The Accounting Postulates and Principles Controversy of the 1960s

Stephen A. Zeff, Stephen A. Zeff

• Publisher: Routledge
• Year: 2020
• ISBN:
  9781000165494
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

This book, first published in 1982, gathers together a series of articles and editorials written in response to the Accounting Research Program of the early 1960s. Accounting Research Study No. 1 and No. 3 sprang from the American Institute of Certified Public Accountants' desire to keep up with 'economic and social changes which affect accounting' and the research studies into 'postulates' and 'principles' proved to be controversial. These articles analyse the findings and provide vital historical insight into the profession of the time, and its further development.

ACCOUNTING RESEARCH STUDY NO. 1

THE BASIC POSTULATES OF ACCOUNTING

By Maurice Moonitz, Ph.D., CPA

AMERICAN INSTITUTE OF CPAs

Copyright 1961 by the

American Institute of Certified Public Accountants

666 Fifth Ave., New York 16, N. Y.

Table of Contents

1. introduction

The Problem

The Approach

The Principle of Selection

The Problem of Method

2. the environment of accounting

Economic Activity

Quantitative Data

Predictability

Characteristics of Economic Organization

Wealth and Welfare

Wealth and Assets

The Accounting Entity

The Nonprofit Area

Income Measurements and Position Statements

Accounting Periods

The Unit of Account

Value in Exchange

Historical Example

3. accounting postulates—the environment

Postulate A-1. Quantification

Postulate A-2. Exchange

Postulate A-3. Entities

Postulate A-4. Time Period

Postulate A-5. Unit of Measure

Definition of Accounting

4. supplementary propositions—the field of accounting

Arbitrary Conditions

Implied Conditions

Rational Decisions

Financial Statements

Market Prices and “Cost,”

Accounting Entities and Uniformity

Time and Uncertainty

Summary

Postulate B-1. Financial Statements

Postulate B-2. Market Prices

Postulate B-3. Entities

Postulate B-4. Tentativeness

5. a third set of propositions—the imperatives

Continuity or Going Concern

Accounts Receivable

Inventories

Buildings and Equipment

Liabilities

Objectivity

Consistency

The Monetary Unit

Materiality and Conservatism

Disclosure

Summary

Postulate C-1. Continuity

Postulate C-2. Objectivity

Postulate C-3. Consistency

Postulate C-4. Stable Unit

Postulate C-5. Disclosure

6. summary, conclusions and recommendations prospectus

Summary

Conclusions and Recommendations

Prospectus

comments of leonard spacek

selected bibliography

Foreword

The Director of Accounting Research of the American Institute of Certified Public Accountants publishes this accounting research study under his authority to circulate the results of the research activities of his staff.

Accounting research studies are designed to provide professional accountants and others interested in the development of accounting with a discussion and documentation of accounting problems. The studies are intended to be informative, but not conclusive. They furnish a vehicle for the exposure of matters for consideration and experimentation prior to the issuance of pronouncements by the Accounting Principles Board.

Individuals and groups are invited to express their views in writing on the conclusions and recommendations contained in this study. These views will be considered by the Accounting Principles Board in forming its own conclusions on the subject.

The responsibility for this study is that of the Director of Accounting Research and those who have been associated with him in the project. The conclusions and recommendations have not been approved, disapproved, or otherwise acted upon by the Accounting Principles Board, the only agency of the American Institute of Certified Public Accountants having authority to make or approve public pronouncements on accounting principles. The study does not necessarily reflect the views of the Board, nor has it been acted upon by the membership or by the governing body of the Institute.

Preface

The report of the Special Committee on Research Program, which laid the basis for the new research program of the American Institute of Certified Public Accountants, proposed that “an immediate project of the accounting research staff should be a study of the basic postulates underlying accounting principles generally, and the preparation of a brief statement thereof. There should be also a study of the broad principles of accounting. . . . The results of these, as adopted by the [Accounting Principles] Board, should serve as the foundation for the entire body of future pronouncements by the Institute on accounting matters, to which each new release should be related.” This monograph is the study of the basic postulates of accounting. The study of the broad principles of accounting is nearing completion and the results will be published later.

The members of two project advisory committees served effectively as advisers and consultants during the conduct of this study. Their names are listed elsewhere in this publication. I wish to extend my heartfelt thanks to them for their constructive criticism and encouragement.

Many persons outside the advisory committees have also contributed much to this study. I have tried to give acknowledgment to some of them where the assistance was direct and therefore readily identifiable. But others have also been of assistance. I can only extend my appreciation to them in this anonymous fashion, reminding them that often I could not measure up to the high standards they set. The flaws in the report are chargeable entirely to my account.

New York, September 1961

Maurice Moonitz
Director of Accounting Research

1

Introduction

The Problem

Terms such as axiom, postulate, principle, standard, procedure, canon, and rule, among others, are widely used, but with no general agreement as to their precise meaning. In order to make its own position clear, the American Institute’s special committee on research program used three basic terms: postulates, principles, and rules. It spelled out its conception of the relationship among these terms in the following paragraph taken from its report of September 1958 to the Council of the American Institute of CPAs:

Postulates are few in number and are the basic assumptions on which principles rest. They necessarily are derived from the economic and political environment and from the modes of thought and customs of all segments of the business community. The profession, however, should make clear their understanding and interpretation of what they are, to provide a meaningful foundation for the formulation of principles and the development of rules or other guides for the application of principles in specific situations.¹

This usage of the terms is not consistent with Accounting Terminology Bulletin No. 1 (pp. 10-11).² The Terminology Bulletin stresses the definition of “principle” rather than that of postulate, with “principle” defined as “a general law or rule adopted or professed as a guide to action; a settled ground or basis of conduct or practice. . . “ It then subordinates “postulate” to “principle” by stating that “initially, accounting postulates are derived from experience and reason; after postulates so derived have proved useful, they become accepted as principles of accounting.”

¹ Journal of Accountancy, Dec. 1958, p. 63.

² Prepared by the committee on terminology of the American Institute of Certified Public Accountants, and published in 1953 under the title Review and Resumé.

The definition of postulates in the Terminology Bulletin is the same as the usage by the Study Group on Business Income in its report entitled Changing Concepts of Business Income?³ That report singled out three of the postulates of accounting for special attention:

1. The monetary postulate. “Fluctuations in value of the monetary unit, which is the accounting symbol, may properly be ignored.”
2. The permanence postulate. “In the absence of actual evidence to the contrary, the prospective life of the enterprise may be deemed to be indefinitely long.”
3. The realization postulate. “The entire income from sale arises at the moment when realization is deemed to take place.”

The report then proceeded to subject the first or monetary postulate to searching analysis, and concluded (with a number of dissents) by recommending a change in the assumption (postulate) that the monetary unit is stable.

In this study we use the term as the special committee used it.^* This choice is dictated not merely because this study was commissioned, so to speak, by the special committee, but also because its usage of the term lends itself readily to a systematic classification of the propositions of accounting theory and practice.

The Approach

We must choose a starting point, determine how much of the environment we are to explore, and decide on a way to proceed. Of the possible approaches considered, the one with the most advantages and the fewest disadvantages is to focus on the question: With what kinds of problems in the economic or political environment do accountants concern themselves?

Among other approaches, the “axiomatic” is the most abstract to come to our attention. Euclidean plane geometry is probably the most familiar example of the axiomatic approach since it is a subject taught in virtually every secondary school in the country. It is based on a few axioms (e.g., “a straight line is the shortest distance between two points”) and a few undefined terms (e.g., a “point”). Given these axioms and terms, certain theorems are then proved by the application of the rules of deductive logic.

³ Published by The Macmillan Company, 1952. The Study Group’s discussion of “postulates” starts on p. 19 of Changing Concepts of Business Income.

^* See “Comments of Leonard Spacek,” page 56.

A few years ago a beginning was made in the application of this method to the a priori part of accounting, that is, the part that can be known by reason alone and not through experience.⁴ This method, however, will probably prove incapable of dealing with the empirical part of accounting, especially with respect to valuation problems. For this aspect of accounting more pragmatic procedures are probably necessary. We are not prepared to operate at the level of abstraction implied by the axiomatic method.

An ethical or sociological approach appeals to many. If this were used as a starting point, concepts such as justice, truth, and fairness would be discussed and extended to accounting. For example, DR Scott gives the following “general statements” in which he relates “accounting rules and procedures to underlying principles.”⁵

...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Original Title Page
• Original Copyright Page
• Introduction
• Acknowledgements
• Table of Contents
• Editor’s Note
• The Basic Postulates of Accounting, Accounting Research Study No. 1, Maurice Moonitz (American Institute of Certified Public Accountants, 1961)
• A Tentative Study of Broad Accounting Principlesfor Business Enterprises, Accounting Research Study No. 3, Robert T. Sprouse and Maurice Moonitz (The American Institute of Certified Public Accountants, 1962)
• Statement Enclosed in each copy of Accounting Research Study No. 3 (Accounting Principles Board, April 13,1962)
• “Detail for a Blueprint,” R. J. Chambers (The Accounting Review, April, 1957, 206-215)
• “Towards a General and Axiomatic Foundation of Accountancy,” Richard Mattessich (Accounting Research, October, 1957, 328-355)
• “Present-Day Challenges in Financial Reporting,” Alvin R. Jennings (The Journal of Accountancy, January, 1958, 28–34)
• Report of the Special Committee on Research Program [of the AICPA) (Journal of Accountancy, December, 1958, 62-68)
• “Accounting Research and Accounting Principles,” editorial (Journal of Accountancy, December, 1958, 27-28)
• “Report on the Accounting Research Activities of the American Institute of Certified Public Accountants,” Weldon Powell (The Accounting Review, January, 1961, 26-31)
• “The Basic Postulates of Accounting,” editorial (Journal of Accountancy, September, 1961, 35-36)
• “Discussion Notes on The Basic Postulates of Accounting’,” Arthur M. Cannon (Journal of Accountancy, February, 1962,42-53)
• “The Approach to Accounting Principles,” editorial (Journal of Accountancy, May, 1962, 37-38)
• “Postulates: Their Place in Accounting Research,” John W. Queenan (Journal of Accountancy, August, 1962, 29-33)
• The TIMS Initiative of 1962
• “‘Postulates and Principles’—Unsupported and Unrestrained,” Herbert Heaton (The New York Certified Public Accountant, October, 1962, 658-664)
• “Comments on The Basic Postulates of Accounting’” (Journal of Accountancy, January, 1963, 44—55)
• “Comments on A Tentative Set of Broad Accounting Principles for Business Enterprises’” (Journal of Accountancy, April, 1963, 36-48)
• “Why Not Retain Historical Costs?,” Eric L. Kohler (Journal of Accountancy, October, 1963, 35-41)
• “Why Do We Need ‘Postulates’ and ‘Principles’?,” Maurice Moonitz (Journal of Accountancy, December, 1963, 42-46)
• “Why Bother with Postulates?,” R. J. Chambers (Journal of Accounting Research, Spring, 1963, 3-15)
• “Postulates and Principles,” William J. Vatter (Journal of Accounting Research, Autumn, 1963,179-197)
• “The ‘Radically Different’ Principles of Accounting Research Study No. 3,” Robert T. Sprouse, (Journal of Accountancy, May, 1964, 63-69)
• Chambers and Moonitz on Accounting Research Studies No. 1 and No. 3