The Cause-and-Effect Information of the Accounting Network

Abstract

Problem: The double-entry system of recording and reporting accounting information has been the most successful in the last 500 years. Initially, it extended the trust in economic transactions among strangers by ensuring the exact calculation of the account balances. Later, the income statement and the cash flow statement allowed the disclosure of the causes of two account balances: earnings and cash. In the early 1960s, prominent scholars started looking for methods to disclose the cause-and-effect information for all accounts. However, this goal has not yet been met for reasons that are explained in this monograph.

Solution: The present monograph proves that the cause-and-effect information of the accounting system can be restored only if expenditures, expenses, revenues, and money flows are treated exclusively as actions (process variables) that affect accounts (state variables). The actions constitute the links (causes) and the accounts constitute the nodes (effects) of an accounting net-work that is the formal expression of three properties of economic transactions: (i) the independence between actions and accounts, (ii) the structural coupling between physical and financial actions, and (iii) the compositionality of flows, actions, and accounts.

Results: The structure of such a network extends the processing of the cause-and-effect information into three complementary four-dimensional accounting spaces: double-entry, topological, and affine, free of the current syntactic and semantic flaws, conceptual controversies, and logical fallacies.

Keywords: 3D Conceptual Framework, 4D Frame of Reference, Accounting Dimensions, Accounting Spaces, Cartesian Database, Fallacy of Conceptual Primacy, General Systems Theory, Graphs, Networks, Net Position, Wealth

JEL Classification: C60, C67, D23, E21, M15, M41