Template-Type: ReDIF-Paper 1.0
Author-Name: Renes, S.
Author-Name-Last: Renes
Author-Name-First: Sander
Title: When Debit=Credit. The balance constraint in bookkeeping, its causes and consequences for accounting
Abstract: This paper studies the balance constraint (debit=credit) in bookkeeping, its
 causes and its consequences for accounting. Balance in the ledger is shown to:
 1) imply balance in journal entries and vice versa; 2) link the value definitions
 in the earnings statement and balance sheet; 3) have direct implications for valuation puzzles encountered in accounting, like accounting for OCI or stock-based
 compensation, and the difference between earnings or balance-sheet approaches to
 valuation. These system-wide effects on accounting highlight a design question:
 why do we have the balance constraint in bookkeeping? Backward-engineering
 shows 6 axioms that logically lead to double-entry bookkeeping. The balance constraint follows from the existence of a residual account: owner’s equity. A class of
 equivalently powerful record keeping systems is shown to exist. These systems use
 double-entry bookkeeping without the monetary-unit assumption and can be used
 to record other outputs of the organization, like societal impact. These systems
 can be implemented in relational databases, a blockchain, or a different technology all together. The discussion covers links with other mathematical descriptions
 of bookkeeping and potential avenues for future research in the mathematics of
 bookkeeping.
Length: 42
Creation-Date: 2020-06-12
File-URL: https://repub.eur.nl/pub/127710/ERS-2020-005-FA.pdf
File-Format: application/pdf
Series: RePEc:ems:eureri
Number: ERS-2020-005-FA
Keywords: Axioms for bookkeeping, duality, bookkeeping system design, mathematics, of record keeping.
Handle: RePEc:ems:eureri:127710