The Financial Accounting Model from a System Dynamics' Perspective

26 Pages Posted: 14 Jan 2008

See all articles by Eric Melse

Eric Melse

Maastricht Accounting and Auditing Research and Education Center (MARC); CAREM

Date Written: 2006

Abstract

This paper explores the foundation of the financial accounting model. We examine the properties of the accounting equation as the principal algorithm for the design and the development of a System Dynamics model. Key to the perspective is the foundational requirement that resolves the temporal conflict that resides in a stock and flow model. Through formal analysis the accounting equation is redefined as a cybernetic model by expressing the temporal and dynamic properties of its terms. Articulated in that form the accounting equation is enabled to be defined as a dynamic stock and flow model expressing the two dimensions of the double-entry accounting system. With that formal foundation it is argued that the accounting model is capable to simulate financial dynamics as well as be integrated with models that express operational and world dynamics. Thus we prove that it is possible to design and build a dynamic business model that can meet requirements of management accounting (ex ante, before the fact) as well as financial accounting (ex post, after the fact). We conclude that the dynamic accounting model can be made relevant for strategic planning and control purposes and be integrated within a System Dynamics model designed for such purposes.

Keywords: dynamic accounting model, accounting simulation, System Dynamics

JEL Classification: M21, M40, M41

Suggested Citation

Melse, Eric, The Financial Accounting Model from a System Dynamics' Perspective (2006). Available at SSRN: https://ssrn.com/abstract=1081620 or http://dx.doi.org/10.2139/ssrn.1081620

Eric Melse (Contact Author)

Maastricht Accounting and Auditing Research and Education Center (MARC) ( email )

P.O. Box 616
Maastricht, Limburg 6200 MD
Netherlands
31610934901 (Phone)
31704140756 (Fax)

CAREM ( email )

Wibautstraat 2-4
Amsterdam, 1091 GM
Netherlands
31610934901 (Phone)

HOME PAGE: http://www.carem.hva.nl/medewerker/eric-melse/

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