Rationalizing Accounting Equation PM – 16:30 PM

68 the funds is acquired. The authors argue that the rationality is more consistent and easier to understand than the conventional one. The conceptual framework of the IASB states 5 elements of financial statements namely assets, liabilities, equity, income and expenses Alfredson et al. 2007, while the FASB states 10 interrelated elements of financial statements namely assets, liabilities, equity, investments by owners, distribution to owners, comprehensive income, revenues, gains, and losses FASB, 1985. Despite the facts that the boards have different elements, the balance between the left side and the right side of the accounting equations which is required by mathematics will remain the same. In the accounting learning, instructors are allowed to develop new elements which have not been determined by the standards. The FASB 1985, par.γ states that ―Although the elements defined in this Statement include basic elements and are probably those most commonly identified as elements of financial statements, they are not the only elements of financial statements‖. Therefore, mathematics-based accounting learning invites students to understand and develop concepts rather than just recognizing rules.

C. Recording transactions

A transaction is the input of accounting. Weygandt et al. 2008, p.14 defined a transaction as: ―a business‘ economic events recorded by accountants‖. Anthony et al β007, p.γ1 defined transactions as ―events that affect the numbers in an entity‘s accounting record…‖ Horngren et al. β001, p.10 defined a transaction as ―any event that both affects the financial position of an entity and can be reliably recorded in money term‖. The three definitions above need further exp lanation in order to facilitate students‘ understanding. Based on the accounting equation, a transaction can be defined as any business event that leads to changes in the elements of the accounting equation by maintaining the balance of it. The changes of elements can be either positive or negative. Consequently, if a transaction 69 changes assets then other assets, liabilities, equity, expenses, revenues or combinations of those elements change. Thus, a transaction at least will cause 2 changes. Presenting accounting information based on the elements of accounting equation is considered uninformative because one element can consist of various objects. For example, 2 firms A and B have equal total assets. εost of firm A‘s assets are account receivables, while most firm B‘s assets is buildings and machinery. Despite the fact that both have equal total assets, creditors assume that firm A is better than firm B in their ability to pay short-term liabilities. In order to present informative accounting information, the elements of accounting equations must be elaborated in detail in the forms of accounts. Each account should reflect a homogenous object. As mentioned above, a transaction at least will cause 2 changes. Therefore, recording a transaction at least will involve two accounts. In accordance with the rationality of the accounting equation, there are two types of accounts namely accounts reflecting the use of funds on the left side of the equation and accounts reflecting the sources of funds on the right side of the equation. Mathematically, it can be explained as follows: a transaction that involves 2 accounts of the same type will have reversed relationships. For example, the payment of salary increases salary expenses an element of expenses and decreases cash an element of assets. On the other hand, the purchase of supplies on account increases supplies an element of assets and account payable.

D. Understanding the Rules of Debit and Credit

Modern accounting explicitly or implicitly puts the emphasis on the need of double entry accounting system in every transaction recording. It requires a balance system between debit and credit. Although double entry system has been used widely, the literatures on mathematical formulation of the double entry and its connection to the accounting are still limited. Ellerman 1985, p.226 mentioned that only few mathematic literatures connected to the mathematics-