Historical cost, Valuation

Building upon the author's earlier work [1982], which demonstrated that double-entry bookkeeping is not an absolute system defying extensions but is logically extendible to triple-entry bookkeeping, this paper develops a framework for a triple-entry bookkeeping system and illustrates it by means of a simple example which includes a worksheet, journal entries, and three basic financial statements-wealth statement, momentum statement, and force statement. While the earlier work extended the existing two dimensions of bookkeeping (wealth and Income) into a third dimension under the same measurement unit, namely dollars, this present paper introduces "momentum accounting" under a related but different measurement unit, namely dollars per time period, such as a month, in such a way that, when mathematically integrated over time, momentum accounting articulates with wealth accounting in every dimension. Dealing with earnings rates per time period associated with assets and liabilities, momentum accounting accounts for earnings rates and their changes. Finally, "force accounting" is introduced as the third layer of the accounting system to explain factors that are judged to be responsible for changes in the earnings rate. Its measurement (dollars per month per month, for example) is induced by the measurement in momentum accounting, which in turn is induced by the measurement in wealth accounting. In this way, the extension of double-entry bookkeeping is carried out under a disciplined framework of measurements, which hopefully will direct management's attention and sensitivity to factors at a level deeper than the level of wealth and income that has been traditionally dealt with by double-entry bookkeeping.

The article reviews the book "An Introduction to Corporate Accounting Standards," by W. A. Paton and A. C. Littleton.

Official pronouncements on financial statements restated for general price level (or simply, price-level statements) repeatedly have emphasized that price-level statements be treated as being entirely different from conventional financial statements. Financial Accounting Standards Board Exposure Draft on price-level statements also follows the same approach, emphasizing that conventional statements are stated in units of money while price-level statements are stated in units of general purchasing power. Such an attempt to treat price-level statements as being totally different in units of measurement may be desirable once a frame of reference is established firmly in the minds of users of financial statements. At least until such time, it seems to make sense to provide a bridge between conventional statements and price-level statements to facilitate acceptance of the new statements. The article analyzes and evaluates price-level statements from the viewpoint that their unit of measurement is comparable to that of conventional statements. The difference in figures arises because different accounting principles are applied to them.

The article presents a reply to the article "Measurement in Current Accounting Practices: A Critique," by Raymond J. Chambers, published in the July 1, 1972 issue of the journal "The Accounting Review." First of all, the author states that the book is definitely concerned with accounting as it is. Although policy implications are not completely lacking, the primary purpose of the book is to promote a better understanding of the foundations of accounting as it is, or more specifically the foundations of accounting measurement as observed in current accounting practice. Although an objection is raised, no alternative definitions are given in the critique and it is hard to evaluate the definition without comparing it with an alternative. It seems most natural to consider objectivity in measurement as the degree of independence of the measure from variations in the personal characteristics of the measurers. The author believes that the above responses cover all of the major issues raised in the critique. Because of space limitations, the author had to omit some responses to the remaining questions and comments in the critique, although such responses have been communicated.

The article comments on budgeting principles and budget-auditing standards. Budget audits are similar to audits on audits in the sense that the central task of both types of audits is to check whether reasonable inferences were made in preparing budgets or in preparing audit reports, and not to make inferences by auditors themselves. The budgeting principles and procedures can be divided into two parts, one concerning predictions of events and the other the recording of predicted events. The latter deals with the ordinary accounting procedures after certain events are predicted according to the former. Therefore, if the budgets are to be reported in the form of projected financial statements, accountants may simply quote the generally accepted accounting principles and procedures and state that the predicted events must be recorded according to them. Thus, the cost principle, the realization principle, the matching principle of revenue and costs, etc., will all be observed. In addition to budgeting principles and procedures, a set of budget-auditing standards and procedures must be prepared in order to define methods of examining budget working papers and related evidence which support inferences as well as the extent of examination. They must also provide reporting standards for budget audits. The main purpose of budget audits is to make sure that budgeting processes are carried out as specified by budgeting principles and procedures.

The auditor is interested in estimating many variables in performing his/her attest function. These estimates include such items as error rates, confidence intervals, maximum overor understated amounts, and account balances. These estimates along with other collateral evidence comprise a multivariate information set upon which the auditor concludes that a set of financial statements fairly presents the financial condition and operating results of the firm. In this multivariate context, the auditor should consider the efficiency of the procedures used to estimate the parameter set upon which the decisions are made. Traditional procedures for obtaining these estimates include the maximum likelihood estimation (MLE) procedure and Bayesian approaches. Bayesian techniques require a considerable amount of judgment and training. Moreover, Stein [1955] proved that the MLE was inadmissible (could be improved upon over some portion of parameter space without worsening over the remainder of the space) as an estimator for the mean vector of a multivariate normal distribution. James and Stein [1961] and Efron and Morris [1971; 1972; 1973; 1975; 1977], among many others, generalized and extended Stein's original proof.' The result

Nicholas J. Gonedes, Yuji Ijiri, Improving Subjective Probability Assessment for Planning and Control in Team-Like Organizations, Journal of Accounting Research, Vol. 12, No. 2 (Autumn, 1974), pp. 251-269