Finance and Accounting: Uncongenial Twins

Drawing upon K.E. Boulding's remark, finance and accounting may be denoted as 'uncongenial twins'.

Accrual accounting can be interpreted as a convenient instrument to protect the corporate capacity to generate future earnings on which the expected financial value is based upon.

However, in order to fulfil this control function, accounting applies an additive process (simple return), while financial valuation imposes a multiplicative process (compound return) over the invested financial capital.

This divergence between accounting and finance has path-breaking implications:

• On the one hand, it enables disentangling business profit – as determined by accounting – from money interest and ownership rent, paving the way to a theory of the business firm based upon its accounting structure ;
• on the other hand, it enables measures of financial performance consistent with this divergence.

Multiplicative processes may lead to unsustainable patterns:

Theory and practice of sustainable business firm should therefore build upon this divergence as a fundamental building block.

CONVIVIUM research on Accounting and Finance: