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TABLE 2 and other legal relationships are built upon accountants’ income figures.
Differencial and Difference Relationships among Six Basic Measurements It seems obvious, however, that accountants must go beyond income in
designing their system if they were to meet the managerial need for
Six Basic Measurements and Their Classifications
reliable measurements focused on long-run benefits.
Conventional Proposed Possible
Classification of Wealth Momentum Force Impulse measurements, while they are still current-period performance
Accounts by:
Measurements Measurements Measurements measurements, are at the minimum a step in the right direction. Of cour-
se, they are by no means measurements of long-run benefits in the true
Types of Wealth
(Assets, Liabilities) Wealth W sense of the term. The extent to which impulse measurements incorpo-
rate the long-run aspect depends upon the rate at which momenta,
Reasons for Wealth Change created by the impulses, dissipate in a particular environment.
(Revenues, Expenses) Income ∆W Momentum Ẇ If maximization of long-run income is not operationally verifiable and by
nature management’s focus has to be limited to current-period perfor-
Reasons for Income or mance, it is then interesting to compare managerial behavior oriented
Momentum Change
(Actions Resulting from Action ∆2W Impulse ∆Ẇ Force Ẅ toward maximizing current-period income and that oriented toward ma-
Impulses Created by ximizing current-period impulses.
Forces)
As a simple illustration, take a project that boosts the momentum from
Relationships among the Six Basic Measurements zero to k dollars/yr instantly at beginning of the project and leaves it at
that level from that point on. The impulses ∆ Ẇ and the income ∆W are k
Wealth: Income: Momentum: W(t+1) - W(t) = ∆W(t) = ∫t +1 Ẇ(r)dr
dollar/yr and k dollars, respectively, for the first year. Then compare this
with a second project whose momentum starts at zero, increases uniformly
Momentum: Impulse: Force: Ẇ(t+1) - Ẇ(t) = ∆Ẇ(t) = ∫t +1 Ẅ(r) to $1/yr at the end of the first year, and stays at that level from that point on.
(This is the case if a constant force Ẅ=$1/yr is applied with a duration of
2
Income: Action: Impulse: ∆W(t+1) - ∆W(t) = ∆ 2 W(t) = ∫t +1 ∆Ẇ(r)dr one year.) The impulse ∆ Ẇ and the income ∆W are $1/yr and $0.5, res-
pectively, for the first year.
differences in accounting standards in the two systems). ln the example, If K≥1, both a current-income maximizer and a current-impulse maximizer
net momenta is $12/mo in the first quarter, is $15/mo ($12+5-2) will choose the first project, and if K≤0.5, both will chose the second project;
in the second and the third quarters, and is $18/mo ($15+5- while if 0.5<k<1, the current-income maximizer will choose the first project
2) in the fourth quarter, totaling $180 for the year which while the current impulse maximizer will chose the second project. Who is
agrees with the net income. right in the choice depends upon how long the project is expected to earn
It may be noted here that while momenta integrated over time should income at the rate that has been achieved at the end of the first year.
equal income, impulses integrated over time generate a new dimension Suppose that both projects terminate at the end of year n. Then, the lifeti-
in conventional accounting, which will be called “actions”. Actions ac- mes of incomes of the first and the second projects are kn dollars and 0.5+
count for changes in income from one period to the next, attributing the (n-1)(or n-0.5) dollars, respectively. (Since the issue is on income and not
changes to various impulses. Wealth, income, and actions then provide on cash flows, discounting will not enter into consideration, although it will
the basic three axes of measurements, where income accounts for be briefly discussed later.) Hence, the current-income maximizer who choo-
wealth changes and actions account for income changes. In this way ses the first project achieves a better life-time income if 1>k>1-0.5/n, while
the double-entry framework is logically extended to a triple-entry fra- the current-impulse maximizer who chooses the second project achieves a
mework. Table 2 shows the relationship among the measurements in better life-time income if 0.5<k<1-0.5/n. The ratio of the widths of the se-
the two accounting systems, along with a third possible system centered cond range over the first range is n-1(= [0.5-0.5/n]/[0.5/n]), favoring the
on the measurement of “force”. current-impulse maximizer for any n>2.
Research has been conducted on momentum accounting and the fra- This issue of income versus impulses as managerial goals is related to the
mework of triple-entry bookkeeping has been developed as shown in choice of what is considered to be “status quo”. The income-based perfor-
the references at the end of the paper. Any further discussions on the mance evaluation views status quo to be no change in net wealth, giving
details of the subject will be omitted and referred to these references so credit to management for any increase in net wealth generated by the ope-
that the issue managerial goals may now be discussed. ration. The impulse-based performance evaluation takes a totally different
notion of status quo. It views status quo to mean constant momenta, na-
2. Income versus Impulses as Managerial Goals mely the state of a firm earning income at a constant rate. Credit is given to
the management only for any increase in net momenta attributable to the
Managerial goals have been overwhelmingly centered on income as operation during the period, and not to a mere realization of momenta crea-
evidence by numerous income-based incentive compensation plans. In ted in the past.
addition to monetary incentives in the form of bonuses, promotions and
salary raises have also been frequently tied to income. This contrast between the two viewpoints is analogous to the ways in which
Lately such emphasis on income has been criticized as promoting deci- moving bodies were viewed physics. Once it was commonly understood
sions oriented toward short-run benefits of the company at the expense that bodies could move only as long as a force acted on them and would
of its long-run benefits. Since income is a change in wealth over relati- come to rest without it. Now it is common knowledge that in absence of
vely short period of time, normally one year, a better income figure does force, bodies continue to move linearly with a constant velocity. Bodies
not necessarily mean that the company is better off at the end of the come to rest not because the force supporting the move disappeared but on
period as compared with is beginning if the betteroffness is evaluated on the contrary because there was another force acting against the movement
the basis of long-run profitability of the company. of the bodies. This law of inertia suggests an important consideration in
Although it is easy to say that emphasis should be on a long-run pros- momentum accounting which will be considered next.
pect of the company, there is a fundamental problem in doing so. That is
the lack of measurements on long-run benefits to the company that are …………………………………………”
reliable as incoming figures. This does not mean that income measure-
ment is easy. It is indeed a significant contribution of accountants over
the centuries that this basically ambiguous concept of income has been
brought to such a level of objectivity and specificity that taxes, contracts