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Accounting

Physical Accounts

The Equation of Account (from Physical Economics) says from time t0 up to time t1, the increase in the quantity of material of a type i, in the control of body β is the sum of; the increase in the quantity as a result of all the physical terms, plus the increase in the quantity as a result  of all contractual terms;

 ΔQ(t0,t1) = ΔQiβp(t0,t1) + ΔQiαc(t0,t1)
                       ∀p                       c

If an economic body at some point in the past had nothing and if it has some quantities of material now and if the terms of its contracts and physical processes are known it is possible to calculate the quantities of material it will have at any time in the foreseeable future based on its current known future contractual terms (i.e. future rights and obligations) and its known physical processes.

Monetary Accounts

Accounts are normally converted to monetary accounts by assuming that all controlled materials can  be converted to money at a given rate, the price. i.e. accounts record the monetary value of materials, not the quantities of materials.

Using this method it can be ensured that a body is solvent i.e. will have the equivalent of a positive amount of money for the foreseeable future. This is generally used as a gauge of economic health.

However there is a flaw in that price variations can radically change the monetary accounts as given materials change their monetary value. None the less this is the principle accounting is largely based on.

(Some accounts value materials at the price paid for them. "Mark to Market Accounting" values them at the current market price.)

The amount of money held will be represented in the money current account while the monetary value of non-money material things will be represented in the materials current account.

Borrowing and Lending

Of course all interest payments or produced and consumed materials will appear in the money current account or the materials current account.

However lending and borrowing must also be considered as credit/debt. Normally the amount of monetary credit and debt will be represented in the money credit/debt account while the monetary value of non-money material things lent (a credit) or borrowed (a debt) will be represented in the materials credit/debt account.

Monetary Accounts

To summarise the four accounts;
  • The money current account must show the amount of money held in each currency and the transactions that terms that have and will change those amounts over time.
  • The money credit/debt account must show the amount of money lent and borrowed in each currency and the transactions that terms that have and will change those amounts over time, (Risk and Yield should be known.)
  • The material current account must show the monetary value of things held of each type and the transactions that terms that have and will change those amounts over time.
  • The material credit/debt account must show the monetary value of things lent and borrowed of each type and the transactions that terms that have and will change those amounts over time. (Risk and Yield should be known.)
Frequently transactions in one account will be linked to transactions in another as they will be part of a trade contract. i.e. when material things are sold that is a debit on the material current account and a credit to the money current account.

This balance should be described in the accountants balance sheets, or for a country, in its balance of payments, though definitions of the accounts vary.

In Reality

These accounts are rarely consistently named and the absence of large amounts of information means they are also rarely complete, and it is in this context that we must try to assess the health of a number of economic domains and bodies!


© Tom de Havas 2011. The information under this section is my own work it may be reproduced without modification but must include this notice.







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