Post on 31-Jan-2023
CONTENTS
INTRODUCTION ........................................................................................................ 5
Claudio Lipari:
Accounting in Palermo – From Ancien Régime to Contemporary Age ........................ 9
Claudio Lipari and Massimo Costa:
Accounting as Administrative Semiotics .................................................................... 29
Massimo Costa:
The ‘Double Integrated System’ in order to Manage Space-Time Articulations in
‘General’ Accounting Determinations ........................................................................ 57
Massimo Costa and Giusy Guzzo
Non-profit ‘Entities’ between Generalistic vs. Specialistic Approaches on a
Systematics of Levels of Definitions and Classifications ........................................... 85
Massimo Costa and Patrizia Torrecchia:
Value and Accounting between History and Theory: The Italian Case .................... 113
Patrizia Torrecchia and Massimo Costa:
More than a Technical Discipline: The Accounting Culture in Italy – A Glance
through the ‘Schools’ ................................................................................................ 187
Patrizia Torrecchia and Massimo Costa:
The Epochal Paradigm Shift in Italian Accounting: From a ‘Stock’ to a ‘Flow’
Approach .................................................................................................................. 219
Giusy Guzzo
The ‘Contemporary’ Thought of Niccolò D’Anastasio through La Scrittura Doppia
Ridotta Scienza (1803) .............................................................................................. 247
Patrizia Torrecchia and Basil S. Yamey:
Giuseppe Cerboni: Accounting Theorist and Practitioner ........................................ 263
Patrizia Torrecchia:
A Sicilian Author of Accounting: Emanuele Pisani and his “Stathmography” ........ 273
4
Claudio Lipari:
Teodoro D’Ippolito: The First Writer of Treatises on Economia Aziendale ............. 287
Massimo Costa:
A 20th
Century Scholar of Accounting and Business Economics through his Major
Works: Prof. Nicola Colletti ..................................................................................... 303
Massimo Costa and Patrizia Torrecchia:
The Court of Auditors in the Kingdom of Sicily ...................................................... 329
Carmela Gulluscio and Patrizia Torrecchia:
Public Accounting in Austria and in the Lombard-Venetian Area: The First Academic
Teachings .................................................................................................................. 361
BIBLIOGRAPHY .................................................................................................... 389
Patrizia Torrecchia and Massimo Costa
THE EPOCHAL PARADIGM SHIFT
IN ITALIAN ACCOUNTING:
FROM A ‘STOCK’ TO A ‘FLOW’ APPROACH*
ABSTRACT
This paper attempts to outline the important shift that Italy faced at the beginning
of the XX century in the Accounting theory field. We refer in particular to the new
approach that saw the ‘flow’ as main category to be explored instead of the old ap-
proach that saw the ‘stock’ as main object to be investigated.
CONTENTS**
: 1. Introduction; 2. – Accounting Method and Systems in Italian
Literature; 3. – The Oldest System in the Italian Literature: the ‘Net Worth’ System
by Besta; 3.1 Historical Origin and Properties of the System; 3.2 The Classical Sys-
tem of ‘Net Worth’; 3.3 The Current System of ‘Net Worth’; 4. – The System Revolu-
tion in the Italian Literature: the ‘Income’ System by Zappa; 4.1 The Characteristics
of the Income System; 4.2 The ‘Pure’ System of ‘Income’; 4.3 The ‘Income and Capi-
tal’ System; 5. Conclusion.
––––––––– * This paper was presented at 13
th World Congress of Accounting Historians,
Newcastle upon Tyne, 16th
-19th
July, 2012.
** The idea of the paper and the bibliographical researches are due to the common
work of the two authors. The sections 1, 3.1, 3.2, 3.3, 4.2 and 4.3 are to be attributed
to P. Torrecchia; the sections 2, 4.1 and 5 are to be attributed to M. Costa.
220 PATRIZIA TORRECCHIA – MASSIMO COSTA
1. Introduction
The paper presents to the International community a crucial Italian
debate on the nature of Accounting and on the conceptual framework
for bookkeeping methods, whose relevance lies essentially upon its
very early beginning. But the relevance of this debate, as written in Ital-
ian language, today is running seriously the risk to be progressively
forgotten if not fully recovered into English literature.
The first decades of the twentieth century, in fact, have been a turn-
ing point for Italian Accounting. Then, after the full establishment of
the Industrial Revolution, which brought the development of markets
and the growth of businesses, the so called ‘Sistema patrimoniale’
(here, conventionally, ‘Net worth’ accounting system), thought by
Fabio Besta already in the last decades of XIX century, quickly became
obsolete as the emphasis was placed no longer on the property but on
the produced and distributed income.
The ‘Net worth’ system is considered the first modern accounting
system in Italian doctrine, and perhaps in the world. It was centred
upon a static view of wealth, namely a ‘stock’ approach, and prevailed
over the old and juridical views that had dominated the previous doc-
trinal landscape of Italy.
While the above mentioned system fit quite well with agricultural
companies typical of a comparatively closed economy, the newborn
context brought the need for a different system which should have
taken into account a dynamic, or ‘flow’ centred, instead of a static ap-
proach. In 1926 Gino Zappa established the Economia aziendale, a dis-
cipline studying, by merging traditional Accounting, Management and
Organization, every azienda (concern, entity, organization or business,
according to the different definitions, here, briefly, ‘entity’). He also
realized that the new study of entities also required a radical change in
accounting logic. The owners’ interests changed as they were more at-
tracted by the information about flows than about stocks, on income
than on net worth. The ‘sistema reddituale’ (here, conventionally, ‘In-
come’ accounting system) is still the basic logical structure of the Ital-
ian Accounting, even if it has been subject to new interpretations and
modifications by many following scholars (i.e. D’Ippolito, Amaduzzi,
THE SHIFT FROM A ‘STOCK’ TO A ‘FLOW’ APPROACH 221
Caramiello) and, finally, to the influence of European and Anglo-
American Accounting in nearest times.
The aim of this paper is, on the one hand, to explain what an ‘ac-
counting system’ is for Italian doctrine and how these two systems
worked, also looking at the different methods of bookkeeping which
they led to; on the other hand, it tries to enlighten the context changes
which brought this paradigm shift making a cross-fertilization between
the socio-economic contexts and the methodological contents. As a
relevant piece of historical context an attention will be paid, or at least
sketched, on the parallel shifting of emphasis from ‘stocks’ to ‘flows’
in literatures of other countries, viewing the ‘Income’ system as the
Italian way to institutionalism. The method adopted, however, will be
the formal comparison between the two accounting systems: the old
‘Net worth’ one and the new ‘Income’ one, and in principles and in
more recurrent bookkeeping entries.
The investigation will be essentially limited to the two major schol-
ars, founders of the aforesaid accounting systems: Fabio Besta for the
former, Gino Zappa for the latter. But the main and widespread variants
and a survey of contributions to the two schools until approximately the
middle of XX century will be supplied as well.
2. Accounting Method and Systems in Italian Literature
In Italian literature we find a great stress on the distinction between the
double entry accounting method and the double entry accounting systems.
In order to make an International Audience understands properly
that, we have to come back to the just beginning of this distinction.
As a matter of fact, in English literature the ‘phrase’ accounting
system has a quite obvious meaning, and it is perhaps misleading for
our goals. We may then give a first direction to understand what Ital-
ians mean when speaking of ‘method’ or of ‘system’.
‘Method’ in modern accounting is only one: double entry method.
Other methods belong only to history or to minor firm accounting or of
other kinds of organisations: simple entry method, triple entry method
or ‘Russian method’, quadruple entry method or ‘logismography’
222 PATRIZIA TORRECCHIA – MASSIMO COSTA
(Coronella, 2007: 71-77). Instead, ‘system-s’ are many, roughly corre-
sponding to the English views, mainly: assets and liabilities view, cen-
tred upon stocks or net worth, and revenues and expenses view, centred
upon flows or earnings. In the former it is necessary to measure the be-
ginning and end points in stock (balance sheet), before measuring the
variation or flow (income statement) that marks the transition from the
beginning to the end. In the latter (Riahi-Belkaoui, 2004: 178) revenues
as variations in owner’s equity during a period other than capital con-
tributions and adjustments and, together with them, expenses as expired
costs that correspond to the revenues of the period, are determined be-
fore stock values. But this first gross correspondence is only intuitive,
while the XX century Italian approach looks more complex. As we
shall realize after, these two views, under Italian eyes are, strictly
speaking, both belonging to the ‘net worth system’ because, out of dif-
ferent emphases on prior determination of stocks vs. flows, they both
derive flows as variations of stocks, and then as dependant variables,
while in proper Italian ‘income system’ we observe a Copernican
Revolution where, this time, owner’s equity is the dependant variable
and income the independent one.
In Italian scientific language accounting history before Besta and
his Venetian School (since ‘70s years of XIX century, until 1922, when
his posthumous opera omnia was finally published (Besta, 1922)), is
named pre-systemic phase of Accounting just because the ‘system’ of
Accounting was not still discerned and defined.
Pre-systemic Accounting was born with Pacioli’s work (Pacioli,
1494) or few before his great masterpiece (Cotrugli, 1458) and Italian
accounting sometimes presumes, with a bit of nationalistic emphasis,
all foreign traditions still live today in this historical phase (Gabrovec
Mei, 1990). In fact, nearly every treatise on accounting still begins with
or contains the fundamental accounting equation where the difference
between assets and liabilities is equal to the net worth or owner’s eq-
uity. Every change in one class of assets or liabilities is to be equalized
by a correspondent other one in order the fundamental equation re-
mains always verified.
For example if we have a new asset or a growing value of an exist-
ing one, by one side, by the other side we shall have either a diminution
in value for another asset or a growing value in liabilities or, otherwise,
THE SHIFT FROM A ‘STOCK’ TO A ‘FLOW’ APPROACH 223
a growing of net worth, in its turn or only in capital or in income. This
balancing justifies ultimately every entry in the book. As it was in Pa-
cioli’s work, so it is still today.
English accounting has never come back questioning about this
arithmetic truth. It was more interested, instead, on what to focus, by
means of this arithmetic truth. We have had, in sequence, a prevailing
‘assets and liabilities’ view in the old days of proprietary theory (Spra-
gue, 1907), centred more on the stocks than on the flows of wealth. Af-
ter we have had the entity theory (Paton, 1922), in which we discern, in
its turn, at least two historical phases. In the first one prevailed a ‘reve-
nues and expenses’ view centred more on the flows, this time, than on
the stocks. After that, in the last decades, we assisted (Gore-
Zimmermann, 2007) to a keeping of the institutional view of the entity
theory but in a renewed ‘assets and liabilities’ view, this time more fo-
cused on balance sheet accounts and its variations, above all for what
concerns perspective in future cash flow. In this third and last period of
contemporary English accounting literature we assist, as well, to the
decline of traditional empirical attitude in favour of rational derivation
from abstract frameworks, to the decline of historical cost accounting in
favour of fair value accounting, to the decline of the traditional income,
linked to physical capital maintenance, in favour of a comprehensive
income, linked to financial capital maintenance.
Globalisation, meanwhile, made the English (or, perhaps, the
American) literature has become simply the International and then
global accounting. In this, at least provisional, arrival point, income is
no more an outcome of business, but the mere sum of the single varia-
tions of values of single assets and liabilities, each of which seems to
have an its own life and fair value, out of the coordination of the whole
business of the entity.
All that, to Italian eyes, is very close to the ‘net worth system’ of
which we shall speak below, but this looks still a ‘net worth system’
still without a systematic language, as it was in the farthest days before
Besta’s work.
Italian accounting – as it is generally known – rose from its decline
in the beginning of XIX century, vindicating for itself the nature and
dignity of science (D’Anastasio, 1803). In this revival, the strongest ef-
224 PATRIZIA TORRECCHIA – MASSIMO COSTA
fort made by those scholars was to give a rational explanation of the
reason why the accounts run in a certain way or in another one.
The first direction, after abandoned, was the attempt to consider
every account as a right or an obligation referred no longer to the mer-
chant or, generically, to the proprietorship, but to the entity or the busi-
ness in itself (the ‘azienda’) (Marchi, 1867) (Cerboni, 1878). In this
first attempt to rationalize accounting even net worth accounts became
juridical accounts, in this case obligations of the abstract executives
who ‘kept the balance’ (the ‘administrators’ resembling the personal-
isation of entity) towards proprietorship, and a complex quadruple en-
try method (the aforesaid logismography) was elaborated for the fine
tuning of this complex net of rights and obligations (1).
This method, more apt to a state accounting or to a pre-industrial
society, was before fought and after abandoned for coming back to the
double entry method (Besta, 1922). In this coming back to double en-
try, however, Besta did not want to come back simply to the empirical
and irrational rules of past centuries. Thus, it was in this context that
the ‘accounting system’ about which we are speaking was proposed
and so was born.
Then, in any case, ‘double entry method’ and ‘double entry system’
were the same thing because no other system has been still conceived
and, likewise, because Besta was a positivist man, son of his times,
who trusted in only ‘one best way’ just like, nearly in the same years,
did Taylor in the dawning organisation science. In words for him it
would have been a nonsense to indicate more than one ‘accounting sys-
tem’. He thought to have discovered the ‘accounting system’.
Then let us finally arrive to the definition of ‘accounting system’.
Double entry is no longer a simple arithmetic method, where the total
of debits is equal to the total of credits of single accounts, but it is a
proper ‘system’ when accounts are shared into two fundamental series
of accounts, whose boundaries are sharply cut.
–––––––––
(1) The reason of this doubling of the double entry method is due to the double na-
ture assessed to every asset or liability from an administrator’s point of view: credit
toward someone and debt toward the owner or vice versa. For example the inventory
was a credit toward the warehouseman and, contemporarily, a debt in nature toward
the owner, and so on.
THE SHIFT FROM A ‘STOCK’ TO A ‘FLOW’ APPROACH 225
We could define the system as a set of accounts related each other for one or more purpose: this set is then organized into the two men-tioned series.
For Besta a true system should possess three arithmetic properties:
I) Total of Debits = Total of Credits (derived from being an application of the double entry method);
II) Total of balances in Debit = Total of balances in Credit (as before);
III) Total of balances of the sum of the ‘first series’ accounts = Total of balances of the sum of the ‘second series’ accounts (this being the proper ‘systematic’ property, because it implies the presence of the two series of accounts).
With such properties every entry in accounting can belong only to the following three kinds of ‘administrative facts’:
a) Permutations, when an increase in an account of one series (mainly the first) corresponds only to a decrease in another account of the same series;
b) Modifications, when an increase in an account of one series corresponds to another increase but in the opposite side of accounts (Credit vs. Debit) and in the other series, or, likewise, when a decrease in an account of one series corresponds to another decrease but in the opposite side of accounts (Debit vs. Credit) and in the other series;
c) ‘Mixed’ facts, when a combination of the two previous ones occurs, e.g., with an increase in a ‘first series’ account (in Debit), to which correspond a sum of two variations (in Credit), respectively in another ‘first series’ account and in a ‘second series’ account.
In words ‘Permutations’ occur when the wealth of the entity re-mains unchanged and what changes is only the nature of this wealth (cash or receivable, for example), while ‘Modifications’ represent the true variation of the wealth itself and, in such instances, the second se-ries represents the causal interpretation of the variation in the first se-ries. The first series, thus, answers to the question ‘What?’, while the second series answers to the question ‘Why?’.
226 PATRIZIA TORRECCHIA – MASSIMO COSTA
The first series is the original one, following the wealth (positive or
negative) in all its manifestations.
The second series is the causal or derived one, following the causes
of status and variations of wealth.
In the first series we find all assets and liabilities, classified accord-
ing their original nature. In the second series we find all the accounts of
net worth, and among them, the income ones, classifying the reasons
for which single assets or liabilities change or are initially determined.
All the disputes in XX century Italian accounting have been about
the right boundaries to mark between the two series: the original one, of
reliable single elements of wealth, by one side, and the derived one, the
remaining accounts, by the other side. What is a true asset and what is,
instead, only a cost to be delayed (2)? What is a true liability and what
is, instead, only a revenue to be delayed (or a cost to be anticipated)? In
this perspective balance sheet become an heterogeneous field, where
we find deferred or anticipated income value as well as cash, cash
equivalents and cash assimilated (the ‘numeraire’ values of before). In
this perspective net worth is no longer a plain difference between two
homogeneous numbers as in ‘net worth system’, but the algebraic sum
of such heterogeneous addends, nothing more than the provisional and
conservative actualisation of future earnings in terms of cash flow. This
net worth, called ‘capitale di funzionamento’ (in English, more or less,
‘business capital’), does not pretend to be the real ‘value of the busi-
ness’ as a whole but a size useful for the best determination of income,
the central scope in ‘income statement’, that is for the best determina-
tion of distributable dividends.
In the following parts of the paper principles and variants of this
basic assumptions concerning accounting systems will be conse-
quently developed.
–––––––––
(2) A positive prepayment, for example, is not an asset, in ‘income system’ of
course, but a ‘suspended’ cost to be attributed to the next year expenses.
THE SHIFT FROM A ‘STOCK’ TO A ‘FLOW’ APPROACH 227
3. The Oldest System in the Italian Literature: the ‘Net Worth’
System by Besta
3.1 Historical Origin and Properties of the System
The patrimonial system arose at the end of the Nineteenth century and exactly in the 1892 thanks to its founder: Fabio Besta.
Before his work, two main Schools of Accounting (Torrecchia-Costa, 2011) had developed:
· the Lombard School: the scholars that belonged to it prefigured the so-called ‘materialistic theory of accounts’ according to which the accounts had to be referred to objects, and not to persons;
· the Tuscan School: the scholars that belonged to it believed that to each account should correspond a person (i.e. owner, agents etc.).
In a way, we can say that Besta continued in the wake left by the Lombard school and founded the Venetian School. In fact, he trans-ferred the materialist conception (inherited by the Lombard school) into the ‘theory of accounts-value’: the theory is materialistic because it does not consider the accounts referred to subjects but to objects (stocks) and also sublimates these objects to a level of abstraction (quantifying them and assigning to them a value).
Apart from the Lombard school, he was influenced by English positivism (Spencer) that theorized a general conception of the world within which the branches of knowledge were composed to form a compact system in which the ‘leader’ discipline was biology. Therefore there was an attempt to assimilate all forms of life to those of living or-ganisms.
In this general context the structure of knowledge was thought as a pyramid (headed by the biology) and composed of different parts per-fectly divisible and identifiable.
Besta transferred this view also on accounting and from a manage-ment point of view it also could be divided into parts that were able to be analysed one by one, always preserving the ability to reassemble them to unity.
From the accounting point of view this meant:
228 PATRIZIA TORRECCHIA – MASSIMO COSTA
· individual objects of the accounts were divisible. So it was expected a ‘biphasic’ function of the accounts. The object of the account could be subject to increases and decreases of opposite sign inside of the same account;
· within the balance sheet, the possibility of reaching the accounts with ‘gross results’.
Also from positivism, he takes the evaluation criteria considering values that are ‘true and real’.
The patrimonial system is based on a conception of value typically for accumulation. The formation of values is gradual; it takes place by incorporation of the factors in the production objects. Thus both exter-nal and internal management (which is independent of trade with third parties) assume the same importance.
As mentioned above, the fundamental difference between the ac-counting systems consists on the content of the two series of accounts. Besta was the first author who made explicit the idea of a system of ac-counts and identified two groups of accounts (called just ‘serie dei conti’): the first series and the second series of accounts.
Concerning the sistema patrimoniale (‘Net worth’ system), the content of the first series is the entire wealth (all the accounts referred to single assets and liabilities) while the content of the second series is constituted by the algebraic sum of all the accounts of the first series defines an aggregated stock that, for Besta, might be only one: the net worth, the ‘patrimonio netto’ of the ‘azienda’ (entity).
The variations in the period (expenses and revenues) exist as there are variations (positive and negative) of net worth. Thus we can define (3):
· an expense as a negative variation of the net worth;
· a revenue as a positive variation of the net worth.
In this view, the net worth (4) is pre-existing in relation to the in-come: it represents the originating element of the flow (income).
–––––––––
(3) It is just the case to underline how much these definitions resemble the ones of
the last release of the IFRS Conceptual Framework.
(4) And, before net worth itself, the sum of single ‘assets and liabilities’ values of
the first series, that so fully deserve the appellation of ‘original’ series.
THE SHIFT FROM A ‘STOCK’ TO A ‘FLOW’ APPROACH 229
Moreover the accounts follow very specific and simply rules:
Fig. 1: Classical ‘Net Worth’ Accounting Rules
(First series) The accounts referred to assets have debit balances
(First series) The accounts referred to liabilities have credit balances
(Second series) The accounts referred to net worth have:
Losses with debit balances
Profits with credit balances
Capital accounts with either debit or credit balances
This system has two main variants that have different characteris-tics. To better understand how the above mentioned systems (and their variants) work, in the following sections we show some examples of administration facts recorded in a double entry ledger. As we see, in fact, each system interprets differently the same administrative fact.
3.2 The Classical System of ‘Net Worth’
As we said above, the two series of accounts work with an antitheti-cal functioning (in respect of the double-entry properties). In particular, the Classical variant of the net worth system interprets every administra-tive fact as ‘net mutations’ of the net worth stock. It considers all the administrative facts as permutations, which means that they do not mod-ify the net worth individually, but they can modify it in conjunction
230 PATRIZIA TORRECCHIA – MASSIMO COSTA
100
(april 26th )
through a positive or negative margin consisting of the gain or loss.
Ex: We suppose that we purchased goods on April 26th
, 2012 at the price of 100 Euros and we paid by cash. Then on May 26
th, 2012 we
sold the all goods (previously bought) at 120 Euros receiving cash.
So, on T diagrams, we have:
In the acquisition phase a debit in ‘Merchandise’ account and a credit in ‘Cash’;
In the transfer phase a debit in ‘Cash’ and a credit either in ‘Mer-chandise’ account and in the ‘Gross merchandise margin’.
If we had internal transformation phases we should have ‘permuta-tions’ between a previous inventory account (for example raw material) and a following one (for example manufactured good).
If the payment and the receipt pass through a payable or a receiv-able, we will have other obvious permutations: between cash and pay-able or between receivable and cash.
In any case we observe that, out of the ‘margins’, belonging to the second series, every other account here mentioned belongs to the first series, because it describes the nature of a ‘piece’ of wealth: cash, mer-chandise, receivable,…
Fig. 2: Typical Classical ‘Net Worth’ System Accounts
CASH
GROSS MERCHANDISE
MARGIN
120
(may 26th)
20
(april 26th)
100
(april 26th)
100
(may 26th)
MERCHANDISE
THE SHIFT FROM A ‘STOCK’ TO A ‘FLOW’ APPROACH 231
3.3 The Current System of ‘Net Worth’
The so called ‘Current’ variant of the net worth system was ideated
by De Dominicis who proposed a wider conception of expenses and
revenues. As we have observed in the classical system the ‘permuta-
tions’ are preferred to the ‘modifications’. Here we use, instead, as far
as it is possible, distinguished ‘modifications’ in every event of admini-
stration. For doing so, we distinguish expenses and revenues into two
main categories (5):
a) financial, when they derive from variation in cash or credits or debts;
b) ‘in nature’, when they derive from any other variation in assets
and liabilities, like plants, properties, or inventories.
In fact, in consideration of the different management phases, it is
possible to better distinguish:
For the acquisition
phase
For the modification
phase
For the transfer
phase
a financial
expense and
An expense
‘in nature’ and
An expense
‘in nature’ and
a revenue ‘in nature’ a revenue ‘in nature’ a financial revenue
It considers all the administrative facts as modifications, which
means that they modify the net worth in a direct way: it interprets the
administrative facts mainly as gross mutations of the net worth.
We now offer the same example above explained.
Ex.: We suppose that we purchased goods on April 26th
, 2012 at
the price of 100 Euros and we paid by cash. Then on May 26th
, 2012
we sold the all goods (previously bought) at 120 Euros receiving cash.
This time, on T diagrams, we have:
–––––––––
(5) Really De Dominicis spotted another kind of ‘revenue/expense’: the ‘revalua-
tion’ or ‘devaluation’, when no new element occurs or increases or decreases in assets
and liabilities, but only a variation in value, as, contemporarily, is the case for the ‘fair
value accounting’.
232 PATRIZIA TORRECCHIA – MASSIMO COSTA
In the acquisition phase a debit in an ‘External charges’ (raw mate-
rials, consumables,…) account and a credit in ‘Cash’, but also a debit in
‘Merchandise’ and a credit in ‘Variations in stock’;
In the transfer phase a debit in ‘Cash’ and a credit in ‘Revenues’,
but also a debit in ‘Variations in stock’ and a credit in ‘Merchandise’.
Thus, we observe a duplication of entries faced to the previous variant
because movements in ‘Cash’ here are seen as separate facts from move-
ments in ‘Merchandise’, originating different revenues and expenses.
If we had internal transformation phases we should have contempo-
rarily negative and positive ‘variations in stock’, that is ‘in nature’
revenues and expenses, as well as negative and positive variations in
‘inventory’ accounts (for example, respectively, raw material and
manufactured good).
If the payment and the receipt pass through a payable or a receivable,
we will have, instead, only permutations as in the previous system: be-
tween cash and payable or between receivable and cash, of course.
In any case we observe that here the first series of accounts is repre-
sented by cash, receivable, payable, merchandise and all other kinds of
assets and liabilities, while the second series is represented by the afore-
said ‘charges’ or ‘revenues’ (financial expenses and revenues) and by the
different kinds of ‘variations in stock’ (in nature expenses and revenues).
THE SHIFT FROM A ‘STOCK’ TO A ‘FLOW’ APPROACH 233
Fig. 3: Typical Current ‘Net Worth’ System Accounts
4. The Revolutionary System in the Italian Literature: the ‘In-
come’ System by Zappa
4.1 The Characteristics of the Income System
As mentioned above, if we modify the first set of account, as it
would be in the ‘income system’, while the systematic language re-
mains, it would give birth to a different ‘accounting system’.
Thus ‘income system’ (Zappa, 1920-1929) is founded essentially
upon a restriction of the original series from all assets and liabilities to
only one part of the same: the numeraire or strictly financial accounts,
leaving out inventory, property, plants, machinery and every other
CASH
120
(may 26th )
100
(april 26th)
REVENUES
100
(april 26th)
EXTERNAL CHARGES
100
(may 26th)
100
(april 26th)
120
(may 26th)
MERCHANDISE VARIATIONS IN STOCK
100
(may 26th)
100
(may 26th)
234 PATRIZIA TORRECCHIA – MASSIMO COSTA
value not being cash, cash equivalent or cash substituting for a short
term. This last assets (or liabilities) will appear only as ‘income values’
still not attributed to the income statement for the accrual accounting.
They are only a sort of actualisation of future revenues and costs, but,
as they do not belong to the first series, they cannot have a value on its
own. So, for them, ‘historical cost’ is not a method of evaluation, but a
‘way of being’. They are not ‘evaluated by their cost’; they are true
‘costs’, still not attributed to the income statement, nearly ‘parked’ in
balance sheet, waiting for entering the income statement as expenses
when their turn will be arrived for being properly matched to the corre-
sponding revenues.
It is based on the primacy and centrality of the market in the forma-
tion of reliable values which are the numeraire values. In a broad sense,
the basic concept could be understood in a neo-classical way: the best
measurer of value is the market-exchange.
An important classification of the numeraire values distinguish
between:
· Proper numeraire values: money, stamps, cashier’s checks etc.;
· Assimilated numeraire values: receivables and payables that
regulate trade through deferral;
· Presumptive numeraire values: they are expressive of future
events like provisions, foreign currency assets, and accruals.
Out of these values the ‘Income system’ does not trust that assets
and liabilities own a value for themselves. Out of ‘cash’ (in the broader
sense of before, of course), nothing is real in evaluation: the only
evaluable size is the ‘Income’ as a whole. ‘Net worth’ is only an ap-
proximate and ‘dirty’ sum of cash values (numeraire better) plus in-
come elements not still matched with the present year, and then nearly
‘parked’ or actualised in the balance sheet.
This is the ‘Copernican Revolution’ about which we spoke before,
where stocks are transformed in dependent variables and, vice versa,
flows in independent variables to be primarily determined. In ‘income
system’ income is no longer the variation in time of net worth but the
original value to be determined, while, this time, net worth is only the
actualisation of future income.
THE SHIFT FROM A ‘STOCK’ TO A ‘FLOW’ APPROACH 235
As already said, the income system is more modern in terms of time
than the net worth one. It could be seen as a ‘halved’ net worth system as
it considers in the first series just the numeraire assets and liabilities
shifting to the second series the remaining assets and liabilities.
For a comparison between the two main systems, we can summa-
rize the characteristics of them as shown in the table below.
Fig. 4: ‘Net Worth’ vs. ‘Income’ System
NET WORTH VS. INCOME SYSTEM
Net worth system Income system
Consideration of External + internal
management
External management
Focus on the
determination of
The stock The flow
Contents of the
first series
Assets + Liabilities Numeraire assets and
liabilities
Contents of the
second series
Net worth values Net worth values +
Costs/Revenues
Functioning (6) of the
costs and revenues
accounts
Two-side
in ‘classical’
One-side/Two-side
in ‘current’
One-side
–––––––––
(6) Of course, in ‘Income system’ if only the whole income is determinable relia-
bly, it is impossible to have gross margins referred to single parts of business. Thus,
in ‘Income system’ we find only costs (by the side of Debit) or revenues (by the side
of Credit) and not margin accounts: they ought to be referred only to the ‘azienda’
(entity/business) as a whole. From that derived also an historical prejudice of Italian
traditional accounting against ‘Management Accounting’ because it shared (produc-
tions, agencies, cost centres) what was united for nature.
236 PATRIZIA TORRECCHIA – MASSIMO COSTA
Now we present the same example as before, focusing on the dif-ferences with the previous system.
Ex.: We suppose that we purchased goods on April 26th
, 2012 at the price of 100 Euros and we paid by cash. Then on May 26
th, 2012
we sold the all goods (previously bought) at 120 Euros receiving cash.
This time, on T diagrams, we have:
In the acquisition phase a debit in an ‘External charges’ (raw mate-rials, consumable,…) account and a credit in ‘Cash’.
In the transfer phase a debit in ‘Cash’ and a credit in ‘Revenues’.
Thus, we observe the same entries of the ‘current net worth system’ but only with financial movements and without the ‘in nature’ ones. Why? Because ‘Income system’, out of the ‘financial’ zone of the wealth is really blind: it does not see inventories, it sees only cash, re-ceivables and payables. The recording of the ‘non-financial’ zone of the wealth is delayed to the end of the year, when the anticipated and de-ferred costs and revenues will be finally calculated and written in the financial reports.
Thus, if we had internal transformation phases we will not have any entry, because no one ‘numeraire’ value is affected by internal trans-formations of resources. The determination of ‘manufactured goods’, for example, will be delayed as well to the end of year as a deferring of costs (the ones charged for the manufacturing).
If the payment and the receipt pass through a payable or a receivable, we will have, instead, only permutations as in the previous systems: be-tween cash and payable or between receivable and cash, of course.
In this case the cash (or cash equivalents, ‘numeraire’,…) belong to the first series, while the others (goods purchase,…) belong to the sec-ond or derived series (answering the question: ‘Why is cash increased? For purchasing or selling goods’)
Fig. 5: Typical ‘Income’ System Accounts
GOODS PURCHASE A/C
100
(april 26th)
120
(may 26th)
CASH GOODS SALE A/C
100
(april 26th)
120
(may 26th)
THE SHIFT FROM A ‘STOCK’ TO A ‘FLOW’ APPROACH 237
In this way we note that it provides two different accounts for cost
and revenue which are one-side as the first works only in the Debit sec-
tion while the latter works only in the Credit section.
As the net worth system also the income system presents its own
variants: here we consider the ‘Pure’ and the ‘Income and Capital’
variants. The former is the original version; the latter is a compromise
with the ‘Net Worth system’ enhancing the domain of ‘financial zone’
at expense of the ‘non-financial zone’ of the second series.
4.2 The ‘Pure’ System of ‘Income’
This variant was supported by two important scholars, Onida and
Ferrero, who were Zappa’s disciples. It is an ‘orthodox’ formulation of
the Income system which wants to go beyond the same tracks of the
Master, bringing the system to its extreme consequences. In fact, it re-
stricts the content of the first series only to the ‘proper’ and ‘assimi-
lated’ numeraire values, expanding in this way the content of the sec-
ond series now including also the ‘presumptive’ numeraire value. Now
a positive accrual, for example, it is no longer a quota of a credit al-
ready matched to the year, but is an anticipated revenue, so belonging
to the non-financial zone of wealth and to the second series.
As in the original variant of the system, from the numeraire varia-
tions derive other variations which can be divided into two groups:
· Indirect variations of wealth: cost (7) and revenues (economic
flows);
· Direct variations of wealth: which are capital injections and
distributions of profit to shareholders.
In a purely didactic assumption, there is perfect coincidence be-
tween the numeraire and the economic dynamics (both temporally and
quantitatively). In this way, all numeraire variations, occurring in one
–––––––––
(7) As the reader can appreciate, in Income system we do not speak any longer of
‘expense’, because only the costs matched to the present year could be named in Eng-
lish with such a term. They are, generically, costs, and become expenses only when
matched to the correspondent revenues.
238 PATRIZIA TORRECCHIA – MASSIMO COSTA
reporting period, generate or capital variations (the aforesaid ‘Direct’
variations) or costs and revenues that are fully attributable to the corre-
sponding financial year (8). From this it comes that the difference be-
tween costs and revenues directly gives the profit/loss for the year. But,
profit or loss could be determined as a comparison between the changes
in resources and claims; or as a comparison between financial receipts
and payments. The reality in almost all cases shows that the above per-
fect correspondence does not exist. Indeed there is a discrepancy that is
characteristic of the economic system.
This means that the costs and revenues that have been sustained or
achieved, almost never can be fully allocated or fully provided on a finan-
cial year according an accrual accounting. Then in determining the operat-
ing result (on 31/12) we will need to make corrections, additions, etc. to
the cash flows which show that there are positive and negative compo-
nents that ‘must go away’, i.e. they cannot be attributed to the current fi-
nancial closure (because not of competence), but must be sent back to the
future as waiting to cross the related revenues and costs. There could also
be costs and revenues for the future that must be allocated to the financial
year (at present) so as to cross the related revenues and costs. Thus we
have a phenomenon known as ‘cost and revenue deferring or anticipating’
which creates the category of ‘accounting inventories’ (9).
In this pure version of the income system, we have an ‘income
statement’ that presents only three main classes of accounts:
· Cost and revenues;
–––––––––
(8) We use roughly the term ‘financial year’ but the Italian doctrine distinguishes
the administrative period (year, semester,…) from the business inside it (esercizio
amministrativo) to which here we refer.
(9) When these scholars speak of ‘accounting inventories’ they are not only think-
ing to the proper inventories. Of course also these are ‘accounting inventories’ be-
cause they are too ‘deferred costs’, but they are thinking also to every other kind of
prepayment, even not represented by a physical object, like capitalised costs for re-
search and development, plants and machinery, and so on. In a similar way the ‘ac-
counting inventories’ can concern revenues and not costs, and both, revenues and
costs, can be anticipated and not deferred for the accrual accounting as occur for the
proper accruals and for provisions.
THE SHIFT FROM A ‘STOCK’ TO A ‘FLOW’ APPROACH 239
· Deferred and anticipated cost and revenues of the precedent year;
· Deferred and anticipated cost and revenues of the year.
So it would be represented as following:
Fig. 6: Income Statement in ‘Pure Income’ System
INCOME STATEMENT
Deferred Costs and Anticipated Revenues
of the precedent year
Deferred Revenues and Anticipated Costs
of the precedent year
COSTS (multi-year and of the year)
REVENUES
Deferred Revenues and Anticipated Costs
of the year
Deferred Costs and Anticipated Revenues
of the year
The main characteristic of this variant is that the depreciation rate
is not present even if the phenomenon of depreciation is indirectly evi-
dent. In fact, the multi-year cost does transit entirely in ‘debit’ section
of the income statement (along with the operating costs) while in the
‘credit’ will be its remaining part: from their opposition we can indi-
rectly find the depreciation rate.
Thus, we do not find a multi-year cost in the Debit side of the Bal-
ance sheet, as in the original formulation, but a ‘prepayment’ progres-
sively depreciated, entering and exiting every year through the income
statement for a progressively diminishing value.
Likewise we do not have provisions, because they are only antici-
pated costs, booked for the entire sum in the Debit side of income
statement every year and taken again after, at the annual opening of ac-
counts, as ‘anticipated costs’ of the precedent year.
A we have just said the income statement is so in the ‘pure’ variant
of ‘Income system’ much simpler in structure than in its original version,
240 PATRIZIA TORRECCHIA – MASSIMO COSTA
but the balance sheet is likewise simpler: in the assets we will find only
cash values (proper and assimilated), positive accrual and positive pre-
payments, in the liabilities we will find only negative cash values (of
course only assimilated, that is payables), negative accruals and negative
prepayments. Nothing more. With no doubt the purest version of income
system owns a peculiar elegance in representation of the entity’s values.
4.3 The ‘Income and Capital’ System
Other disciples of Zappa preferred to enlarge the original series in-stead of restricting it like Onida did. The ‘Income and Capital’ variant, due to the names of Amaduzzi and D’Ippolito, went just in this direc-tion. Of course this results in a compromise between ‘Income’ and ‘Net worth’ systems, because shifting upwards the boundaries between the financial zone of wealth (the domain of the first series) at the expenses of the non-financial zone (the domain of the second one, where assets and liabilities are properly costs and revenues, even if deferred or an-ticipated respect to the present financial year), is equivalent to move towards the ‘net worth’ system, where all assets and liabilities are original and not income values.
While in the pure variant the first series was limited only to the proper and assimilated numeraire values, and in the original variant the first series is expanded also to the third class of numeraire values, the presumptive ones, here it includes not only these but also other finan-cial values. The first enlargement is due to Amaduzzi, who found very weak the distinction between ‘receivables’ (I series) and ‘loans’ (II se-ries, as ‘financial’ costs) by one side, and the distinction between ‘pay-ables’ (I series) and ‘debts’ (II series, as ‘financial’ revenues) of the original version. Not always the distinction between a credit or a debit that has only a temporary task of money substitution and a credit or a debit that are negotiated as separate goods in themselves is so sharp to can cut exactly the limit numeraire – non numeraire. For Amaduzzi, then, all credits and debts have an intrinsic value and then they are equivalent, in this respect, to cash.
The first series is then called financial and it is bigger than just the numeraire one.
D’Ippolito did another step. The financial instruments (shares,
THE SHIFT FROM A ‘STOCK’ TO A ‘FLOW’ APPROACH 241
bonds, securities,…) in portfolio were still considered by ‘Income sys-
tem’ scholars (Zappa, Onida, Ferrero, also Amaduzzi) as ‘deferred
costs’. Their evaluation, then, might be pursued only according the His-
torical Cost Accounting. For him, instead, the evaluation of such instru-
ments depended on the nature of their value. If they had a large market, a
prompt conversion to money, a reliable market evaluation, and if they
were used as obtaining earnings by them (in capital value, interests, divi-
dends,…), they should be considered no longer ‘deferred costs’ (II se-
ries), but really ‘money equivalents’, that is ‘financial values’ of the I se-
ries. Thus, the most of financial values were shifting toward an ante lit-
teram fair value accounting, leaving in the II one only properties, plans
and machinery, and inventory, curiously arriving nearly to the same con-
clusions of modern IFRS (10), but – this is the difference – with a ‘sys-
tematic’ language to justify rationally the different ways of evaluation
(HCA vs. FVA) in the two different ‘zones’ of wealth.
Fig. 7: Income Statement in ‘Income and Capital’ System
INCOME STATEMENT
Deferred Costs and Anticipated Revenues of the precedent year
Deferred Revenues and Anticipated Costs of the precedent year
COSTS (multi-year and of the year)
Depreciation rates
Provision rates
REVENUES
Distribution of multi-year revenues
Deferred Revenues and Anticipated Costs
of the year
Deferred Costs and Anticipated Revenues
of the year
As we can see the phenomenon of depreciation is calculated differ-
ently than before: this time the share is shown in a direct way. In this
–––––––––
(10
) And peculiarly is amazing the fact that, in this twofold way of considering fi-
nancial instruments, he arrived just to the same ending points upon which now relies
the last version of IFRS 9.
242 PATRIZIA TORRECCHIA – MASSIMO COSTA
case we can say that we are in the presence of ‘degradation’ (adjust-
ment) of the Income system itself.
5. Conclusion
All this history, at a first glance, might be superficially mistaken
for a heavy philosophical superstructure that those odd Italian scholars
wanted to give for an intrinsically simple subject: the ‘system’ of ac-
counts. Perhaps, however, the purport of this conceiving is broader, and
under a historiographical point of view and under a theoretical one.
In the first respect this dichotomy of schools is not isolated or eth-
nically Italian. Nearly in the same years of Italian ‘Income Revolution’
(1920-60), other western countries experienced similar trends. We have
already said of the contraposition proprietary vs. entity theory (and the
underlying contraposition between ‘assets and liabilities’ vs. ‘revenues
and expenses’ view) in English literature. To this we have to add, at
least, the turning point of ‘Plan Comptable Général’ in French Ac-
counting (1947), when an HCA was certainly established in France, not
very far from the Italian one, or, otherwise, the ‘Dynamische Bilanz’ of
Schmalenbach in Germany faced to the oldest conceptions more similar
to the classical Italian ‘Net Worth system’ by Besta. Italian ‘systems’,
then, are surely in the full stream of times.
In the second respect ‘Net worth’ and ‘Income’ systems suppose two
alternative worldviews: optimism in accounting evaluation vs. pessimism.
In the ‘Net worth’ system it is always possible to find the true
value of goods, at least approximately, and the value of an entity is al-
ways the algebraic sum of all assets and liabilities.
In the ‘Income’ system only a part, the ‘financial zone’ of assets
and liabilities, is liable to be sharply evaluated (even if the boundaries
of this zone vary according the different variants): in the strictest views
only cash and cash equivalents have a sure value, others are more in-
dulgent. Thus, for every other asset or liability the historical cost (or
revenue for the liabilities) is the only reliable and prudent way to figure
them. Furthermore, the value of the entity is always different (often
greater) than the single units (assets and liabilities) of which it consists.
The evaluation of entities in ‘Income system’ is always ‘holistic’ and
THE SHIFT FROM A ‘STOCK’ TO A ‘FLOW’ APPROACH 243
‘prudent’ at the same time.
Faced to the ‘Net worth’ system, more conventional, ‘Income’ sys-
tem brings more new consequences due to this holistic conception.
The first, here only touched, is that the income is referable only to
the year and to the entity as a whole. Sharing principal business into
separate and internal businesses, like does Management Accounting, is
a non-sense operation. Financial accounting ‘must not’ deal with inter-
nal transactions (11).
The second is that we find a rationale for adopting a generalised his-
torical cost accounting and thus it represents one of the best ideologies
supporting what is now generally considered the ‘conservative’ approach.
Not less important look the ‘variants’ inside the two main systems.
They do not represent, in fact, only a sort of dialects within a common
language. They, operating mainly on the second series elements, give
the foundation for the structure to be adopted in financial reports. In the
‘current net worth’ system, for example, we open the way to a structure
of income statement with revenues and expended of the ‘produced’ (not
of the ‘sold’); in the ‘classical net worth’ system we open the way to a
gross margin structure of income statement, and so on. They, still, de-
fining the right boundaries between the financial and non-financial
zone of the wealth, prospect various kinds and degrees of compromises
between the two aforesaid worldviews.
But on the whole the interest for Italian ‘Accounting Systems’ is
mainly due to theoretical reasons. Systematic language, in fact, might
be considered existing in Accounting even if not still perceived by its
users, just as a grammar of a natural language had been existing even
before the first treatise on grammar has been written. What classical
–––––––––
(11
) Even D’Ippolito, the ‘nearest’ to the ‘Net worth’ system of our scholars, sup-
ported this idea. But he ideated a twofold system for dealing with management ac-
counting: an ‘income system’ for financial accounting, sharply cut from a ‘net worth
system’ for management accounting with another ledger. Relations between the two
ledgers were granted by ‘link-accounts’ that, in management accounting, took again
‘financial accounting revenues and expenses’ and transformed them with a giro in ‘for
destination’ revenues and expenses. The attempt, however, for certain respects, could
look somehow schizophrenic in its twofold attitude toward, respectively financial and
management accounting, but surely very ingenious.
244 PATRIZIA TORRECCHIA – MASSIMO COSTA
Italian scholars are still trying to tell us is that, when we produce in-
formation by means of accounting and double entry method, we are
implicitly observing our world under two points of view corresponding
to the two series of accounts. And this distinction, far from being only a
questionable and abstract hypothesis, has deep implications on evalua-
tions methods, that is it has very practical consequences. Now Account-
ing is trying since decades to overwhelm every simple empirical ap-
proach where no one is able to explain why a practice should be ‘best’.
Better than what? Then it has trying to cover this fault by assuming
general conceptual ‘frameworks’. But, in the evaluations, the true rea-
son for which we should prefer the FVA than other methods (mainly
HCA) remains quite obscure.
Does, then, exist in IFRS itself an implicit ‘system’ (in Italian
sense)? And, if it does, which is among the ones here surveyed?
In our modest opinion IFRS look a generalisation of the D’Ippolito’s
system. In that one a set of assets and liabilities (the financial zone) was
liable to have a single evaluation process, while another set was made by
assets and liabilities whose value has a sense only in the business coordi-
nation (the non-financial zone). The first set recalls to the mind the main-
tenance of capital in financial terms; the second set recalls the mainte-
nance in physical terms. In the first zone we have simply a sum of sepa-
rate investments; in the second zone we have a true combination, ordered
to the production of an operating income. Starting from D’Ippolito’s
view we have to do just another little step to arrive to IFRS implicit sys-
tem. The step is the conventionality of choosing which asset or liability
belongs to the first or to the second set of accounts.
If we decide (mainly for inventory, for fixed assets, for some finan-
cial instruments) that goods have a value only if inserted in a combina-
tion, they then do not belong to the I but to the II series. They are only
income values (revenues or costs) and then can be evaluated only at
their historical cost (or revenue). Better, they are not evaluated by an
HCA; they are true costs, even if not still matched with correspondent
revenues in the income statement. We may choose and argue for an al-
ternative ‘cost’ evaluation, as the ‘substitution’ one, but we are com-
pelled to remain inside the boundary of costs.
If we decide, on the contrary, that goods have a single value, as
THE SHIFT FROM A ‘STOCK’ TO A ‘FLOW’ APPROACH 245
separate investments, as primarily cash is, they belong to the I series,
they are basically equivalent to cash, or, in Italian language, properly
‘financial’. Having a value for themselves they have a ‘fair value’ that
can be determined and it is for that reason that their accounting should
be a FVA. We may choose or argue for another ‘current’ value, as the
Chamber’s COCOA, but we are compelled to remain inside the bound-
ary of a single evaluation process.
The Italian ‘accounting systems’ in a word left as legacy to contem-
porary accounting a rational basis for choosing an evaluation principle
and for discerning the link between the two classes of assets and liabili-
ties and the two conceptions of capital maintenance as well as for the
reason we now have two different conceptions of income and income
statements, ‘separate’ or ‘comprehensive’ in IFRS’s language. Its appro-
priation by the international community, for that, could perhaps be useful
to resolve not few very debated problems in contemporary accounting.