Accounting in Three Dimensions: A Case for Momentum

Abstract

To this day, triple-entry accounting and momentum accounting are seldom applied. We regret this because of the growing need for more forward-looking information by management and external stakeholders and the apparent lack of theory and practical solutions. The ever-increasing pace of the economy incites the need to disclose trends on the microeconomic level of a company. Further to this point, recent developments related to corporate governance, give new imputes to search for the answer to the question if we can improve the reliability and effectiveness of accounting in general, and financial statements in particular. This paper may contribute in two ways to a better understanding of the concept that underpins momentum accounting. First, we present a notional example concerning the balance sheet ratio: return on equity. Second, we analyse companies included in the FTSE with the three accounting dimensions: force, momentum, or income, and wealth. These examples, so we hope, should encourage practitioners and academics to explore the usability of triple-entry accounting and momentum accounting as alternative means to provide more forward-looking information.

However complete and accurate financial statements might be, the information they contain is exclusively "historical" for the simple reason that the accounts contain data pertaining to facts that can be proven to have happened. This, of course, is a gross simplification because not only does the balance sheet include data from the past but also data that points to the future. The obvious example is debtors that record the amount of money owed by customers to the firm. From the standpoint of the accountant that data is a historical fact but for the treasury department only a marking of future cash in hand. More important, we can characterize all balance sheet data as point measurements, i.e. a record of the source and use of wealth at a given date and as such, it is a static or "non-moving" representation of economic information. To account for the business dynamics in between two such moments of measurement we account for income and expenses, hopefully the first being the larger sum then the second and then report a profit. This profit increases owners' equity, or net wealth, and is equal to the wealth increase between the balance sheet total at two successive dates, excluding equity raised or retired through financing. Likewise, a loss reported is then equal to the decrease of wealth. Consequently, the profit and loss accounts are period related. Conceptually, they constitute the second dimension of the financial accounting system and explain the change of magnitude of the first dimension: wealth.

Keywords: momentum accounting, financial statement analysis, performance measurement, forward-looking information, accounting theory

JEL Classification: M41, M21, C22, C53