The Financial Accounting Model from a System Dynamics' Perspective

Melse, Eric (2006): The Financial Accounting Model from a System Dynamics' Perspective.

Abstract

This paper explores the foundation of the financial accounting model. We examine the properties of the accounting equation as the principal algorithm for the design and the development of a System Dynamics model. Key to the perspective is the foundational requirement that resolves the temporal conflict that resides in a stock and flow model. Through formal analysis the accounting equation is redefined as a cybernetic model by expressing the temporal and dynamic properties of its terms. Articulated in that form the accounting equation is enabled to be defined as a dynamic stock and flow model expressing the two dimensions of the double-entry accounting system. With that formal foundation it is argued that the accounting model is capable to simulate financial dynamics as well as be integrated with models that express operational and world dynamics. Thus we prove that it is possible to design and build a dynamic business model that can meet requirements of management accounting (ex ante, before the fact) as well as financial accounting (ex post, after the fact). We conclude that the dynamic accounting model can be made relevant for strategic planning and control purposes and be integrated within a System Dynamics model designed for such purposes.

• Item Type: MPRA Paper
• Language: English
• Keywords: dynamic accounting model, accounting simulation, System Dynamics
• Subjects: M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M4 - Accounting and Auditing > M41 - Accounting; M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M4 - Accounting and Auditing > M40 - General; M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M2 - Business Economics > M21 - Business Economics

References

Amigoni F.E.C. et al. 1992. ’Planning management control systems.’ In: Emmanuel C. e.a. 1992, 174-214. Published earlier in: Journal of Business Finance & Accounting, 5 (3), 1978, 279-92. Anthony R.N., 1965. Planning and control systems: A framework for analysis. Harvard, Boston. Bjøornenak T. and Olson O., 1999. ‘Unbundling management accounting innovations.’ In: Management Accounting Research, 10 (4), 325-338. Bailey A.D. et al. 1993. ‘Qualitative and causal reasoning in auditing’, In: Creative and innovative approaches to the science of management. The IC2 Management and Management Science Series. Quorum Books, Westport, 67-113. Bianchi C., 1996. Modelli contabili e modelli ‘dinamici’ per il controllo di gestione in un’ottica strategica. Centro Universitario Studi Aziendali (30 Collana di studi economico-aziendali) Milano. Blommaert A.M.M., 1994. Additional disclosure. Triple-entry en Momentum Accounting. Stenfert Kroese, Houten. Chadwick L. 1996. The essence of financial accounting. Prentice Hall Europe (The essence of management series.), 2nd ed., 1990. Daft R.L., 1989. Organization theory and design. West Pub. Comp., St. Paul MN. Emmanuel C., Otley D., Merchant K. (eds.), 1992. Readings in accounting for management control. Chapman & Hall, London etc. Forrester J.W., 1961. Industrial dynamics. Productivity Press, Portland. Geerts G.L., McCarthy W.E., 1999. ‘An accounting object infrastructure for knowledge-based enterprise models.’ In: IEEE Intelligent Systems, 1999 (July/August), 1-6. Geus A.P. de, 1997. The living company. Nicholas Brealey Publishing, London-Sonoma. Gustafsson L., 2000. ‘Poisson simulation—A method for generating stochastic variations in continuous system simulations.’ In: Simulation. 74-5, 264-274. Ijiri Y., 1982. Triple-entry bookkeeping and income momentum. Studies in Accounting Research Vol. 18, American Accounting Association. Ijiri Y., 1986. ‘A framework for triple-entry bookkeeping’, The Accounting Review, Nr. 4, 745-759. Ijiri Y., 1989. Momentum accounting and triple-entry bookkeeping: exploring the dynamic structure of accounting measurements. Studies in Accounting Research Vol. 31, American Accounting Association. Horngren C.T., 1995. ‘Management accounting: this century and beyond.’ In: Management Accounting Research, 6, 281- 286. 25 Horngren C.T. et al., 1996. Introduction to management Accounting. Prentice-Hall Int., Upper Saddle River, 10th ed. Johnson H.T., Kaplan R.S., 1991 Relevance lost. The rise and fall of management accounting. Harvard Business School Press, Boston. Kefford B., 1995. Financial modelling for business decisions. Kogan Page Ltd. CIMA Financial skills series, London. Kieso D.E. and Weygandt J.J., 1995. Intermediate accounting. Wiley, New York, 8th ed. Kaplan R.S., Norton D.P., 1996. The balanced scorecard. Translating strategy into action. Harvard Business School Press, Boston. Kramer N.J.T.A., Smit J. de, 1991. Systeemdenken, Stenfert Kroese, Leiden, 5e druk. Legasto Jr. A.L., Forrester J.W., Lyneis J.M., eds. 1980. System Dynamics. Studies in the management sciences. Vol. 14, North-Holland pub. Comp., Amsterdam etc. Lewi P.J., 1982. Multivariate data analysis in industrial practice, Wiley, Chichester. Lyneis J.M., 1982. Corporate planning and policy design: a system dynamics approach. MIT Press, Wright-Allen series in system dynamics, s.l. (Boston). Machin J.L.J., 1992. Management control systems: whence and whither?’ In: Emmanuel C. et al., 9-27. Published earlier in E.A. Lowe, J.L.J. Machin (eds) New perspectives in management control, Macmillan, 1983, 22-42. Mattessich R., 1991. ‘Social reality and the measurement of its phenomena’, Advances in accounting. A research annual, 1991, Vol. 9, 3-17. Mattessich R., 1995. Critique of accounting. Examination of the foundations and normative structure of an applied discipline, Quorum Books, Westport/London. Porter G.A. and Norton C.L., 1998. Financial Accounting. The impact on decision makers. Forth Worth, The Dryden Press. Randers J., 1980, Elements of the System Dynamics method. MIT Press, Cambridge etc. Richardson G.P. 1991. Feedback thought in social science and systems theory. University of Pennsylvania Press, Philadelphia. Richardson G.P ed. 1996. Modelling for management. Simulation in support of systems thinking. Vol.I, Vol II. Dartmouth Pub. Comp. Ltd, Aldershot etc. Roberts E.B. ed. 1978. Managerial applications of system dynamics. Productivity press, Cambridge MA/Norwalk. Smith M., 1995. New tools for management accounting. Putting activity based costing and non-financial indicators to work. Financial Times Pitman Publishing, London. Sterman J.D. 2000. Business Dynamics: Systems Thinking and Modeling for a Complex World. McGraw-Hill, New York etc.