[Introductory
note: Professor Louis Goldberg was educated at the University of
Melbourne, where he received the degrees of BA, MCom, and LittD
and where he was Professor and Head of the Department of Accounting
from 1955-73.
Before he became the first full-time academic in
accounting in an Australian University in 1946, he had extensive
practical experience in public, industrial, and governmental accounting.
He has written several books and many articles, papers, and chapters
of books. His books include a Philosophy of Accounting, Concepts
of Depreciation, Elements of Accounting, and the AAA
Monograph No. 7, An Inquiry into the Nature of Accounting.
He visited the United States as a Rockefeller Foundation Fellow
in 1955 and as a Fulbright Fellow in 1963, when he was visiting
professor at Baruch College. In 1970 he was visiting professor at
the University of Florida.
note: In his lecture Professor Goldberg points
out that the work of accountants can be discerned as conforming
to a number of patterns applicable to the tasks of recording, measurement,
and reporting, and that the complexities of present-day accounting
arise from the interrelation and interaction among these patterns.]
I am concerned -- and have been concerned for some years -- in studying
accounting theory, especially with the implications of one word --
the word "why." That is, I am interested in explanations,
and, as I see it, a theory is some form of explanation in terms of
a kind of generalization which is applicable to more than a very few
phenomena.
The tide of the lecture, as announced, is -- perhaps rather vaguely
-- " Patterns of Accounting Activities"; but what I really
mean, I suppose, is "patterns of accountants' activities."
I have one basic premise, with which I think you'll agree, and that
is that accountants are people. (And most of them, in my experience,
are, really nice people.) They are people, and, as people, they do
things; and the things they do are what I am interested in considering.
Accountants are measurers, recorders, reporters, and interpreters.
This does not mean to say that they are bookkeepers, but they are
responsible for designing and installing records and having them maintained.
They are responsible for the preparation of reports derived from the
accounting records and data, and they carry out the function of interpretation
of reports, transactions, and events. What is it, then, that accountants
record and measure and report about and interpret? Let us try to look
dispassionately at what accountants do in their day-to-day activities
-- or at least with as much uncolored attention as possible; I don't
suppose that we could be completely unbiased, but we can try to be,
and we can try to avoid emotional and evocative impulses arising in
us to color or distort any sort of picture we get. If we do that,
then I think that some patterns of accountants' activity can be discerned.
One of these patterns was pointed out in An Inquiry Into the Nature
of Accounting (1965 American Accounting Association Monograph
#7) and it may be of interest to indicate this because it may have
some bearing on part of the discussions that are currently taking
place by your Financial Accounting Standards Board on the "conceptual
framework for accounting and reporting."
The pattern of accountants' activities that I referred to in this
book is that of being based upon events: the phenomena with which
the procedures and practices of accountants are concerned relate to
happenings that take place--occurrences -- and I called them "events."
Any accounting report, in whatever form and in whatever terms it may
be expressed, is a summary of things that have happened or the results
of things that have happened. In the case of an income statement we
have a summary of what has taken place -- the various activities,
transactions, and so on-during a given period. The balance sheet,
or, as it is frequently called nowadays, the statement of financial
position, expresses the results of things that have occurred in the
past. Another report, the statement of changes in financial position,
which we used to call a funds statement, is also a statement of things
that have happened during a period. So it seemed reasonable to me
to seek a unit of activity in terms of which accounting procedures
may be considered to be carried out. The term "event" was
assigned to this sort of individual unitary bit of activity. You can
all think of examples of events: payment of a check, receipt of a
dividend, the deposit of a number of checks in a bank account -- these
are all separate events. Purchase of a commodity, sale of a commodity,
and so on, are all events too.
Not all the events that take place within a given social unit or
economic unit would necessarily be accountable in the sense that they
could be brought into the accountant's procedures. The managing director
drinking his morning cup of coffee is an event, that is, something
that happens, but it does not necessarily have to be brought into
the accounting record. At the same time it is at least conceiv-able
-- and I really think it likely -- that many more events than are
presently accounted for could be brought into the accounting procedure.
I leave that matter open for the time being. For the present we have
this basic unitary notion of events.
The next point is that a series of events -- a minimum of two, but
very often many more -- linked by some common measure and some social
or economic objective into a relationship which has some meaning,
constitutes what I called a "venture." For example, the
receipt of a quantity of goods and its piecemeal issue to various
production jobs until the whole quantity has been disposed of would
constitute a venture. The acquisition of the initial quantity, say,
of 100 yards of material would be one event; the issue of 25 yards
to Job X would be another event; the issue of 40 yards to Job Y a
further event, and so on until the whole 100 yards had been used up.
This series of events will constitute a venture. The purchase and
sale of a particular commodity would be a simple example of a venture.
These examples are simple and straightforward and constitute what
I labeled "determinate" ventures. I used the term "determinate"
because I felt that they had limits, that is, terminal points; each
of them had a beginning and an end, and we could say, in affect, that
in this sort of venture, one starts the venture, and after a series
of events the venture is finished. But many series of events are not
so easy to determine, in the sense of setting boundaries or limits
to them. To give an example, consider the acquisition of shares of
stock in a company. Dividends are received on the shares, maybe regularly
or maybe irregularly; the amounts of the dividends may be subject
to fluctuations. The shares may be disposed of after a short period,
or they may be held for a long time, or they may be transferred from
one shareholder to his heir or to a trustee of his estate after his
death for the purpose of holding them as a charitable trust in perpetuity.
In a case like this the series of events does not have a determinable
future end. And a number of ventures are of this indeterminable character.
Hence, the second type of venture that I distinguished was that of
"indeterminable" ventures.
The difference between a determinate venture and an indeterminable
venture is one of degree and, basically, one of time. There will come
an end to that shareholding eventually when the company goes out of
existence; there will be an end to a particular holder's shareholding
in a company, for when he dies his shareholding will cease. But it
is nevertheless convenient to make a distinction between determinate
and indeterminable ventures when we are thinking of the activities
of particular people or legal persons. The activities of a corporation,
until it has ceased to operate or until cessation is envisaged, may
be regarded as comprising an indeterminable venture. When a corporation
is started, it is normally hoped that it will go on indefinitely.
But at some time or other, at an indeterminable point in the future,
it will end. So, within this indeterminable venture which comprises
the life of a corporation-or any other social enterprise-there is
a vast number of determinate ventures going on day by day, week by
week, month by month, starting and finishing, overlapping and interacting.
What the accountant is trying to do is to segregate these ventures,
to record the events in each of them, and bring the events into relationships
with each other. At the same time he has to be able to keep the record
for each venture separate from those of other ventures so that the
story of each venture may be picked out and told, as well as the story
of the combination of ventures for a given period -- for example,
yearly. From this point of view an income statement becomes a summary
of ventures, some of which have been started during the period, some
of which have been completed during the period, and some of which
are incomplete at the end of the period. The accountant's task is
to sort all of this out.
Ventures are of different kinds, and I was able to distinguish five
types. There may be more, but I think there are at least these five.
The first are trading ventures -- the acquisition and sale
of a commodity, with a resulting profit or loss on the venture. The
basic pattern is that a commodity is acquired at a cost of, say, x
dollars and sold for y dollars, the difference between x
and y representing a profit or loss. The fact that in many
cases there are additional charges-costs of manufacture, distribution,
advertising, selling, buying, freight, and so on-to be taken into
account means that the venture is more complicated in detail, but
it does not affect its basic pattern, namely, that you are buying
something and selling something. You may be converting the thing you
buy into the thing you sell by manufacture or by relocation, but it
is still a trading venture. This pattern occurs in accounting procedures
under a variety of disguises, apart from straightforward purchase
and sale: it occurs in consignment and joint venture accounting, job
cost finding, liquidation, and realization accounting (in the case
of bankruptcy).
Second, there are usage ventures. An article is acquired
and is used for a more or less specific objective, and the elemental
pattern is of this form: of 100 units of a commodity, 40 are disposed
of on objective A, 25 on objective B, and 35 on objective C, so that
all the units are disposed of. This pattern will be recognized as
applying to inventory records, live-stock accounts, and of course,
long-term asset accounting. What is usually called depreciation could
be ex-pounded in this way be saying that when a machine is acquired
it represents a certain quantum of units of service which are allocated
on a usage basis to relevant objective, and in many cases time is
an approximation to usage. That doesn't explain all of depreciation,
but I suggest that it is one way of expressing the notion of depreciation.
The main point is that usage ventures are distinct from trading --
ventures: they are different kinds of ventures.
Third, there are financing ventures. Resources are obtained,
usually in the form of monetary resources but not absolutely necessarily
so, and a commitment is entered into for their subsequent return,
in the same form or maybe in a different form, with or without some
interim compensation for having had them made available. This type
of venture covers quite a wide range, but in each case there are three
fundamental events or elements that can be distinguished: the obtaining
of resources, the eventual return or commitment for return, and, usually,
some compensation in the meantime. For example, in an ordinary trading
pur-chase of goods there is, first, the event of obtaining the goods
and the creation of the liability to pay for them; second, there is
the discharge of that liability. The third element may arise if interest
is charged on the commitment; this arises particularly if there is
a promissory note or bill of exchange as an intermediate step between
incurring the liability and discharging it, but it may also appear
as discount for prompt payment. Hence, I would distinguish between
the trading venture, which commences with the acquisition of the goods,
and the financing venture, which begins with the creation of the liability
or commitment and ends with the discharge of that commitment. Other
examples would be the issue of shares of stock in a company, and of
course, straightforward bank loans and any form of borrowing which
involves repayment at the end of a certain period (or the period may
be uncertain in an indeterminable venture ) and the payment of interest
for the use of the resources.
Fourth, another type, which I thought I could see was that of service
ventures. A natural or acquired skill of a personal nature is made
available for the benefit or enjoyment of others for a reward, the
reward being financial or nonfinancial. This type of venture covers
not only professional activities of various kinds -- doctors, dentists,
accountants, lawyers -- but also those of tradesmen, agents, salesmen,
sportsmen, entertainers, artists, domestics, and all those cases where
personal services are involved. A person makes his or her skills available
for a reward, and this constitutes a type of venture.
The fifth type, which I called custodial or fiduciary
ventures, arises where resources are placed under the control or management
of person or group of persons who, while not the beneficial owner
of them, is or are responsible to another or to others for their safekeeping
or disposal; the custodian is not the beneficial owner of the resources
but has to account to others for them. This type covers trusts, charitable
and educational foundations, receiverships and liquidations, and in
the broad sense some governmental activities. At the same time some
aspects of the accountability inherent in custodial ventures are present
even in private enterprise corporations.
Now, in any given set of circumstances, a number of ventures of
different kinds are normally being undertaken at the same time, and
the character of some of the ventures may influence ventures of another
kind. For example, a decision to acquire a machine or a building may
be affected by past or, perhaps, prospective financing ventures. "Yes,
we'd like to have this building, but where is the money to come from?"
To have the building is to enter into a usage venture, but this has
to be related to a financing venture. So, one of the accountant's
tasks is to relate each venture to the others that are going on at
the same time and to determine the distinctive characteristics of
each venture from those of the others. This is not always an easy
task, but it is one that accountants have to face up to and, of course,
do face up to, sometimes successfully and, maybe, at other times not
so successfully. However, it is necessary as a preliminary to sound
decisionmaking; I beg the question here of what is sound decisionmaking,
but if we can take it as given that there is such a thing as a sound
decision, it is necessary as a preliminary to isolate each venture
from the others, and it is this aspect of isolation which constitutes
a basic feature of the recording process in accounting.
This pattern of events, ventures, and types of venture is a pattern
basically related to the recording function. What is the significance
of this events/venture notion? It immediately raises the question:
What events are to be recognized for accounting purposes? That is,
it raises the question of the selection of events to be recorded and,
of course, to be subsequently reported upon.
At the simplest level or, say, at the most immediate level, the
only events that are recognized are those that involve cash transactions,
that is, a transfer of cash between persons. This is purely cash accounting,
with which I presume we are all familiar. Next comes the recognition
of debts -- debts owed and debts owing, accounts receivable and accounts
payable -- and this is credit accounting. Now, both cash accounting
and credit accounting are concerned with transactions, that is, events
that take place between people.
After that comes the imputation of values of some sort, that is,
what has come to be called accrual accounting; this has developed
in regard to inventories, depreciation, and so on. When we come to
this stage or level, we are getting into the area of "as if"
accounting, that is, some events are recognized for purposes of accounting
procedures not because they have occurred but as if
they had occurred or as if they will occur. This is the subject
of a number of balance sheet adjustments -- probably a long way behind
you now in your studies.
However, if we follow this direction a bit further, we move on to
what we might call prognostic accounting, recognizing future events;
and to some extent we do this in budgeting, in preparing standard
costs from budgeted figures, in providing forecasts of operations.
To some extent we recognize events and record them not simply because
they happen, and not simply because they have happened, but because
they have or because we expect them to have some relation to other
events that have taken place or are expected to take place, which
relationship will be significant in terms of some venture that it
is desired or required to account for. This may seem involved, and,
in fact, it is; but it boils down to this. We recognize and record
an event not only and not simply because it has taken place, but because
it has some relation to other events. And this relationship with other
events constitutes the notion of the venture.
The events we are concerned with are human activities. They are
not events which occur in nature; they are not natural phenomena which
are operating altogether apart from human intervention. Hence, they
cannot be made subject to the same kinds of experimentation or even
observation as the phenomena of the natural scientist. There is a
human deliberateness about them. But there is a coherence between
the events comprising each venture, and this coherence is a man-made
relationship. Moreover, to a great extent it is the intention to enter
into a venture that constitutes the basis for the relationship which
gives the coherence. In other words, if you look at the accounting
records, you will see that they relate to human activities and human
intentions. So that, while the event is, so to speak the atom or atomic
unit for the accounting process, the more fundamental concept is that
of the venture because it is the venture which gives meaning to the
events. This is, if you like, a teleological interpretation of events
and their coherence.
Now, it is conceivable to widen our present recognition of events;
I don't suppose it is immediately likely, but it is possible to recognize
more kinds of events for accounting purposes than are currently recognized.
For example, it would be possible to account for commitments and obligations
before they give rise to actual liabilities; warranties under which
sales are frequently made are an instance. Bank overdrafts provide
another; rather than, or in addition to, the overdraft position from
time to time, we could account for the limit to which the bank is
prepared to carry an enterprise. The potential maximum claim for damages
under a lawsuit is a further instance. To do this would be, in effect,
to bring some of what are now contingent liabilities into the accounting
system. I feel sure that there would be no serious technical difficulty
in bringing things of that sort into the accounting process. But it
would comprise a difference or a broader recognition of events.
It is of interest, now, to note some of the concepts in the report
of the Study Group of the American Institute of CPAs on Objectives
of Financial Statements, which came out in 1973, a copy of which I
got recently. It states "For purposes of this discussion .. those
changes in conditions, stages or circumstances that affect the enterprise
are defined as events. Events may be exchanges between parties, that
is, transactions. Or events may be occurrences that affect the enterprise
without being exchanges in the usual sense of the word. All business
enterprises engage in related activities aimed at goals. These related
activities are defined as cycles. The overriding and commanding cycle
of an enterprise encompasses all the activities in its life from its
inception to its dissolution. Within that life span there are other
cycles and subcycles of transactions and other events. Some of these
cycles are readily identifiable, others are not." (p. 27) Now
this is very similar to some of the points I have been trying to make.
The report then goes on: "Since the goals of an enterprise and its
earning process involve the use of cash to generate the maximum amount
of cash, earnings cycles should relate cash receipts and disbursements
... An earnings cycle can be classified as completed, incomplete or
prospective." (pp. 27-8)
They define a completed cycle as requiring three conditions: "(1)
a realized sacrifice (an actual or highly probable disbursement of
cash), (2) a related realized benefit (an actual or highly probable
receipt of cash), and (3) no further related substantive effort."
And: "The earnings cycle is defined as incomplete (1) when a
realized sacrifice or a benefit has occurred, but the related benefit
or sacrifice has not been realized, (2) when both sacrifice and benefit
are not realized, or (3) when the effort has not taken place. "
(pp. 28-9) I must confess I am lost here when they talk about the
effort not having taken place. However, they go on: "An earnings
cycle may be defined as prospective whenever plans have been adopted
or unilateral actions taken but neither a sacrifice nor a benefit
has occurred. Examples of prospective earnings cycles are the receipt
of an order, a purchase commitment, or the adoption of next year's
budget." (p. 29)
Now there are similarities between my position and that of the Study
Group, but when I think of an "earnings cycle," I tend to
think of something that goes round and round -- and maybe the front
wheel might wobble a bit. And the report itself states that "some
members of the Group believe that the notion of an earnings cycle
as described herein represents a simplistic and/or impractical approach
to the measurement of accounting earnings." (p. 29)
I take it that an earnings cycle is not the same as a venture because
of the narrowing of the notion of an earnings cycle to cash. This
basic adherence to a cash interpretation might, perhaps, equate the
earnings cycle to a financing venture. But there are other kinds of
ventures, surely. The earnings cycle, as a basis for the determination
of objectives of financial statements, is, I feel, too narrow. Frankly,
I can find only half a meaning in earnings cycles, yet this report
relies to a considerable degree on the notion of cash flow generation.
Although the Study Group itself was somewhat divided on the question
of earnings cycles, and, in fact, the report goes on to say: "there
is no doubt that a pure earnings cycle is rare in the activities of
corporate enterprises" (pp. 29-30), it does adopt it. "The
Study Group members recognize these difficulties. However, the majority
of the Group believes that the earnings cycle concept is useful because
the classifications derived from the concept assist users in evaluating
uncertainties and the earning power of the enterprise." (p. 30)
Earlier, on the first page of the text of the report, they had said
that "users' needs for information, however, are not known with any
degree of certainty." (p. 13) This sort of admission or recognition
of lack of knowledge on this point is not uncommon in accounting literature
nowadays.
I am heartened in my noncomprehension of this part of the Study
Group's report by comments in the recent Statement of Position on
Conceptual Framework for Accounting and Reporting, issued by the Accounting
Standards Division of the American Institute of CPAs. This document
was prepared in response to a request by the Financial Accounting
Standards Board for "views ... on the objectives of financial
statements and on the qualitative characteristics of reporting set
forth in the Objectives Study." (FASB Discussion Memorandum,
p. 2) The Accounting Standards Division, in its position statement,
says that it "does not have a good understanding of the implications
of the distinction between complete and incomplete earnings cycles,
and therefore it questions the emphasis ...on complete versus incomplete
cycles." (P.6) Well, I am pleased to see that other people besides
myself are at least a bit puzzled by this.
To sum up to this point I suggest that this recognition of things
as really taking place -- events, ventures, and the several types
of ventures-is what accountants are properly concerned with and constitutes
a pattern of accountants are doing.
This first pattern is related primarily to selection and recording
of events. But events are measured, and the second pattern is basically
related to measurement, although selection also enters into it. There
are four categories of "accounting" in respect of measurement.
First, there is what at we might call precision accounting.
Some things can be and are accounted for with precision. Examples
are cash, accounts receivable, accounts payable, bills of exchange,
quantities of inventories, quantities of investments, i.e., numbers
of shares or stock units, etc. These can be and are accounted for
precisely, often to the last unit.
Second, some things can be accounted for-with reasonable assurance -- within
a range, though not precisely. For example, while accounts receivable
are recorded precisely, their collectibility is not known with precision,
but with experience we can get a basis for an acceptable approximation;
hence an allowance or provision for doubtful debts is raised which
is usually accurate within a range or, as the statisticians put it,
within limits of tolerance. Hence this category may be termed tolerance
(or range) accounting. It applies to at least part of the monetary
(but not physical) accounting for inventories, often to part of the
accounting for fixed assets, and to such things as provision for pension
entitlements and long-service leave and so on.
Third, beyond the first two categories, there is what I tentatively
call value accounting, but I wish I could think of a better
term for it. This category comprises things that cannot be accounted
for precisely, or even within a reasonable range, but, rather, only
in terms of somebody's evaluation of them at a given point in time.
This applies to part of inventories (the part on hand at the end of
a period which has to be valued after stocktaking), part of fixed
assets, especially if they are revalued but often even if they are
not, to goodwill, and so on. The main point here is that the basis
of valuation is outside a range and perhaps not even related to a
range. Perhaps it is not even based on my knowledge or experience
in a positive sense. I prefer not to say that it is "subjective"
because that would avoid the issue. I think it is essentially based
on "guesstimate" and accepted on somebody's authority --
or somebody's "say-so." It might be called "authoritative"
accounting, except that that term would almost certainly be misunderstood,
because it is not authoritative in the sense of being definite but
only in the sense of stemming from somebody's authority rather than
from somebody's positive knowledge.
Outside these three categories there lies a universe of events and
situations and environmental factors which cannot be accounted for
in monetary or financial terms at all, which may not impinge upon
the activities of an enterprise in a positive economic fashion, but
which may have social implications. Examples of these things, in relation
to a given enterprise, would be human resources---which have come
under a little discussion by accountants in recent years -- organization,
loyalty, environmental impacts and influences, etc. The expression
societal (or socio-economic) accounting might be appropriate
for this category.
Now accountants do very well in the first category -- precision
accounting -- and they do pretty well in the tolerance or range category.
They have some misgivings about value accounting, and they haven't
yet had much to say about or much to do with the societal factors.
But I envisage that it is certainly conceivable that the notion of
events could be broadened to bring these environmental, societal,
and human factors within the province of the accountant's work so
that they become part of the accountant's headaches.
I believe that this schema applies to corporations, charitable,
educational, and religious institutions, and individuals.
Those are two patterns of accountants' activities. There is a third
pattern that you are all familiar with, and it relates basically to
reporting. It is that reports are prepared within a time-reference
-- past, present, or future. Thus, we have retrospective accounting,
in which the accounting product relates to the past, and prospective
accounting, which relates to the future. One could speak of present
or current accounting, but I am not at all sure that there is such
a thing as "the present." What is the present besides the
immediate future or the immediate past? The present is instantaneous
and cannot be grasped. Hence we are, fundamentally, concerned with
retrospective and prospective accounting. I am sure you are familiar
with retrospective accounting, for, in terms of reporting, it covers
the usual income statement, balance sheet, and funds statement. And
you are no doubt acquainted with prospective accounting in the form
of budgeting and other projected statements, or what we may call target
accounting.
In conclusion, when we consider these three patterns of activity
and recognize that when the accountant is carrying out his functions
these patterns are interacting and being superimposed upon each other,
it is small wonder that his job nowadays is getting rather complex.
I dare say it will get even more complex in the future---which is
something you can all look forward to.
