A. C. Littleton’s Final Thoughts on Accounting: A Collection of Unpublished Essays: Volume 20

Accounting education can be considered as experience, as practice in learning to learn, and as part of education for business. Accounting techniques are important as parts of a data-processing apparatus, providing deeply significant data regarding enterprise prior experience. The objective of accounting is to provide insight into the results of management decisions. The aim of accounting education is to help students learn to learn to become professional accountants. The teacher should often mix theory with practice (the why and the how), and often indicate the contact of the course with non-accounting courses.

Experience is educational; education is a form of experience. Study of accounting ideology and methodology can help develop rational thinking and provide exercise in forming judgments. It is a good area in which to experience the techniques of learning to learn. Accounts themselves speak of experience, of the results from management decisions. Knowledge of such results offers a platform for rational decisions. Accounting is a special kind of information apparatus. Significant relations exist among its data; these provide definite aid for judgmental decisions. Thus, accounting provides experience in using accumulated experience.

Within enterprise accounting, there is a significant degree of pragmatic logic. It is a suitable means toward the objective of making transaction-experience understandable. It is a combination of theory and practice and of ideology and methodology. The reason accounting function is so thoroughly acceptable is because of the pressing need in business to review the results of prior decisions in preparation for next decisions. Two compelling concepts for accounting are the following: (1) the reciprocal relation between its objectives and techniques that makes accounting an instrument for exploring the significance of enterprise transaction-experience and (2) accounting’s duty to preserve the integrity of its recorded data for the benefit of later review by interested parties.

It is necessary that accounting actions should rest on accounting concepts, for these can explain so much. These concepts can speak about what our action is, about what it is not, about things to which action is related, and about the necessity for the relationship. Concepts can be compelling and many accounting actions are analytically necessary. Equivalence of experience for both parties is a necessary feature of every exchange-priced transaction consummated in the market. Equivalence of favorable and unfavorable effects is a necessary part of each party’s record of a transaction. Neglect to recognize the analytical necessity could destroy the service function of accounting.

The characteristics of accounting objectives are formed by the needs that exert pressure on its function to deal with enterprise prior experience. As such, the actions of accountants should be influenced less by postulated principles and more by understanding the compelling concepts that strongly influence accounting action.

When early Italian accounting methods were translated into English text, they sometimes were titled Records in the Italian Manner. Later the term “double-entry bookkeeping” was used; this gave some notice to the reader that duality was a characteristic feature of this record system. Still later, taking as a clue the term “account” (the basic category for data classification) the title “accounting” emphasized a shift from the journal entry form to the classification of categories – a distant movement closer to the essence. A more significant descriptive phase could be “a data-organizing technology for enterprise transaction experience.” In an expanded form, this could clearly justify accounting as realistic because of its inseparable association with the realities of an enterprise’s actual experience.

Accounting is a necessary but incomplete technology for providing all the decision-useful information needed by management and investors. Accounting is inseparably tied to enterprise transactions and its history. Expected future experience may be entertained but cannot be convincingly reported as established fact. Reported expectations in the midst of actual experience could be more confusing than enlightening. Instead, non-accounting technology can effectively supplement transaction enterprise data with projected expectations and interpretative data. Furthermore, accounting does not possess the qualities necessary for a science; yet accounting, as science, has an interpretative obligation to hold fast to specific realities.

Alternatives to inventory pricing and depreciation expense calculation are examples of actions beyond the limits of the actual experience of an enterprise. They tend to mix expectations (looking forward) with actual experience (looking backward). Both cannot be equally objective. The calculation of insolvency, company mergers, and secret reserves as well as the confusion between values and prices are some of the possible antecedents for the muddling of experience with expectations.

The existence of statistical price index series does not persuasively support proposals to modify account data from prior transaction experience. The consequences of using accounting techniques will demonstrate whether those actions have served accounting objectives satisfactorily. Management’s overt actions in the markets, rather than changes in general price-levels, are the source of enterprise earnings. Accounting objectives are either compelling or limiting elements affecting the choice and use of accounting techniques.

Exchange-priced transactions should be recognized and treated as items of enterprise experience, which should be summarized for later review. This is so because the major objective of accounting technology is to aid men to understand the results of enterprise management’s decisions. This, in turn, is based on compelling concepts that invite certain conclusions and limitations that direct certain exclusions. Intentions, purpose, and objectives lie at the heart of transactions and their nature is an aspect of the logic of accounting actions.

Current prices, future estimates, and price statistics cannot reflect specific transaction experience generated by enterprise management. Instead, overt transaction data in accounts continue to constitute evidence of management decision-actions, even after apportioned among fiscal periods. And the interrelation of enterprise capital employed productively, and the income generated by its use, will continue whether or not accounts are kept. Yet, the significance of factual integrity for enterprise transaction experience is strongly influenced by the functional logic inherent in accounting.

The attest function of the professional accountant does not include an obligation to interpret the significance that the account data may have for various users. As auditor, he cannot attest the effect price-level changes will have on the certified statements. However, he can assist the client to prepare supplementary disclosures of the resulting changes if the historical accounting figures were modified by systematic application of a price-level index series.

Ideas of accounting already considered acceptable might well be tested by (1) identifying specific actions with specific objectives and (2) searching out the reasons why account data can serve those ends. The reasons supporting known accounting actions and objectives are seldom examined. Yet, each objective must be desirable; each action in support must be satisfactory in its effect. Whatever can be known need not be assumed. But “knowns” still need to be understood from the exploration of their significance and limitations.

Account data alone, no more than other data alone, cannot suffice as a basis for decisions. But account data seem the more significant: they come from decisions in and for the specific enterprise. They reflect specific and overt transactions experience of the enterprise. Once such experience is brought into the record, it is unrealistic to consider the data to be misleading and subject it to unilateral change. On the contrary, actual change of the record would violate the integrity of the transaction event and of the account involved.

The mission of accounting is revealed by its conceptual objectives, such as servicing the need men have to review the prior transaction experience of enterprises. This mission is the basis of its method and of the means devised to service that mission. As a basis for critically examining the means, their effective association with the mission affords the starting point. Hence, the need to search beneath method for clues to its justification, appropriateness, and distinction between logic and tradition.

The logical function of accounting ends is that of stimulating and directing appropriate accounting actions as means toward those ends. These ends should be tested for desirability, whereas the means should be tested for suitability. The pairing of ends and means should be based on realistic and convincing reasons. Furthermore, rather than being expressions of values, account data are symbols of quantitative pictures of overt transaction experience. As such, dual entries express the relationship of an intended effort on the enterprise and the consideration necessary to generate the transaction. A logically coordinated body of accounting theory, along these lines, should generate a logically coordinated body of technical actions.

A consummated transaction indicates a clear intention of management to affect the enterprise in a specific way. Both management and investor can benefit from the same data source because both are interested in enterprise transaction experience. Enterprise expectations, on the other hand, can at best only serve as supplements to reviewable prior transaction experience. The reason for this is that transactions become enterprise experience precisely because of management’s intention to implement enterprise objectives, and the service capacity of accounting stems from the objectives that prompt such actions.

Behind actions lie objectives, and behind objectives lie motives. Accounting theory undertakes to appraise intentions as goals, to explore reasons, and to see actions geared to intentions. Intentions, in turn, produce actions and the results from this confirm the initial intentions. Furthermore, interrelations among ideas can generate interrelations among actions. Interrelations among its actions and the related ideas indicate that accounting is a highly rational, thoroughly logical, and analytical technology.

Each exchange-priced transaction will present some combination of favorable and/or unfavorable effects on the enterprise concerned. In order to segregate unlike transaction effects and to aggregate like transaction effects, account categories are named and given bilateral form. Each transaction, in turn, speaks of the experience of that enterprise.

The exchange of reciprocal and quantitative consideration between transaction parties rests on the independent intentions and judgments of potential benefit for each. A transaction consummated between independent parties should logically be beyond subsequent unilateral modification. And, because “duality” is inherent in every exchange-priced transaction, the account form follows the lead of transaction substance. Conditions precedent to consummation of a transaction is two affirmative value judgments by the parties as to the benefits expected.

Accounting opens to analytical examination many aspects of an enterprise that are not visible to direct observation. Scientific techniques foster certain techniques, just as successful accounting techniques foster managerial techniques. These basic concepts and useful techniques are integrated by a hidden logic, much as water unites aggregate and cement. Accounting analysis breaks down diverse transaction experience and, by synthesis, re-assembles the raw data into compact and informative reports. The result from this process, dollar-price data in accounts, opens for study realities lying deep beneath the figures.

Management engages in self-examination by studying the account data reporting the results of prior decision-actions. Actual transaction experience data will be more significant than data that are hypothetical. This is so because back of financial statements lie consummated transactions reflecting planned efforts on the part of the buyer and planned performance on the part of the seller. With this in mind, profit as motivation can be over emphasized, although in reality it is still a good indication of sound prior policies, plans, and decisions of management. Standardized accounting, however, is not without its limitations, as it cannot reflect the individuality of competitive enterprise and their management.

Techniques are actions. Reasons for actions tell of objectives, such as the need men have to review the results of prior decisions. Convincing support for an orderly methodology can be sought in the orderly structure of accounting ideology, and a basis for constructive criticism lies in clear knowledge of how things are in the present. This ability to learn by experience rests on knowledge of prior experience, and knowledge means that those prior events are understood.

Accounting is a systematic method of providing experience-tested data as a basis for future decisions. That experience, which is much more dependable than expectations, is open to diagnosis as an approach to decisions. An analytical recording of experience can stimulate an interpretative reading of the results of prior policy. This can be a road toward learning from experience. Ratner (1939) foresees this development, stating that “[e]nds which could justify themselves to reason [should] take the place of custom as guides to conduct (p. 288).” As such, functional theory can be useful even to practical roles, as theory can improve practice and good practices can improve business decisions.

Searching into the inner nature of accounting can be approached by finding supporting reasons for propositions, which undertake to penetrate beneath its techniques and explain its limitations. From the understanding, thus based, it should be possible to formulate accounting’s most compelling concepts and persuasive truths – ideas, which, if desired, might be assembled under the scientific sounding term “principals.”

Mathematics is a tool of service, but the use of quantitative digits does not automatically make accounting also a tool of service. The equality of total debits and credits is not an example of scientific perfection. The close interrelation between real and nominal accounts, between balance sheet and income sheet, however, reflect near perfection. Account data from consummated transactions between independent parties also approach near perfection: there is an equivalence, for each party’s transaction of favorable and unfavorable effects, although each party’s intentions have been quite different.

High significance for accounting objectives is evident from the support they provide for accounting actions. An inventory of these objectives could be very useful. In such an inventory, the integrity of all account data would be supported by tight identification with the consummated transaction experience of the related enterprise. But since enterprise economic activities are necessarily continuous, the results can only be made understandable by reporting account data periodically. Yet, this allocation to fiscal periods does not call for new measurement of the data. This is so because the center of accounting function is not measurement but that of reporting prior experience. This mistake has come about because of the emphasis on measurement as a function, which invites advocacy of using a “stabilized unit of measure.” This is a useful analytical technique for statistical economics, but it can only represent a revolutionary idea for accounting where the technical function is far more limited.

This well-planned research is in tune with the times. ¹ Five of the postulates are called imperatives. They are indeed persuasive objectives. The remaining postulates deal with means for attaining those goals. Another word for postulate is assumption. Both words refer to ideas that we cannot know as facts of business life, and yet are needed as a basis for discussing accounting principles. Perhaps, therefore, they may be considered as compact verbalizations of basic concepts serving as foundational stones beneath accounting technology.

In five pages, the study summaries the proposed principles; twenty-four pages summarize committee members’ comments, some of which are in support and others in dissent. ¹ The latter include reservations regarding the lack of convincing logic, adequate reasoning, and limited examination of objectives. In particular, it could have been helpful if specific principles had been coordinated with individual postulates, and the concept of realization seems to have been weakened by focusing on the reporting of holding gains and loss as a matter of principle. Yet, there was a time when “theory” was considered to mean “the impractical.” But research activities such as these, and the discussion they generate, carry much promise for refining conceptual bases; thus, strengthening accounting technology and its associated profession by cementing its foundation blocks.

Price level movements have been under scrutiny for forty years. Yet, a need still exists for further classification of the concept of business income. This is so because accounting has a justifiably duty to report on actual transaction experience. General prices, on the other hand, cannot speak so specifically, but business decisions nonetheless need to consider such data. With this in mind, an alternative emerges: include price level adjustments in accounts or report them separately as supplements. The support is given in this study to the latter, while acknowledging that time is needed for the interpretative benefits of supplementary reports to be more widely recognized. Given enough time, it is reasonable to expect that a favorable consensus will emerge. Financial statement users would no doubt favorably receive supplementary data on the impact of inflation, and companies would not suffer from enlightening the people at interest in this manner.

A deductive approach to the principle is demonstrated here. An “inventory” is a presentation of knowns. Knowledge, in turn, offers a basis for critically appraising technical actions. Principles distilled out of experience can provide dependable guidance to subsequent actions. This may sponsor rational innovations, correction, or cancellation of action-types as well as convincing reasons in support of existing action-types.

The book shows that accounting has attained the status of a modest intellectual discipline. ¹ This achievement is demonstrated by a skillful weaving of significant accounting terms into a description of the way systematically arranged account data can convey verbal ideas about the situation and the progress achieved by a business enterprise. It is made evident that accounting aims at communication; but “reading” the communication must first be learned.

The major service of accounting concepts comes from their association with relevant accounting actions. Decisions by enterprise management generate a continuing flow of transaction experience, which will be systematically organized toward review. Organizing transaction data, in turn, requires recognition and respect for a variety of classification boundaries. Most notably of these boundaries is the enterprise itself, the fiscal period, and the ledger account.

The figure pictures in financial statements may seem motionless. Yet, movement is essential to an enterprise. The analytical service of an account is best reflected by the relative rates of inflow and outflow of data. At the same time, the functional logic inherent in capital-income accounting does not support “valuation” as an appropriate part of accounting objectives. This is so because transaction experience is objective in nature whereas valuation is subjective. And the logic relevant to accounting actions would seem to include relevance as a key term because boundaries are functional aspects of accounting.

An accounting principle should be supported by clear concepts of the needs to be served by reporting on actual transaction experience. This is so because account data are able to speak authoritatively only of transaction experience of the specific enterprise. In addition, some actions are justified by principles resting on moral grounds. Some of the characteristics of an accounting principle that emerge are that these are persuasive, relevant, and reflective of the truth.

Because of pressure from a concept of analytical necessity, account data must be reported for comparable periods of time. This is so because accounting is committed, by its reporting function, to hold its data as closely as is reasonably possible within realistic classification boundaries. The entity is the most prominent of these categories, but the fiscal year is another prominent category. With these two categories in mind, account figures speak with authority of transactions where the output price of the seller and the input price of the buyer are identical. Only by review of his account data can either party review in retrospect his prior valuation judgment.

Periodic allocation of asset potential is necessary in order to open enterprise efforts and achievements to analytical study. Productive assets are purchased and used for their inherent power to contribute to the creation of new products and to the achievement of revenue. Management’s decisions direct this asset acquisition and use toward the end of achieving earned revenue in excess to applicable cost-expense efforts. Acquisition costs and liability obligations (reported in the balance sheet) are therefore necessary antecedents to enterprise service effectiveness. As such, accounting is failing in its primary function if it deals ineffectively with data expressive of those enterprise efforts and achievements.

Account data and computer output can organize facts in aid of decisions, but men must still decide. Education as such is a way of deepening experience, and practical experience is educational from pressing one to think. On one hand, the function of financial statements is to open transaction experience to analytical review. On the other hand, college education should provide some experience in thinking when not all useful facts are available.

Accounting concepts undertake to verbalize ideological building blocks. Each represents a unit that may be assembled in varying groups. The resulting organized communication can be represented neither by a list of concepts nor by a collection of definitions. A mere sequence of presentation will not do either. Instead, it is more informative to select several concepts and bring their interrelations under close examination. This is so because concepts associated in groups can illuminate the inner nature of enterprise accounting. Arranging the data from related accounts into groups, such as an earnings statement, will also present a grouping of ideas that give the accounts added meaning. Related to this, it is significant to note that ideas are more basic than words or digits. Learning to write involves more than forming letters and spelling words. A composition or discourse is more an arrangement of ideas than of words. Similarly, in accounting, an exchange-priced transaction expresses an idea made concrete and objective by decisions in the markets. These transaction ideas are distributed among a variety of accounts. Each account expresses an idea; its name, form, and content derived from specific concepts. Awareness of these concepts is a necessary factor for constructing an account category, for arranging a financial statement, and for interpreting meaning from data reported therein.