The Accounting Properties of Economic Events (Part I: A Network Perspective)

Abstract

Accounting is studied in this paper as an evolving artificial language that enables economic agents to manipulate symbolically networks of economic events. Expenditures, expenses, revenues, and cash flows are classes of processes, called actions, which affect the reservoirs of agents’ economic interests, called accounts: physical assets, financial assets, financial liabilities, and earnings. While the independence of actions (causes) from accounts (effects) is widely adopted by accounting scholars, it is systematically violated in all accounting databases. While the structural coupling of physical actions (expenditures, expenses, and revenues) with financial actions (cash flows) is widely discussed by scholars, it remains obscured. Finally, this paper discloses the compositionality of accounting transactions, i.e., the hierarchical structure {flow, [action, (credited account, debited account)]}, which automates the syntactic/semantic control of accounting data and reduces auditing to only pragmatic relevance. These three properties constitute an accounting theory that explains all paradoxes of the current double-entry theory of financial statements and resolves the debates on the causes of the nonarticulation of accounting information that undermines the consensus on the Conceptual Framework. In Part II, this theory is mathematically formalized for making the recording, reporting, and econometrics of complex empirical facts efficient and effective.

Keywords: accounting properties, flow networks, binary syntax vs. double-entry layout, incidence and adjacency relations, FASB/IASB 3D conceptual framework vs. 4D frame of reference

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