Accounting
From ADC
Accounting is viewed in its managerial meaning as defined in the Wikipedia article:
[...] is the process of identification, measurement, accumulation, analysis, preparation, interpretation and communication of information used by management to plan, evaluate and control within an entity and to assure appropriate use of and accountability for its resources.
Identification and accumulation part of the process is objective: it is expected to produce the same result for every tester. The rest of the process involves considerable judgment. Abstract provides an accounting framework, that strictly enforces correctness of primary data, and at the same time facilitates application of different analysis and interpretation techniques.
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Measurement or Interpretation
Statement of Financial Accounting Concepts on "Objectives of Financial Reporting by Business Enterprises" of US FASB says about accounting:
[...] despite the aura of precision that may seem to surround financial reporting in general and financial statements in particular, with few exceptions the measures are approximations, which may be based on rules and conventions, rather than exact amounts.
This aura is rooted in the objective nature of accounting data pertaining to relationships with clients, suppliers, employees and investors. All these figures are clearly stated in contracts, orders, invoices and other legal documents, which makes them easy to identify and reconcile. The perceived precision is further increased by popular notion, that all accounts are "balanced", because total debits always equal total credits.
However, modern economy leaves little space for arbitrage. As a result, business enterprises must take unbalanced financial positions to achieve their top goal "make money now and in the future". Such positions remain open for different periods of time, from seconds for scalpers to years for manufactures, but the underlying mechanics of actions is the same for all.
Little to no conclusions about enterprise performance can be made upon precise, but raw primary accounting information. The identified data undergo measurement, which converts values of numerous economic resources to a single one. The latter is called reporting currency. Profit or loss is calculated to bring the books to a balanced state.
Double-entry Accumulation
Measured accounting information is traditionally accumulated using double-entry bookkeeping system. The system operates only in reporting currency by definition. This has several important consequences, each creating a potential error injection point.
Off-system Analytic Data
Transaction values in reporting currency constitute only a fraction in the picture of enterprise's business processes. Physical volumes of goods or foreign currency transfers are much more important for operations management. These figures are also the base for measurement. Traditional accounting approach is to use an "extension" to double-entry system. The extension associates additional information with transaction. It works on a per-account basis in many systems. For example, shipped quantities can be viewed in the 'storage' account , but not in the 'customers' one.
Manual revenue recognition
Revenue recognition is probably the most challenging part of accounting. One transfer of goods or services needs to be reflected as two accounting events (one for revenue, and one for expense). In other words, revenue recognition triggering events are compound transactions, having at least 2 lower level parts. While double-entry system protects accounts from going unbalanced, it doesn't prevent revenue and expense from going out of sync. If the wrong value is used for revenue or expense part, or a part is totally missing, the system will still remain in a balanced, though incorrect state.
In addition, division of labor means, that modern enterprises have a specialization. At the same time, most of them also receive income for activities, that are supportive or even unconnected to their major field of operations. For example, a manufacturing plant may receive money for lease of spare storage facilities. Certain systems of accounting principles will require that this income is presented separately from the results of mainline activities.
Accounting Chart Overhead
Rules for measurement differ among systems of accounting principles. In certain situations, enterprises need to simultaneously carry two or more sets of accounts. Each set is based on exactly the same input data, but each requires full effort for measurement, accumulation, analysis, preparation, interpretation and communication. Little could be done to reduce complexity, because measurement is done prior to accumulation. A common example of rule divergence is difference between views, that national accounting and tax systems have on the issue of expense recognition in areas like depreciation and interest.
The matter is further complicated, because different systems may have non-matching requirements to content of accounts. In other word, two transactions may be required to be in the same account in one system, but in different accounts in the other.
Exchange-driven Accumulation
Exchange of goods and services between willing parties is a central concept of highly-specialized modern economy. Exchange is also a central concept in the accumulation framework, that abstract is providing to addresses the above shortcomings of double-entry system. The concept is understood in its legal meaning as an exchange of liabilities. Thus, the system lays out two distinct types of economic activity:
- exchange of liabilities;
- settlement of liabilities.
Resource
Resource is any scarce economic benefit. It may be money, goods, services, unfinished products, work in progress, and everything else that may contribute to positive inflow of cash.
Entity
Entity is any of organizations and individuals, that the enterprise interacts with. It includes clients, suppliers, employees and investors, as well as government agencies.
Flow
Flow describes enterprise's relationship with another entity. A flow is a simplest exchange of one resource, that the enterprise possesses, to another one, which it wants instead. Flows determine conditions, on which the enterprise accepts liabilities. It is assumed, that goods or services are completely interchangeable within each side of the exchange. The assumption is important for correct processing of the flow-related events in different accounting charts.
Storage flow is a special type of exchange, when the enterprises gives away and receives back the same resource. Except obvious storage examples for products or raw materials, most bank and stock broker accounts are also storage flows.
Transfer
Transfer links real-life events to relationships, which the enterprise has previously entered. The term itself implies, that there are a source and a destination. Other important attributes are a date and an amount. A notable quality of exchange-driven accumulation system is, that type of goods or services being transferred is unambiguously determined by the pair of flows. If the source produces a different resource, than the destination consumes, the transfer is invalid and will be blocked. This way the system prevents "meaningless" transactions from ever being registered.
The system uses exchange rates of both flows to recalculate their states after each transfer, but the states are not balanced and demonstrate raw financial position of the enterprise. We process legal events separately from their accounting meaning. This will allow to have as many accounting interpretations of the same set of legal facts, as needed. As a positive side effect, this should also improve system performance under pressure. Since computation-heavy accounting tasks can be deferred until load falls.
Accounting chart
Accounting chart is a system of accounts in which total debits always equal total credits. There may be many different accounting charts, each identified by a functional currency and a set of rules to determine value of each economic resource, that the enterprise possesses or owes.
Transaction
For accounting purposes we differentiate two types of objects: monetary and non-monetary. The former are universally acceptable as a measure of other objects. For non-monetary objects value exists only in the moment of measurement. Following historical cost accounting concept, we move object's value together with the object, until we have conflicting estimates of both sides of a flow (or exchange). This moment is usually referred to as revenue recognition.
