In 1983, I published Inflation Accounting: An Introduction to the Debate, on which this book is based. This earlier book was intended to introduce the basic framework of inflation accounting as a preparation for reading the study of the inflation accounting debate which David Tweedie and I published in 1984. However, it was also intended to stand on its own as an introduction to the measurement concepts underlying financial accounting as it is currently practiced, which are extremely important in determining economic decisions. Such issues as how profit is measured in the profit and loss account and how assets and liabilities are measured in the balance sheet affect our perception of the performance of businesses and, increasingly, of other entities, including public-sector bodies. This became alarmingly obvious during the Financial Crisis of 2007 onwards.
When the original book was written, inflation was a major economic concern throughout the world economy, so the book emphasised inflation accounting, whilst acknowledging that inflation is only one aspect of the measurement problem: individual prices typically change relative to one another even when inflation (the change in the general price level) is negligible. Since that time, the world economy has changed in a way that emphasises the importance of specific, rather than general, price changes. Notably, the recession following the Financial Crisis has been characterised by low inflation accompanied by some large changes in the prices of some goods and commodities, such as oil.
This book reflects this shift of emphasis from inflation to individual price changes, although it is based on the earlier one and, in particular, uses the same fundamental framework of accounting identities and numerical examples. The text has been re-written and re-ordered to emphasise specific rather than general price changes, and in particular, the detailed discussion of inflation is now deferred until Chapter 5. It also attempts to reflect the enormous amount of relevant research that has been published since the original book appeared. Much of this research is empirical, whereas the framework of this book is essentially theoretical, focusing on how accounting statements are, or might be, constructed rather than on what methods are actually adopted and how they are received by users of accounts. The style of the book may therefore seem to be a little old-fashioned. I make no apology for this, because theory and empirical studies must surely be essential companions rather than competitors: empirical studies cannot yield sensible answers if they are not based on theoretically sensible questions, and, of course, policy choices involve choosing between theoretical models on the basis of their empirical feasibility and consequences. My perception (despite having started academic life as an empirical researcher working on a large database of company accounts) is that the welcome expansion of empirical accounting research has started to crowd out theory to an unhealthy extent. As a result of this, there is a serious danger that knowledge gained in the past will be lost and will have to be rediscovered when it becomes relevant in the future. Therefore, if I can persuade a few accounting researchers to work through my simple, but fundamental, accounting identities and numerical examples, I will be more satisfied than if I had written a more popular survey of recent empirical work alone.
That is not to say that the book is aimed solely at accounting researchers. I have tried to make it readable and accessible, but the reader's task will be helped by having a basic knowledge of accounting, such as might be obtained from an introductory course. Beyond that, the stronger the readers’ background in accounting and finance, the more they are likely to understand, but understanding is relative. Even as the author, I cannot claim to understand fully all of the apparently simple but often subtle problems posed by the subject. That is why I am still attempting to explain it to myself, a third of a century after the original book was published.
It is a pleasure to acknowledge and thank all those who have helped me in the long process of writing this book. Apart from those acknowledged in the preface to the original book, I have benefitted from the support and comments of friends and colleagues too numerous to list here. However, special thanks should be accorded to Richard Barker and Geoff Meeks, professors at Oxford and Cambridge, respectively (and my PhD students long ago), each of whom gave very helpful comments on the penultimate draft. Also, thanks to Dr William Peterson of Christ's College, Cambridge, who made some astute comments on the treatment of index numbers in Chapter 5 and saved me from at least one foolish error. Needless to say, I retain sole responsibility for the remaining errors and deficiencies. Finally, since I left the International Accounting Standards Board in 2006, my work has been supported by the research facilities provided by the Cambridge Endowment for Research in Finance (CERF) at the Judge Business School, and I wish to thank its trustees for their support and its successive directors, Professors John Eatwell and Bart Lambrecht, for their unfailing encouragement.
It is a mark of the passage of time that I dedicated the original book to my children, Alan and Richard, who were then both under ten years old. The present book is dedicated to my grandchildren, who, by the time the book appears in print, will each be at least ten years old. If somebody in their generation reads the book, the effort of writing it will have been worthwhile.
