
working in two different countries? Economists have yet to come up with a clear
answer to this question. In order to briefly answer this question we will also
take into account the problem of labor productivity. Let us use common sense
first and consider two imaginary individuals from Poland and from the USA. Each
of them is part worker, part farmer, part clerk, part manager, part teacher,
part politician etc. Let Q represent the value (not expressed in monetary
terms) of their labor during a given period. What is the result of comparing
their effects in terms of labor? We should consider two cases. The Q of two
countries are equal (case A) and the Q’s differ (case B).
Case A. The Q’s are equal
Let
us now consider the situation where all things being equal the relationship
between the number of money units paid in the two countries in question for
equal labor gives the initial value of the exchange rate, with no other factors
coming into play and where QA = QP. This is simply a case
of the two identical economies. The only difference lies in unequal amounts of
monetary units paid to employees (for instance, 10 DM in Germany in comparison
to $5 in the USA) and the names of the currencies are different too.
Then
assuming that NU denotes a number of monetary units paid for the labor creating
value Q we may write:
where ERP denotes exchange
rate in total parity conditions.
Since
Q·NU = AP (average pay) we come up to conclusion:
Case B. The Q’s are not equal
Would the result be QP/QA = 1
where P denotes the Polish employee and A denotes the American? It is commonly
known that the effects are quite different. The relationship should be written
as follows:
where U denotes equalizing coefficient (of
labor power comparison).
The required relationship is thus as follows.
What is the economic essence of the U? The
labor effect of a country representative as discussed above is nothing more
than real GNP per capita or per working person. To illustrate the meaning of
this coefficient we can estimate the U using rough data, as well as examine the
value of exchange rate using average wages. According to research made by (Grabowski,
2001) a comparison of wages yield estimations as in table 1.
Table 1. Wage estimation of exchange
rate
|
COUNTRY |
Average pay in the USA |
Average pay in the country |
Estimated ER |
Actual ER |
|
Germany |
$2 437 |
4300 DM |
1.765 |
1.74 DM/$ |
|
Japan |
$2 437 |
298 900 YEN |
122.7 |
121.00 YEN/$ |
|
UK |
$2 437 |
1.649 Ł |
0.677 |
0.61 Ł/$ |
Source: Grabowski (2001)
The above results concern countries where the
coefficient U is close to one, which means that the productivity of each
economy is to some extent comparable to USA productivity. We should note that
the average pay concerns an industrial average not for all countries, which is
unknown. A fundamental difference can
be observed in the case of Poland.
For instance the average pay in Poland in May
2000 was 1,950 zł. Thus the average cost of labor is estimated as 1 950 *
1.23 = 2398.5 zł. Assuming an
average wage in the USA of only $2,437 we receive estimation 0.98 zł/$
when actual exchange rate exceeded 4. What is the reason? The coefficient U is
not equal to 1. In this case we can compute the U taking actual ER = 4.15 then
U = (2437/2337)*4.15 = 4.327 times. Labor in the USA is therefore over 4 times
more productive compared to Poland. Thus, the equation which determines a pay
equivalent to a foreign wage may be written as follows:
The ultimate formula is therefore:
The GNPCs are expressed in the same money unit
[$].
In such case as the above, the model to
describe the exchange rate, can be derived as follows:
The above formula may be interpreted in
different ways. It is worth stressing that per capita income levels broadly
reflect differences in labor productivity, an idea which comes originally from
early Balassa-Samuelson research. Turning to Big Macs, it is unlikely that
there are large differences in the productivity of workers cooking burgers
regardless of whether they are working in China or United States. There are,
however, large differences in general productivity measured as a relationship
between wages and GNP. The general motion, which stems from the above
consideration is: Law of one price is not
applicable to any product or labor cost unless the all parities are hold. The
law is applicable to one abstract product only, namely the $1 in the USA, or
1DM in Germany, and so on.
How to update the PPP theory
The purchasing power parity hypothesis (PPP) is
an economic topic that should, according to many economists’ belief, be able to
explain exchange rate movements. According to the PPP hypothesis the ratio of
domestic to foreign prices determines the basic exchange rate. O’Connell (1998)
interprets the PPP theory to mean that national price level should be evened
out (equal) when expressed in a common currency. Researchers have devised a
number of econometric models in order to empirically test PPP as a means of
explaining exchange rate behavior. Such
research was designed to confirm the belief that exchange rate would be very
stable, not only in the long run, but also over a short period, which is easy
to predict on the basis of firm economic fundamentals. When exchange rate were
floated on a wide scale for the first time in 1973 (Bretton Woods), it was
generally assumed that exchange rate would quickly adjust to change in relative
price levels. Studies carried out on this topic have yet to confirm these
expectations. Fluctuation in nominal exchange rate seemed extreme in relation
to fluctuations in economic fundamentals. As a consequence PPP can no longer be
regarded as a reliable theory. Despite the fact that this theory has been put
to the test on many occasion, evidence to support it remains elusive, at least
with regard to the modern floating rate area. O’Connell (1998) paid attention
to a variety of real factors such as productivity and others, which can also
determine the exchange rate behavior.
The formal definition of the PPP relationship
as described by Edison at al. (1997) is as follows:
where: P* - denotes an index of foreign prices
(CPI - consumer price index); P – denotes an index of domestic prices; l - is a
constant; ER – denotes the exchange rate.
Most of studies have rejected the formula in
the above strictest form as presented above.
Beachill and Pugh (1998) and others indicate that presently done
empirical tests have not always rejected productivity-adjusted PPP relationship
despite that the concept is limited only to traded goods sector.
As was stated earlier, the exchange rate
depends not only on the price level but is also closely related to general wage
productivity. Economic fundamentals such as wages, GNP, and wages productivity
have some influence on exchange rates behavior and movements. In order to
derive any relationship between exchange rate and others variables first we
must consider a wage version of exchange equation. In accordance with the
exchange equation formula the GNP deflator is:
The PPP theory focuses mainly on consumer price
index. A better way is to consider the GNP deflator in this case. Thus, we
determine a relationship between the PD of two selected countries for instance
Germany and the USA, as follows:
Establishing USD now as the basic currency we
must express GNPR of Germany in this money unit. To achieve this the past value
of exchange rate is used (ER0).
GNPRD[$] = GNPRD[DM]* ER0[$/DM]
where: ER0 denotes the exchange rate
at the end of last year.
Subsequently we obtain the formula:
Therefore the end model which explains exchange
rate is as follows:
where:
PPPD/A- - GNP deflators parity;
WPPD/A - wage productivity parity.
Thus the set of variables which influence the
exchange rate (besides current market impacts) are shaped as follows:
And therefore the general model (the adequate
form of PPP) which determines exchange rate is as follows:
where: RWP* - real wage productivity
abroad, RWP - domestic real wage
productivity, ER0 - a former exchange rate value.
The conclusion is that the greater relative
inflation rates in Germany, the higher the USD price. But the higher the wage
productivity in Germany, the cheaper is the USD. The PPP theory could explain
exchange rate behavior provided one more parity is included. Besides inflation
the wage productivity variable is needed to determine the purchasing power of a
monetary unit. The exchange rate should depend only on the last value when the
above mentioned parities are used.
6. Productivity Function as
an Indicator of Key Variables to Measure in Accounting
The
general Solow’s production function as discussed by Romer (1996) involves four
variables. A natural accounting approach to production function leads to
greater number of variables tied in a unique composition. Let us denote a
market value of an output as (PR), total costs of labor are (W), and assets (A)
denote capital embodied already in the physical and financial resources.
Therefore market value of the output can be generally introduced as the sum of
the additive factors:
PR = W + zA + rA – sA
where: z - is ratio of an annual usage of the
assets; r - is market rate of return on capital placed in the assets; s – is
looseness of the assets in production processes.
After a simple rearrangement a model composed
of the above-specified variables arrives at the production variable:
PR = W[1 + A * (z + r - s)/W] = W*WP
where
WP – denotes labor productivity variable.
Because
W = u * H, where u - is rate of human labor payoff thus the productivity is
arrived at as follows:
WP = 1 + A/H * (z + r – s)/u
Then, applying a simple mathematical formula
(exp(x) @ 1 + x, for small x) the production (PR) can be expressed as exponential
function of considered variables as follows:
The above function reshapes input factors into
products. The productivity is growing provided an adequate relationship between
human and physical resources. Variable (z) is asset turnover ratio so the
higher rotation the higher labor productivity, and also, the lower the human
capital payoff ratio (u) the higher is the labor productivity. Let us note that
if A = 0 the production variable (PR) is equal to W. It is a case of primitive
man working without any tools. The productivity can also be less than zero.
This is a case when looseness of assets exceeds variable z+r.
The complex of variables written as small
letters can be assumed as a one variable Z denoting level and quality of the
management. Then the production function is as follows:
Now
the model is like Solow’s production function to which so many well-known
interpretations can be applied. The general motion is that the productivity is
growing according to technical means and quality management. Let us recall
Japan now and realise again their management efforts in implementing just-in-time systems. The force of
Japanese yen and decrease of exchange rate of yen to dollar close to one
hundred yen per one dollar is the result of faster growing productivity in
Japan than in the USA. Since 1980s, the
effective efforts in the field of productivity, which have been undertaken in
the USA, have stopped the process of dollar depreciation.
7. Emerging Structure of
Accounting Theory
Let
us concentrate our attention on a particular approach to analysis of an
accounting theory supported on category of capital. Since capital is the most
important term of economic research and discussions as well is a constant
subject of accounting measurement we can attain to reasonable division of
accounting field. To be precise the definition of capital is refereed to as
follows (Dobija, 1998) :
Capital
is the value of economic means capitalized in physical and human resources. The
rate of capitalization is determined through the natural and social conditions
of environment.
Such a definition shows
relationships between capital and a measure of economic value which is an
abstract and homogeneous category. The
nature of capital (i.e., its capitalization ability) is the reason for
discounting the expected future stream of inflows. The extended definition may
involve natural resources as well.
Capital
is the value of economic means capitalized in natural, human and physical
resources. The rate of capitalization is determined through the natural and
social conditions of the environment.
The
value must always be taken at a certain point in time, so that while it may
serve as the present value in some cases it ought to be computed as the future
capitalized value of the past stream of used means.
Capital
defined in the above way may be classified assuming different criteria:
1. Equities:
equity capital, debt capital;
2. Placement:
human, physical, and natural;
3. Kind
of fund: fixed, circulating
The
value of capital or the capital embodied in assets will be maintained
(preserved), provided the assets generate a stream of inflows that will yield a
sufficient rate of return. The rate should not be less than the capitalization
rate. Otherwise, the value of capital declines and becomes less than the
historical cost value. This is also an essential feature of capital and this
measurement process is the main accounting function.
Having
determined the main feature of capital, we can generally perceive an economic
system as a structure of the three sorts of capital. This concept is
illustrated on figure 3. Let us consider a general model of an economy, in
which the sole capital is that, which is subject to restructuring and increase
in a given period of time, at a speed equal to the rate of return obtained. The
engine of the capital change is work, which is measured by costs of labor by
means of analyzing the outlays and the exchange value in assessing its results.
Figure 3. Labor
process as process of capital restructuring and GNP generation
In the presented model, the engine of the
changes to the existing capital structure into a new one, better adjusted
reality, is the process of labor, the source of which is the man and where the
corresponding human capital must influence labor costs. Another important issue
related to the labor process is the relationship between results and costs of
labor, i.e. productivity, which determines how many output there are per unit
of labor costs. Therefore an indispensable accounting aims is to account for and
to preserve individual human capital as well to account for and to preserve
capital invested in private and public sector. An inclusion of human capital
agenda as well as cost of labor agenda into accounting lead to new structure of
accounting field of research as shown in figure 4.
Figure 4. The
rough division of the accounting field of research
|
Accounting theory |
Subject of the discipline |
|
General Accounting Theory |
Theory of accounting measurement
and |
|
State Accounting |
GNP
accounting Accounting
for Productivity |
|
Human Resources Costing and Accounting |
Human
capital measurement Minimum
wage measurement Value
added reporting Household
accounting |
|
Managerial Accounting |
Costing
and pricing systems Accounting
for short and long run decisions Productivity
control and reporting Reporting
to internal parties, creditors, and government agencies |
|
Financial Accounting |
Bookkeeping
organization Financial
reporting to external parties |
|
Auditing |
Independent
auditing of accounting information |
|
Financial Analysis |
Analysis
and predicting of financial information
on the basis of accounting data |
Concluding remarks
The above analysis shows that the monetary
issues are no longer merely of macroeconomic character; they become also an
important theoretical problem of accounting theory. Account unit or unit of
measure agenda in money economy framework is indispensable to accounting
theory. The adequate theoretical descriptions and adequate procedures of
stabilization of a monetary unit can be seen as a solid basis for each more or
less coherent system of objectives and assumptions of accounting theory.
Monetary unit considerations are closely
related to many areas of contemporary research in accounting: human capital
costing and wage accounting in particular. Therefore, the human resources
costing and accounting discipline gains a new impulse, as a fundamental for
wage managerial accounting, which is a tool for labor productivity
stabilization and, as a consequence, the stability of the value of monetary
unit.
Accounting for labor appears as still
undiscovered accounting agenda although with the great past. Capital and labor
relationships could gain a new enlightenment from research made in accounting approach. Money is wage
receivables so money is a by-product of accounting system. There are strong
relationships between accounting and money.
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Money
and Accounting Complementary Relationships as a Key to Theory
Mieczyslaw Dobija
ABSTRACT
One of the fundamental accounting conventions is the money-measured
principle and measuring in money terms is an unquestioned background of the
accounting consideration commonly accepted in accounting theory and practice.
Despite of accounting does not appear as any complete system of thoughts the
money-measured convention is commonly conceived as the fundamental. Accounting
theory therefore cannot avoid these most general issues and should be among
others concentrated on the theoretical research related to money-measured
principle and monetary unit stability in particular. The search for a coherent
set of logical principles to provide accounting with similar foundations as
other sciences must concerns relationships between monetary unit and accounting
theory and vice versa.
This paper is an attempt of better description and new recognition of
monetary unit stability agenda from accounting point of view. It includes a new
approach to theory of money on a basis of a wage equation of exchange concept.
In money economy labor and cost of labor determine two streams. The first one
is a stream of products and is created by dynamic linking of the labor measured
by cost of labor and company assets. The second stream generated by the labor
is wage receivables stream. This stream can be seen and quantified as a rate of
return on human capital employed. Money is wage receivables and it is labor
process in market environment which creates them. The two streams can be
described and quantified with use of adequate production and credit creation
functions. The wage equation of exchange arises in result of existence of free
market where the products are exchanged for the money, and this is an essence
of monetary economy. The wage equation of exchange is then a new theoretical
tool for money unit stability research and actions and it sheds new light on a
part the accounting has played in monetary economy.
Accounting for labor appears as still
undiscovered accounting agenda although with the great past. Capital and labor
relationships could gain a new enlightenment from research made in accounting approach. Money is wage
receivables so money is a by-product of accounting system. There are strong
relationships between accounting and money.
Professor Dobija Mieczysław, Cracow University of Economics, Accounting Chair
e-mail:
accountd@ae.krakow.pl
Address for
correspondence:
Katedra Rachunkowości
Akademia Ekonomiczna w Krakowie
ul. Rakowicka 27
31-510 Kraków, Poland
Phone: (++48 12) 29 35 285, Fax: (++48 12) 29 35 039