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Accounting for Market Equilibrium – Comparing the Revenue-Expense to the Balance-Sheet Approach

Accounting for Market Equilibrium – Comparing the Revenue-Expense to the Balance-Sheet Approach AbstractThis paper combines the market process approach developed by the Austrian School of Economics with the theory of capital as worked out by the Historical School in order to provide a suitable framework for discussing the two competing approaches to financial accounting. Within this framework, it becomes clear that the revenue-expense approach with its emphasis on actually realized, historical transactions plays an important role in creating a tendency towards market equilibrium. Net income determined according to this approach provides information to the market on where there are gaps in the price structure. The balance-sheet approach, on the other hand, and particularly fair value measurement take market equilibrium for granted. Based on fair value accounting, an equilibrium could never be accomplished in the first place. Ironically, in order to be applicable, the balance-sheet approach presupposes the perfect working of the market process, including financial reporting based on the revenue-expense approach. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Accounting, Economics and Law de Gruyter

Accounting for Market Equilibrium – Comparing the Revenue-Expense to the Balance-Sheet Approach

Braun, Eduard
Accounting, Economics and Law , Volume 12 (1): 23 – Feb 8, 2022
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Publisher
de Gruyter
Copyright
© 2019 Walter de Gruyter GmbH, Berlin/Boston
ISSN
2151-2820
eISSN
2152-2820
DOI
10.1515/ael-2018-0024
Publisher site
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Abstract

AbstractThis paper combines the market process approach developed by the Austrian School of Economics with the theory of capital as worked out by the Historical School in order to provide a suitable framework for discussing the two competing approaches to financial accounting. Within this framework, it becomes clear that the revenue-expense approach with its emphasis on actually realized, historical transactions plays an important role in creating a tendency towards market equilibrium. Net income determined according to this approach provides information to the market on where there are gaps in the price structure. The balance-sheet approach, on the other hand, and particularly fair value measurement take market equilibrium for granted. Based on fair value accounting, an equilibrium could never be accomplished in the first place. Ironically, in order to be applicable, the balance-sheet approach presupposes the perfect working of the market process, including financial reporting based on the revenue-expense approach.

Journal

Accounting, Economics and Law – de Gruyter

Published: Feb 8, 2022

Keywords: financial accounting; capitalism; market process; revenue-expense approach; balance-sheet approach

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