When Debit=Credit. The balance constraint in bookkeeping, its causes and consequences for accounting
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.
|Keywords||Axioms for bookkeeping, duality, bookkeeping system design, mathematics, of record keeping.|
|Series||ERIM Report Series Research in Management|
|Journal||ERIM report series research in management Erasmus Research Institute of Management|
Renes, S. (2020). When Debit=Credit. The balance constraint in bookkeeping, its causes and consequences for accounting (No. ERS-2020-005-FA). ERIM report series research in management Erasmus Research Institute of Management. Retrieved from http://hdl.handle.net/1765/127710