Accounting Principles

Accounting Principles - Duality The accountant recognizes...

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Duality The accountant recognizes dual effects when recording transactions in equal debits and credits. These debits and credits produce accounts that articulate and provide a check on the accuracy of accounts. The method of recording debits and credits so as to produce a check on the accuracy of accounts is known as double entry bookkeeping. A key element is the individual account where increases and decreases are both recorded as positive amounts. For example, the increases are credits and decreases are debits for a liability account. Since every transaction results in a debit to one account and credit to another, the double entry system allows for checks on accuracy. Double entry accounting has been argued to be the driving force underlying the success of capitalism (Sombart 1919; Weber 1926; Schumpeter 1950; Von Mises 1998). The argument is that double entry produces a mindset that leads naturally to the evaluation of increases and decreases of profit that are articulated in the calculus of economic choice. We suggest here that what made a system so viable were the similarities of keeping track of accounts much like a brain keeps track of instances of phenomena when generating a decision variable. To see this we look at a particular account (say a liability account) with its debits and credits as portrayed in Figure 12. Note that credits are tending to accumulate faster than debits and are reflected in a positive balance at any point in time. Shadlen and Newsome (2001) isolated a similar counting device in the brain of the macaque monkey using single cell recording. The monkey performs the task of observing a screen with arrows moving right and left on the screen. Some arrows (the ones moving right for example) exceed in number the arrows moving in the opposite direction. The monkey is rewarded when he makes a movement (eyes or a lever) in the same direction in which more dots are moving. To perform such a task the monkey records (in the form of neuronal activations) the net movement of all dots (left or right) and the difference between the two at any point in time is registered in the lateral intraparietal sulcus. Note both types of movement (right and left) are reflected in positive amounts (just like credits and debits) and the difference amounts will be a positive account balance of the net movements in that
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direction. For the monkey when this difference reaches a critical level a message will be sent to the motor system and a movement will be made indicating a choice. Thus, the monkey’s brain further uses the amounts in these “accounts” as decision variables that trigger an action much like typical accounting balances are used to assess if loan provisions are not satisfied, inventory cost is excessive in relation to its realizable value, and also whether profits meet a target. Double entry emerged during the Renaissance, a time when the number of transactions
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This note was uploaded on 09/18/2008 for the course ACCT 2050 taught by Professor Sanjay during the Spring '08 term at Minnesota.

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Accounting Principles - Duality The accountant recognizes...

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