Genesis of Accounting Profit: A Dialectical Approach

Critical Perspectives on Accounting (2002) 13, 463–476 doi:10.1006/cpac.2002.0545 Available online at http://www.idealibrary.com on

GENESIS OF ACCOUNTING PROFIT: A DIALECTICAL APPROACH M ASAYA F UJITA Faculty of Economics, Kyushu University, Japan This paper intends to explain the genesis of accounting profit from the viewpoint of dialectical materialism. Here accounting profit means the expression-form of valuechange or surplus which is produced by human beings’ activities. In other words, it is a form of alienation. One of the characteristics of this paper is to try to criticize accounting from the viewpoint of accounting, not economics nor sociology. The meaning of criticize here is to explain the rationality of the existence of accounting profit, i.e. make clear the reason for the birth and development of accounting profit, because the affirmation by the explanation of rationality means the negative explanation at the same time. Accounting profit is a balance concept and, therefore, it must be computed according to a computation structure, i.e. bookkeeping, single or double. Some writers assert that accounting is so subjective as to change profit as accounting likes. However, what is asserted in this paper is that one cannot help using the computation-structure of bookkeeping, in book or in brain and single or double form, to measure income and it is difficult to change accounting arbitrarily. The reason why transaction cost cannot help becoming the basis of valuation in double bookkeeping is explained. Needless to say, holding gain or money-value change should not be ignored. However, these problems should be discussed more as a development of accounting profit, based upon the part which is dealt with in this paper. c 2002 Elsevier Science Ltd. All rights reserved.

Problems of Some Approaches Critical accounting in Japan has had a different agenda from that in the West (Boland, 1989; Jinnai, 1990; Tanaka, 1990; Ryan et al., 1992). It is quite important to briefly clarify this. In Japan, the critical approach has mainly prevailed in financial accounting. We are therefore restricted to this field (Hopper et al., 1989). Needless to say, one task of traditional accounting theories is to develop more reasonable ways or means for accounting objectives. However, radical or critical accounting theorists cannot be contented with this and have tried to analyse some classical and institutional relationships of accounting practices and society. In Japan, some people have also been engaged in this field from the viewpoint of Received 14 October 2001; accepted 25 November 2001

463 1045–2354/02/ $ - see front matter

c 2002 Elsevier Science Ltd. All rights reserved.

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Marxism. However, there is little agreement in the definition of what is “critical approach” (Chua, 1989; Sudhir & Michael, 1997). The political economics, that is, the Marxian economics had so strong an influence on the critical accounting research that many accounting researchers have been interested in the difference between both. First, what is the object that the accounting researcher researches into? Is it different from or similar to one of the economics? The object of political-economics is capitalistic societies and the role of it is to analyse the movement of society, while that of accounting research is the accounting praxis of business. It does not means that accounting praxis has nothing to do with economic matters, but sets the object of the research. What is the accounting praxis of business? How do you research into it? Some put a stress on the function that accounting makes up a likely excuse for capital accumulation of a company such as the researchers of the Super Structure approach in Japan (Jinnai, 1990). It is quite interesting and significant to reveal the misspecification by big business. However, from the viewpoint of methodology, it seems to me that a trick is concealed unconsciously. For in this style, a major role is given to something such as capital accumulation but not accounting. Accounting is assumed to be only the means to realize some specific purposes that the drive to capital accumulation gives. At the same time, accounting is regarded as something like a sheet of white paper, the colour of which is changeable by the painter’s intention. It means that accounting as an independent discipline is also denied. Thus this approach denies accounting as an historical existence. They must assume that accounting itself is non-historical like technology or an abacus. Therefore as an abacus it can work for any calculation object in any society, accounting also can do so for any foundation. Although they appear to have a strong stress on the class character of accounting, they deny the historical and class character. They may be able to analyse society, but they cannot explain accounting. Although they have to analyse accounting, their approach results in the effect that they neglect what they impose on themselves. I am sure that the purpose of accounting research is not to prove that accounting is neutral. Therefore the function approach must be avoided. The next problem is how to grasp the accounting praxis. Where can you find accounting praxis? In a company, people keep records, process data, and so on. Can you see accounting praxis as a whole? Can you obtain a concept about the praxis? It must be impossible to do so. Eventually, the accounting principles that companies should follow represent the accounting praxis. These principles include not only accounting standards but also custom, and so on, which are called accounting techniques here. Making an analysis of them is the job of accounting research. But we meet a difficult problem at the start. It is that the accounting technique is based on rigid measurement structure (double-entry bookkeeping), which appears insensitive to social and historical matter, because it has a mathematical equation. But accounting research as a social science should distil social and historical disposition from the equation. To avoid this difficulty, some researchers have made use of the function approach but the result is a logical failure as mentioned previously.

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The rest try to analyse the structure of the basic accounting measurement technique and prove that it reflects capital movement as shown in Das Kapital II. To do so, they try to make a harmonization between accounting technique and political economics. In other words, they think that the measurement structure itself is based on capital movement, and it seems to them that accounting basic structure has a historical and classic relationship with society. So sometimes they stress that accounting terminology is similar to that of Das Kapital. A typical example in the West is a paper by Bryer (1994). He intended basically to prove in the paper that Marx’s labour value is superior, for accounting, to the marginalist one. To do so, he dealt several problems. Of them he explained capital as the following: As Marx put it, whereas in a system of “Simple Commodity Production” the circulation of commodities takes the form commodity (C)—money (M)—commodity (C), in the capitalist system of production the circulation of commodities takes the form M-C-M’, where M’ equals the original money investment (M) plus the increase over the cash cycle: Money which describes the later course in the movement is transformed into capital, and, from the point of view of its function, already capital. For conventional accounting also, “capital” is money (or money-equivalent) advanced to an entity for the purpose of earning “profit”, and to the extent that the expectation of profit disappears the capital is write-off” (Bryer, 1994, p. 323).

His main point is that capital in political economics and capital in accounting are the same. Is this true? Capital in accounting is capital account or equity account on the credit side in a balance-sheet. This account shows the amount of investment by owners or shareholders. So it functions as a standard for profit and loss measurement. Therefore, it cannot be identified with capital, which is the value of movement for exploitation to the labourer. “Capital” in accounting that Bryer used is cited from the FASB Statement of Financial Accounting Concepts No. 1, Objectives of Financial Concepts. Par. 11 and 13 shown as follows: Par. 11. Production and marketing of goods and services often involve long, continuous, or intricate processes that require large amounts of capital, which in turn require substantial saving in the economy. Par. 13. Business enterprises raise capital for production and marketing activities not only from financial institutions and small groups of individuals but also from the public through issuing equity and debt securities that are widely traded in highly developed securities markets. This part means that business needs lots of money to produce and market goods and services, but does not relate to accounting. Therefore “capital” here is close to that in economics, not to capital account in accounting. In other words, the above citation cannot support his opinion that Marx’ labour value is more relevant for accounting. FASB does not use the words capital account but equity. You can find it in Statement of Concepts 3 as follows:

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Par. 43. Equity is the residual interest in the assets of an equity that remains after deducting its liabilities. In a business enterprise, the equity is the ownership interest. Equity includes capital a/c and earned surplus a/c, but according to the above definition equity a/c cannot be identified with capital in Marx. He distorts a common sense of accounting to make harmony with political economics (Tinker, 1985; Humphrey, 2001). He tries to make harmony in another part relating to depreciation (Bryer, 1994, p. 327). If we. . . consider the case of an instrument of labour during the whole of its period of service. . . we find that during this period its use-value has been completely consumed, and therefore its exchange value completely transferred to the product. For instance, if a spinning machine lasts for 10 years, it is plain that during that working period its total value is gradually transferred to the product of 10 years (Marx, Capital, Vol. 1, p. 311).

From this description he asserts that Marx advocated the historical cost base and straight-line method in depreciation. However, you cannot find anywhere in Capital any explanations about depreciation methods nor historical cost base. This is an example of distorting the concept of capital to make accounting and political economics harmonize. And he seems to understand that depreciation is a calculation of value transferred to products. Is this true? It is not proved in accounting theories that depreciation a/c shows the value transferred (Baba, 1965; Fujita, 1997).

Existence and Existence-Form What to do? (Humphrey & Scapen, 1996) Capital starts with analysing commodities. What should be analysed as the object of critical accounting theory? We are given financial statements. They are a result of accounting praxis that obeys social standards and custom. What is expressed or computed in them? It must be the numerical value at the bottom of the statement, that is, profit. This is our object of research. Needless to say, it is just a hypothesis. However, if anyone can prove the framework of statements starting with this hypothesis, it proves at the same time the rightness of the hypothesis. What is “to compute profit”? To compute something is to recognize something. And to recognize something is a kind of mental work. As you manufacture something by utilizing some tools, you produce the information of profit by making use of a special tool. The special tool is bookkeeping, single or double, which is a data processing system. It collects necessary data to give birth to products, that is, profit information not profit itself. The system of bookkeeping must be devised to be adequate for the purpose, because if not so, you could not compute profit according to this system. Profit cannot be found before it is recognized through this system. This system is a kind of tool for data processing. How it was born and developed to produce its products is an important accounting theory.

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This subject is related to the genesis of accounting profit. Here accounting profit means what is expressed on a balance-sheet and a profit and loss statement which are prepared from accounts. This paper is related to several recent works about epistemology in the field of accounting (Berger & Luckmann, 1966; Tomkins & Groves, 1983; Chua, 1989). One of them is by Hines (1988). In it she asks herself, “Do we construct reality in communicating reality or in recognizing?”. Then one of her conclusions is that generally individuals make things real “by recognizing them as real. Until we recognize them, they are, for just about all intents and purposes, not real.” (Hines, 1988, p. 252) Further, she shows her conclusion in the dialogue of a master and his apprentice as follows: (Apprentice:) “I mean, if they exist, then, even without your recognizing them, they are real.” (Master:) “Oh yes, that is our every day concept of reality all right. But everyday concepts are a cover-up. Did ‘black holes’ and ‘subatomic particles’ exist, before physicists created the idea of them? Of course they did not” (p. 252). In relating to accounting, She writes: “The river—the water in it—only becomes an ‘asset’ of an organization, when the whole organization is sold”. (p. 252) Obviously, she asserts that we make something real by realizing it. However, this contradicts her earlier claims that something only exists when it is recognized. Hines attempts to distinguish between something “unreal” (e.g. a river) before being realized and the reality of assets (after being realized). In so doing, though, she accepts the existence (or reality) of the river before it is realized as an asset. Further, whilst stressing the socially constructed nature of reality, she is unable to deny the existence of some form of reality prior to recognition: “reality does not concretely exist independent of concepts, norms, language and behaviour of people” (p. 257). Not exist unproblematically “out there”, independent of social actors. One cannot deny the existence of the earth before human beings, while it is certain that the earth has significance, such as land, wood, river, etc. after the birth of human beings. As the above quotations show, recognition is never like a mirror, but a kind of work which produces something. Therefore sometimes we may have illusions, as a carpenter misconstructs. One can agree with the above criticism against one of our most fundamental commonsense assumptions that our accounts of reality, rather than reflexively constituting, correspond to a reality which exists independently of our accounts of it (Hines, 1989, p. 53). Thus I would like to distinguish between existence and the existence-form as Marx did between value and the value-form (Marx). Further, here I would like to make sense of the logic of the development of the value-form by him. Because the logic is that the value-form is the form of appearance of value. We may twist and turn a single commodity as we wish; it remains impossible to grasp it as a thing possessing value (Marx, p. 138). Value does not appear as such in the single individual commodity. Only if a commodity enters into exchange relations with others does it acquire, in the exchange-value it has against these others, a form of appearance of its value (Arthur, 1979, p. 68).

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Marx explains this process by using a metaphor as follows: “Let us make this clear with the example of a measure which is applied to commodities as a material object, i.e. as use-value. A sugar-loaf, because it is a body, is heavy and therefore possesses weight; but we can neither take a look at this weight nor touch it. We then take various pieces of iron, whose weight has been determined beforehand. The bodily form of the iron, considered for itself, is no more the form of appearance of weight than is the sugar-loaf. Nevertheless, in order to express the sugar-loaf as a weight, we put it into a relation of weight with the iron. In this relation, the iron counts as a body representing nothing but weight. Quantities of iron therefore serve to measure the weight of the sugar, and represent, in relation to sugar-loaf, weight in its pure form, the form of manifestation of weight” (Marx, p. 148). What we cannot take a look at nor touch as such can appear or be measured by other things to which it relates or made to relate. In other words, what cannot be recognized as such can be recognized through the other thing under a given relation with it. This relation is constructed by the subjective actions of people. Commodities cannot themselves go to market and perform exchange in their own right. We must, therefore, have recourse to their guardians, who are the possessors of commodities. Commodities are thing, and therefore lack the power to resist man. If they are unwilling, he can use force; in other words, he can take possession of them (Marx, p. 178).

The equivalent form is soon identified with the natural form of a particular commodity and crystals into the money-form, which is omitted here. Money is structured by private owners as Marx shows and it cannot exist without us, but it exists as real (Marx, p. 204). If it were subjective, how could there be the poor and the rich? However, the more important problem is how to apply the above approach to accounting. In the following, accounting computation is a central subject. The reason is that what is crucial to accounting is profit (Lukka, 1990), not value theory which has been the topic of political economics (Tinker et al., 1982).

Expression of Value-Change We must assume such an economic human being gets something to eat, consumes it, gets married and has children. To keep himself and his family alive, he must work to get something and consume it. What he gets by consuming his working power, belongs to him, which is a primitive ownership. How this ownership can be transformed under feudalism, capitalism and so on, is omitted here. Anyway, he can use what belongs to him, as he likes. First, he must consume his possession to keep his life. Then, he must have surplus of what belongs to him after keeping his life, for, without surplus, he cannot keep his family. Thus, there must be a promise of the boundary, i.e. ownership in the sense that he may exchange surplus for what he needs. And when he has a plan to extend his life, quantitatively or qualitatively, he has to get more surplus. However, the nature of the surplus is not our concern here. What we are interested in is how to measure surplus.

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When one draws a boundary of ownership and recognizes the movement of his goods within it, caused by the production by making use of nature or by transactions with the external world, one can know the increase and decrease of his property. In the following the example of the case of production makes my explanation complicated and not so useful. Therefore, I would like to suppose the case of transaction as an example and refer to production later. On the basis of ownership, one can suppose that different properties are consumed, produced, exchanged, transformed into one another and so on through economic activities. Well, suppose that you have 100 g of corn first. Next you trade all the corn for 10 lb. of sugar. Then you exchange the 10 lb. of sugar for 120 g of corn. You may get other goods, for example, coal, instead of corn. But though the result is the same, it is more complex to understand the following. When you record these transactions in accounts supposing that the left side of T-form functions as plus and the right side as minus, you can draw them as follows.

corn 100g

a.100g

sugar a. 10lb.

b. 10lb

b. 120g (a,b,:transaction number)

Figure 1.

These accounts show an increase and decrease of goods and at the same time a transformation of your own property, which is caused by economic activities. Therefore, the relation between volume-changes of corn and sugar is a causal one. However, when you observe two accounts separately, you can understand that each account shows the residue as a result of these transactions. For example, the corn account shows that the residual quantity of corn is (100 g + 120 g − 100 g). The sugar account shows that the residue is zero. We call such a system stockaccounting. For example, custodial accounting belongs to this system. Then, when, based on the causal relationship, you try to draw a relationship between these accounts for the purpose of computation of profit and loss, you can see that the corn account can show the value-change of sugar, irrespective of the cause of value-change. That is, you disbursed 100 g of corn for 10 lb. of sugar, and later you received 120 g of corn for 10 lb. of sugar. Meanwhile, sugar underwent a value-change. As a result, a difference can be seen between the disbursement of 100 g of corn and the receipt of 120 g of corn. Thus, the change in market value of sugar is reflected in difference between b.120 g and a.100 g of corn. What has undergone value-change is sugar, not corn. But sugar cannot show its value-change by itself. Although sugar underwent a value-change, it could not increase or decrease in weight. It remains 10 lb. Instead, other goods, i.e. corn of which the volume-change has a causal relation with that of sugar, can reflect the value-change of sugar. In other words, sugar functions as a substance of valuechange, while corn functions as its reflection.

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Let us add another transaction by supposing that 120 g of corn is changed for 12 lb. of sugar. Both accounts will be as follows; corn b.

sugar

100g

a. 100g

a. 10 lb

120g

c. 120g

c

b. 10 lb

12 lb

Figure 2.

Let us observe these accounts from the opposite point of view. You disbursed 10 lb. of sugar for 120 g of corn and later received 12 lb. of sugar for 120 g of corn. You can understand that the difference between 12 lb. and 10 lb. of sugar reflects the value-change of 120 g of corn, irrespective of the cause of value-change. In this case corn functions as the substance of value-change, while sugar functions as the reflection of the value-change of corn. Generally speaking, the value-change of something cannot be shown, i.e. it is not known in terms of the quantity of change in itself, but it is reflected in the quantity of change of other goods involved with it. By way of a metaphor the previous explanation can be shown as follows: suppose you have several lumps of iron and several bundles of cotton. You cannot show the weight of a lump of iron in terms of iron, but you can show its weight in terms of cotton if you use a method such as balancing them on scales. You will succeed in showing, for example, that the weight of a lump of iron is five bundles of cotton. Earlier I gave an example of an exchange of corn and sugar. But this idea is useful not only for trade, but also for production. For instance, suppose that you sowed 10 grains of corn seeds in spring and reaped 100 grains of corn in autumn. You can compute the profit of 90 grains by deducting 10 grains from 100 grains. You can understand that the difference of 90 grains reflects the productivity of your land and your labour. In this case the productivity of the land is the substance of the value-change and corn functions as a means of its reflection. This system might be developed for an agriculture and industry accounting system, which is omitted here. However, just one point that I address is that you cannot compute the real cost of land or nature for corn production. Sunshine, rain, wind and so on are real costs for agriculture and industry. But you cannot recognize them because you do not pay. It is the causal of environmental problems. The above approach illustrates the limit of a human being’s recognition and the wrong illusion of accounting (Tinker, 1984; Dillard, 1991). The next problem is how to compute the differences between 120 and 100 g of corn to recognize the value-change of sugar. Let us refer back to Figure 2 again to keep the example simple. In this figure how do you compute the differences between 120 and 100 g by using the corn account? In order to compute the differences, you have to calculate as follows: b.120 g– a.100 g = 20 g. It is not necessary to consider the quantity of stock at the beginning (in this case 100 g), because it is necessary to calculate the difference between a.100 g of corn (which one traded for 10 lb. of sugar) and b.120 g of corn (which one received

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after trading away the 10 lb. of sugar) in the above corn account, which reflects the value-change of sugar. However, although the stock at the beginning is unnecessary for computation, it is necessary for transaction, because a.100 g of corn cannot be disbursed to be exchanged for 10 lb. of sugar without the investment at the beginning. How will one solve it? The stock at the beginning must be neutralized or counteracted by subtracting the same quantity, 100 g. corn Stock at the bgn. 100g b. 120g

a. 100g d. 100g net 20

Figure 3.

Therefore you have to record d.100 g on the right side of the corn account for neutralizing. And you can compute 20 g of the net increase which shows the valuechange of sugar. You will see that this method is the computation of subtracting the stock at the beginning from the one at the end, which is called the stock-comparison method. And you will understand the reason why you can get profit or loss by stockcomparison, and you may see that this primitive stock-comparison method will develop into a balance-sheet. Further more, I hope you can understand that d.100 g operates as a counterbalance (it is called an “original assets” account here) for the computation of the net quantity of increase or decrease which will develop into a capital and liability account later. The value-change of sugar, the cause of which we are not concerned with here, cannot be recognized, though it exists. It can be recognized only as the net increase of corn. In other words, the value-change of the one can be made real through the net change of the other good. In this sense, when there is no exchange in the above example, any holding gain cannot be expressed. And one cannot know which part of the corn constitutes the net increase, even if one were to analyse it with a microscope. It can be known only by the computation of subtracting the stock at the beginning from the one at the end and, therefore, it can only be recognized through a computation structure of accounting, i.e. accounting profit. Thus, accounting profit is an expression-form of value-change. In the same way, you will be able to quantify the net increase or decrease of sugar which reflects the value-change of corn. In this case corn functions as the substance of value-change, while sugar functions as the means of expression of the value-change of corn, though I omit the explanation. So, in the above system corn functions as a substance of value-change, and at the same time it functions as a reflection of value-change of sugar. Corn has a dual function as a substance of value-change on the one side and as a means of expression of value-change on the other side. Sugar has the same dual functions. The profit and loss in the above transactions is the total quantity of the net increase or decrease of corn and sugar; it is expressed in quantity units, like, for example, 0 g of corn + 2 lb. of sugar.

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In the above example I have dealt with the transaction of only two kinds of goods, but this analysis is also useful in the case of more than two goods. All goods have a dual function in this system, and profit and loss is the total quantity of the net increase or decrease of all goods. I call the above system a plural-means of expression accounting system. In this system you must compute the differences between the stock at the end and the beginning of the trading period to recognize profit or loss. By the way, in this system anything which cannot be recognized as stock cannot become an object of this system. Therefore, any service which has no stock-form, for example, working power, is not recorded. Thus, this system must be a kind of single-entry accounting system. The above is shown logically and the validity for it can possibly be tested by historical evidence. We can cite some Assyrian records from around the seventh century B.C. (C.H.W. Johns, from Goldberg, 1965, pp. 206–210). The translator comments as follows: The owner of the estate supplies to his serfs, who are partly smaller farmers on their own account, partly his servants, a large proportion of their stock. Thus we find the same officials advancing corn, oxen, sheep, oil, wine, & c to people on precisely the same conditions as the money is here advanced. It was the interest, the duty, of the landlord to find these things for his farmers for a proper time. They were bound to return them at the end of the period for which they had been furnished. They were bound to return them uninjured, or in full measure, or pay for them at market rates. If they retained them beyond the proper period they paid a fine, for the prolonged use of them. The money advanced may have been in lieu of these corn and stock allowances, or for businesses other than farming. The payment of wages is possible. It seems more probable that the borrowers were commissioned to undertake some remunerative works and furnished with the capital. It must have been remunerative or the money could not be returned. It could not be mere wages nor keep for that could not be expected back. If, however, these borrowers had been farmers of the royal estates and the lenders royal stewards, all is plain. The money was advanced to work the farm, repaid from sale of produce, when also the farmer paid himself for his labour and made his profit. Of course if the farmer had the capital to expend on the farm he would not borrow. On other hand, if he had no capital to carry on till harvest, he did not go to a money lender and borrow at the ruinous Oriental rates, his landlord advanced the capital and he repaid when he sold the crop (pp. 206–207).

Goldberg introduces an interesting record as follows: (EX-1) “Dannai lends 200 sheep, 150 goats, 230 yearling lambs, in all 550 small cattle, to Iahutu, Ilumukin-ahi and another. They are to return the animals in a certain month, or pay. Dated, the 7th of Aaru, B.C. 673. Seven witness.” (p. 207). Firstly, these “documents” were recorded in kind (Goldberg, L, p. 207) as (EX-1) shows. Secondly, what had been borrowed was returned in kind, not in money. The translator’s comment is as follows: It is noteworthy that although three men are named as receiving the grant, only one, Iahutu, seals the acknowledgment the scribe has added up the numbers incorrectly. It is clear that here the animals are consigned to the care of a head herdsman or shepherd. On what terms we may ask? He had to restore them or pay for them and take all due care of them in the meantime. What profit had he, or was he simply a hired servant? It seems to me that a well-known rate of profit was allowed him, which lay at the root of the fine he had to pay for retention of his charge overtime. I think he took the cattle out to pasture, and had to bring them back and then was paid (p. 207).

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From these comments, one can understand that profit was computed by the differences of the animals borrowed and returned, which must have been computed by a kind of stock-comparison because they computed the difference of sale and cost by profit and loss account. Needless to add, the above relates to farming, not trade. However, as I explained, the example from agriculture supports my thesis to some extent. Well, let us select corn as the only means of expressing the value-change of any other goods. The reason why only one means of expression is selected will become evident in the result. Then you can get two kinds of accounting systems as follows. corn Stock at the bgn 100g b. 120g

sugar a. 100g

a. 100g

b. 100g

Figure 4.

corn stock at bgn 100g

sugar a. 100g

a. 100g

b. 120g

b 120g

Figure 5.

Figure 4 represents a so-called single accounting system and Figure 5 represents a double-entry accounting system. In the former (Figure 4), the value-change of sugar is reflected in the net increase of corn, while the value-change of corn is reflected in the net increase of sugar. This system is basically similar to Figure 2 where one good functions as the substance of the value-change and at the same time as the reflection of the other one. As a result, the single-entry accounting system cannot make it clear which goods make profit. In the double-entry system, the value-changes of any goods other than corn are expressed in the net increase or decrease of corn as the only means of expression, which is the function of money. In other words, corn is selected as money from all other goods by chance. Such a system can be called a single-means of expression accounting system. Even if one substitutes money and goods for corn and sugar in Figure 5, respectively, the nature of this system is not changed. The result is as follows: money stock at the bgn 100g b. 120g Figure 6.

a. 100g

goods a

100g

b.

120g

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If you have to deal with more kinds of goods than two, you will find that the double-entry accounting system can show which goods make profit and how much they make. The reason why the first form of a double-entry accounting system was venture accounting (Erfolgsrechnung an die Partien) in early Italy might then become clear. In other words, one can see that the development of accounting in a double-entry system was the result of the administration for venture in terms of profit and loss. In this double-entry accounting system, money is the only means of reflecting the value-change of any other goods, while its own value-change of money cannot be reflected in this accounting system. As a result, as will be appreciated, one of the important problems in money value-change is how to restructure the accounting system to measure the value-change of money. The reason is that double-entry bookkeeping cannot express the value-change of money from the viewpoint of the structure of computation, as has been shown earlier. And at the same time, any value-change of goods without exchange also cannot be expressed. Even though holding gain is taken into consideration, the total amount of accounting profit cannot be changed. Thus, this problem must relate to a pattern of the periodical distribution of accounting profit as Edward and Bell (1967) showed, which is omitted here. Conclusions We can now draw some general conclusions about accounting from this example. The value-change of something could not be reflected by itself, but through the change of other goods involved in it. However in double-entry bookkeeping, what undergoes value-change can express the value-change of itself in terms of the other goods, i.e. money as the goods account in Figure 6. Here profit and loss accounting is born. However, it should be noted that, even though the profit and loss account expresses the value-change in terms of money, it can only explain the cause of the net increase of money. In other words, though money (wheat, for example) functioned only as an expression means of the value-change of the other goods (sugar) originally as in Figure 6, now the net change of money itself has come to be profit and loss, while the goods which undergo value-change have come to show the cause of the change of money. The relationship between the objective and the means for achievement has been reversed. Thus, in double-entry bookkeeping, the profit means the net increase of money regardless of any causes and at the same time the receipts and disbursement, except financial transactions, mean revenue and expenses, respectively. In other words, in the former case, the net increase or decrease, which express the value-change of another good, is shown concretely in the quantity of goods and, therefore, it reflects the profit as a result of causal transactions. On the other hand, in double-entry bookkeeping, profit is the net increase of money itself and, therefore, it shows that the money invested returns with profit after economic activities. It is also noted that double-entry bookkeeping does not reflect but generates the idea of capital movement. Earlier it was said that 100 g, as a counterbalance for the computation of a net quantity of increase or decrease in Figure 3, i.e. the “original assets” account, would

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develop to a capital and liability account later. Why is the “original assets” account divided into these two? Accounting history shows credit and debit entries were used before Italian double-entry bookkeeping was established and there is little or no historical evidence of their origins. However, one can guess that a distinction between the capital account and the liability become logically necessary. That is, if the interest need not be paid for liabilities, one need not distinguish between them. If the interest is a dividend of profit, the difference between the capital account and liability must be caused by the difference between different investors of the same capital investor and creditor. In other words, there is no necessity for the distinction between both. However, if one must pay the interest for liability, one must classify it as an expense to compute profit for capital investors. As a result, in computing stockcomparison computation for accounting profit, one must discriminate between the capital account and the liability, as follows: (assets–liabilities)–capital, which means that profit is the increase of the owner’s equity. Thus, the division of surplus into interest and profit result in the division of the “original assets” account into capital account and liability. One important feature of the above is that the capital account was developed to operate as a subtracting item to compute profit. In other words, the relation of both sides of the balance-sheet is neither duality of something nor something doubled, but of subtracting and being subtracted. After I criticized several methodologies of radical accounting theories, I started with analysing accounting profit as a hypothesis, described the development of the recognition of accounting profit deductively and ended in obtaining a structure of financial statements, which is a contemporary form of recognition of accounting profit. The development process of the recognition is one of alienating. The starting point is accounting profit and the goal is accounting profit also. However, accounting profit at the end is not similar to the one at the start, but is one which has the reason and inevitability of its existence. This approach may be called a dialectical one. References Arthur, C., “Dialectic of the Value-form”, in D. Elson (ed.), Value (CSE Book, 1979). Baba, K., Depreciation, (Chikura Shobo, 1965) (in Japanese). Berger, R. L. & Luckmann, T., The Social Construction of Reality (Harmondsworth: Penguin, 1966). Boland, R. Jr, “Beyond the Objectivity and the Subjectivity: Learning to Read Accounting as Text”, Accounting, Organization and Society, Vol. 14, No. 5/6, 1989, pp. 591–604. Bryer, R. A., “Why Marx’s Labor Theory Is Superior to the Marginalist Theory of Value: The Case from Modern Financial Reporting”, Critical Perspective on Accounting, Vol. 5, 1994, pp. 313–340. Chua, W. F., “Theoretical Construction of and by the Real”, Accounting, Organization and Society, Vol. 11, No. 6, 1986. Chua, W. F., “Radical Development in Accounting Thought”, Accounting Review, Vol. 61, 1989, pp. 601–632. Davis, S. W., Menon, K. & Morgen, G., “The Images That Have Shaped Accounting Theory”, Accounting, Organization and Society, Vol. 7, No. 4, 1982, pp. 307–318. Dillard, J. F., “Accounting as a Critical Social Science”, Accounting Auditing & Accountability Journal, Vol. 4. No. 1, 1991, pp. 8–28. Edward, E. O. & Bell, P. W., “The Theory and Measurement of Business Income”, Barkley and Los Angels 1967.

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