Some formal properties of capital maintenance and revaluation systems in financial accounting

Abstract

Accounting systems are analysed from a theoretical perspective using mathematical methods of analysis and proof, supplemented by numerical illustrations. Earlier work which applied to capital maintenance systems, is developed and extended to encompass full accounting systems, which include valuation systems together with capital maintenance systems. An important possible property of accounting systems is temporal consistency and this requires the existence of two other properties, perdurability and revaluation neutrality. A general theorem is proved, which implies that, of six alternative accounting systems examined, only one, pure historical cost accounting, possesses all of these properties. This analysis is interpreted not as a basis for rejecting alternative accounting systems, but rather as affording an insight into their structures and properties. A particularly important insight is that even within a common accounting system, accounting measurements may not be strictly comparable if they do not share an identical temporal basis.