REFORMING ACCOUNTING EDUCATION: BACK TO THE BASIC

Sony Warsono1 (corresponding author) Zaki Baridwan2 Ertambang Nahartyo3 Nidaul Uswah Prasetyaningsih4

Coordinator of Center for Good Corporate Governance (CGCG), Faculty of Economics and Business, Universitas Professor of Accounting Department at Faculty of Economics and Business, Universitas Gadjah Mada. Deputy Director of Administration Affairs, Master of Development Economics Program, Universitas Gadjah Researcher at Center for Good Corporate Governance (CGCG), Faculty of Economics and Business, Universitas

Gadjah Mada.
2 3

Mada.
4

Gadjah Mada.

Let those who vaunt the superior merits of other disciplines remember that this first presentation made by Paciolo was not crude and incorrect but contains the essentials of bookkeeping as we know it today, despite the fact that it was written at a time when chemistry partook of the vagaries of alchemy, biology was a weird collection of errors, and medicine had more in common with the medicine man than it has even today. (Hatfield, 1924:246) 1. INTRODUCTION Discussions about accounting principles teaching methods are always appealing. The conventional teaching model of accounting which generally refers to the double entry bookkeeping teaching models has been criticized in many countries (Duff and McKinstry 2007). The model is too narrow and procedural (Nelson 1995), inadequate in equipping the student with the necessary competencies (Mohamed and Lashine 2003), and closely based on textbooks that insufficiently encourage students to follow deep learning strategies that connect to real-world experiences (Sangster et al., 2007). Over past 25 years at least four reports suggested that accounting education is broken and in need of complete changes (Bedford Committee; 1986; AECC, 1990; Big 8 White Paper, 1989; Albrecht and Sack, 2000). As the response, a great number of experts have been doing research and proposing changes in the teaching methods of Introduction to Accounting courses (see Appendix A). Some changes have been proposed but there was considerable evidence suggesting that changes to accounting education have not been pervasive or substantive enough. As a professor of mathematics, Luca Pacioli taught the double entry bookkeeping to students in the schools attended by the sons of merchants, and codified double-entry bookkeeping in his mathematics book Summa de Arithmetica, Geometria, Proportioni et Proportionalita (hereafter, Summa) in 1494. Interestingly, the double entry bookkeeping is one of the few accounting principles that stay unchanged for centuries (Hatfield, 1924; Littleton, 1926; Vangermeersch, 1997; Rabinowitz, 2009). Thus, the use of a mathematical perspective as an accounting education model is appropriate and valid. Moreover, the use of the mathematical perspective helps us to identify the inappropriateness of the existing accounting education models, to identify the limitations of the current financial standards, and propose the alternative solutions to solve some current accounting issues.
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The following section states the research question. Sections 3 and 4, respectively, points out our research objectives and research topics. Section 5 describes accounting as an application of mathematics. Section 6 justifies the hypotheses development. Final sections briefly describe the research methods (section 7) and the proposed research activities (section 8). 2. RESEARCH QUESTION Treating the double entry bookkeeping mechanism merely as a black box, i.e. an application of the rules, makes the double entry bookkeeping perceived as rule driven, mechanics, static, unintuitive, and forces students to memorize it. Recently we found that the double entry bookkeeping mechanism is purely an application of mathematics. The use of the mathematical perspective has made irrelevant the assumption that the rules of debits and credits are knowledge that should be memorized. Thus, we offer the research proposal to answer the following research question: Is the mathematical perspective teaching model in Introduction to Accounting courses effective to make both non-accounting and accounting students understand the double-entry bookkeeping well, and help accounting students to prepare for more advanced accounting courses. 3. RESEARCH OBJECTIVES Based on the research question above, the following objectives of our research are: a. Experiment the impact of the mathematical perspective teaching model on student performance in understanding the mechanism of debits and credits. b. Experiment the impact of the mathematical perspective teaching model on student performance in understanding the rationale of the accounting equation. c. Experiment the impact of the mathematical perspective teaching model on accounting student performance in journalizing regular transactions. d. Experiment the impact of the mathematical perspective teaching model on accounting student performance in journalizing the varieties of accounting transaction simulation. 4. RESEARCH TOPICS Mathematics is considered as the essential knowledge that students need to successfully complete a college education (Lee and Lee, 2009), including accounting education (Alcock et al.
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2008). Thus, research on the effectiveness of the mathematical perspective education model is important and has strategic impact on the development of accounting education. Basically, our research addresses these three topics: a. Models of Accounting Education: The mathematical perspective teaching model in accounting courses is unusual but promising. We expect that our accounting education model will have high contribution to develop accounting as an academic discipline. b. Convergence of Accounting Education Standards: The use of mathematical perspective teaching model helps accounting education setters to standardize the accounting education around the world because most students are familiar with mathematics, especially algebra. c. Education and Development of Accounting Technicians: The mathematics perspective teaching model gives accounting technicians the cognitive knowledge about the double entry bookkeeping and expand their accounting knowledge skill. 5. ACCOUNTING AS AN APPLICATION OF MATHEMATICS As widely acknowledged, Luca Pacioli discussed the double entry bookkeeping in his mathematics book Summa (Weis & Tinius, 1991). The section of Particularis de Computis et Scripturis appears to be included for the sake of completeness to recognize the importance of arithmetic principles in the application of bookkeeping (Rabinowitz, 2009). Most of accounting textbooks define debits meaning the left side, and credits meaning the right side (e.g. Anthony, et al., 2007; Williams, et al., 2007; Weygandt, et al., 2008). The definition indicates that the use of debits and credits is identical with algebra that has left and right sides. Furthermore, we argue that the use of debits and credits in the double entry system is mainly because there is no negative numbers in financial unit. As we all had known, accounting uses a monetary unit principle to measure the economic activities (Littleton, 1926). Mathematically, moving negative numbers (suppose minus 5) from the left side of algebra to the right side will change the numbers into positive ones (plus 5). Thus, the use of debits and credits in accounting is purely an application of mathematics. Not only is the use of mathematical perspective able to identify the inappropriateness of existing teaching models of the double entry bookkeeping, but it is also able to identify the incompleteness of the definitions of financial statement elements, particularly revenues and

expenses (see Appendix B). Furthermore, the use of mathematical perspective can be used to propose alternative solutions to solve current accounting issues (see Appendix C). 6. HYPOTHESES DEVELOPMENT Essentially our research is to compare the effectiveness of the traditional bookkeeping teaching model and the mathematical perspective teaching model. Thus, we develop each of the hypotheses based on those two models. a. The Mechanism of Debits and Credits A number of textbooks mentioned that the mechanism of debits and credits are arbitrary (Anthony et al., 2007), a rule of thumb (Williams et al., 2007), or customs like the custom of driving on the right-hand side.. (Weygant et al., 2008:49). From the mathematical perspective, this debits and credits mechanism actually has an argument which is clear and easy to understand. The brief description is as follows. Illustrative Case: Supposed, Assets = 10, Liabilities = 4, and Equity = 6. The basic accounting equation is 10 = 4 + 6. Next, the amount of liabilities is the difference between 18 and 14 (18 14), and accounting does not recognize the negative number. The liabilities with the value of 4 can be recorded either on one side, i.e. 18 is recorded to the debit and 14 to the credit (alternative A) or 14 to debit and 18 to the credit (alternative B). According to the mathematical formulation, however, the alternative B should be applied because the liabilities have a positive value and located on the right side of the accounting equation (see Figure 1). The interpretation is that number 14 on the debit deducts number 18 on the credit. As a result, the increase of liabilities is recorded on the credit while the decrease of liabilities is recorded on the debit (see Figure 2). Appendix D describes the detail mechanism of debits and credits for each element of the accounting equation. Figure 1 The Mathematics of Number Credits/Right Side Debits/Left Side 10 = 14 Credits/Right Side 4 18 + 6

Figure 2 The Rule of Debits and Credits Liabilities Debits/Left Side 10 = Thus, we hypothesize as follows: Ha1: Compared to the traditional models, the mathematics perspective education model results in higher student performance in understanding the mechanism of debits and credits. b. The Rationale of the Accounting Equations The double entry bookkeeping is based on the basic accounting equation: Assets = Liabilities + Equity (Equation 1). The traditional teaching models rationale of the Equation 1 is that the resources must always be equal to the sources of fund. Then, the equation was expanded to include expense and revenue elements to represent firms economic activities. The traditional expanded accounting equation was written as: Assets = Liabilities + Equity + Revenues Expenses (Equation 2a). The rationale of the Equation 2a is that resources must be equal to sources of fund in which revenues and expenses are part of the equity. These rationales are primarily based on the balance-sheet approach so that other accounting variables (i.e. revenues and expenses) are considered secondary and derivative. We argue that the rationale employed to explain the basic accounting equation (Equation 1) is not consistent with that employed to explain the expanded accounting equation (Equation 2a) because the element of expenses on the right side of the equation is not sources of fund. In other words, the rationale employed to explain the basic accounting equation is different from that employed to explain the expanded accounting equation even though both equations are similar. Learning which employs different rationales to explain two things which in essence are closely related is liable to confuse students. Mathematically, Equation 2a can be re-written into Assets + Expenses = Liabilities + Equity + Revenues (Equation 2b). It is more proper to place elements with the same signs (positive or negative) on the same side because accounting does not recognize negative numbers (Warsono-bin-Hardono, 2010). We can interpret that the left side of the Equation 1 and Equation
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Credits/Right Side 4 + + 6

2b reflect the uses of fund, while the right side reflects the sources of fund. This mathematical rationale consistently explains both the basic accounting equation (Equation 1) and the expanded accounting equation (Equation 2b). In summary, the use of the mathematical perspective provides better rationale of the accounting equations. Thus, we hypothesize as follows: Ha2: Compared to the traditional ones, the mathematics perspective education model results in higher student performance in understanding the rationale of the accounting equations. c. The Account-based Journal Entries Journal entries are implementing the double entry bookkeeping. A journal always affects at least two accounts. Most accounting textbooks describe the definition of an account as a means of accumulating all the information about changes in specific financial statement items. Using the mathematical perspective, we define accounts as the detail or the breakdown of specific elements of the accounting equation. Rather than providing element-based financial information as a representation of the accounting equations, accounting provides account-based financial information that are more detailed and useful. Students will easily understand the know what and know why of accounts. The understanding will prevent students from just memorizing various accounts. Thus, we hypothesize as follows: Ha3: Compared to the traditional methods, the mathematics perspective education model results in higher student performance in journalizing accounting transactions. d. The Simulation of Transactions Based on the accounting equation, it is possible that a transaction results in an increase of expenses (debits) followed by an increase of revenues (credits). This happens in barter transactions (see Appendix B). In addition, it is possible that a transaction results in the decrease of revenues (debits) followed by the decrease of expenses. It exists when firms make elimination entries for the inter-company transactions. Many other varieties are possible as long as the balance of the equation is maintained. Unfortunately, the traditional accounting teaching models do not cover these issues. The traditional accounting education, aware or not, require students to memorize the journal. Thus, we hypothesize as follows.
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Ha4: Compared to the traditional model, the mathematics perspective education model results in higher student performance in journalizing the varieties of accounting transaction simulation. 7. RESEARCH METHODS This study uses an experimental method expected to reflect the effect of the use of mathematical perspective education method on student performance. The method selected aimed to minimize researcher bias, content bias, subject background bias, as well as subject participation bias. The method used is to split the group of students taking the course into two comparable groups. The material taught to both groups is identical, only the method differs and changes. Group one is taught using the mathematical perspective model (treatment group), while the second group is taught using the traditional teaching model (control group). In allocating students to groups it is important to ensure homogeneity in the groups composition. We randomly assign students to either traditional or mathematics-based teaching models. To generalize the effectiveness of the mathematical perspective model, we use 5 types of student classifications, i.e. (a) accounting students; to examine hypotheses 1, 2, 3 and 4, (b) nonaccounting students in business schools; to examine hypotheses 1, 2, and 3, (c) non-business students schools; to examine hypotheses 1 and 2, (d) vocational accounting students, to examine hypotheses 1, 2, 3, and 4, and (e) students in high schools; to examine hypotheses 1 and 2. Each classification consists of two groups (treatment and control groups). Each group receives a 10 minute written module per hypothesis which covers identical conceptual material and used identical examples, but for the treatment group the mathematical perspective model is used, while for the control group a traditional teaching model is used. We use t tests to analyze differences in student attitudes about the teaching models. We categorize students by treatment (i.e., traditional versus mathematical perspective education models) and by student classification (accounting students, non-accounting business students, non-business students, vocational accounting students, and high school students). It is possible to use ANOVA to analyze the collected data. We discuss differences with a p value at .05. A survey of student attitudes regarding the course and specific pedagogical methods is used and administered to students in both groups at the end of the experiment. We will develop our survey on attitude questionnaires used in other studies. The attitudinal questions are to be
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answered on a scale ranging from 1 (strongly disagree) to 5 (strongly agree). Before implementing the survey, we will submit the attitudinal questionnaire to a panel of two business experts to determine whether the questions clearly and adequately describe student attitudes.

8. DESCRIPTION OF PROPOSED RESEARCH ACTIVITIES Due Date Aug 30/2010 Nov 10/2010 January 2011 March 2011 Activity Description Submit the proposal Revise the proposal, if determined as a finalist Sign contract, specify interim milestones, deliverables, and expected delivery dates Develop research instruments, and do pilot study April 2011 May 2011 Follow-up the Program Advisory Committees feedback and suggestions Do experiment 1 to non-business students and high-school students to examine hypotheses 1 and 2) August 2011 Do experiment 2 to business students (first year university students) to examine hypotheses 1, 2, and 3 September 2011 Do experiment 3 to university accounting students (third year students) to examine hypotheses 1, 2, 3 and 4. September 2011 October 2011 November 2011 December 2011 Make progress report Present the research report Follow-up the Program Advisory Committees feedback and suggestions Do experiment 4 to vocational accounting
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Output Research proposal Revised research proposal Written contract Expanded research proposal (including research instruments) Revised research proposal Data collection and analysis

Data collection and analysis

Data collection and analysis

Interim report Draft of the research paper Revised research paper Data collection and analysis

students to examine hypotheses 1, 2, 3, and 4 January 2012 February/March 2012 April 2012 Submit the paper to the Accounting Education Journal Research manuscript Finalize the research paper Present the research paper Final research paper Final research paper

REFERENCES AECC (Accounting Education Change Committee). 1990. Position Statement Number One Objectives of Education for Accountants. http://aaahq.org/aecc/PositionsandIssues/ pos1.htm, download on 1 August, 2010. Albrecht, W.S. and Sack, R.J. 2000. Accounting Education: Charting the Course Through a Perilous Future. http://aaahq.org/pubs/aesv16/toc.htm, download on 1 April 2010. Alcock, J., Cockcroft, S. and Finn, F. 2008. Quantifying the advantage of secondary mathematics study for accounting and finance undergraduates. Accounting and Finance, 697-818. Anthony, R.N., Hawkins, D.F., and Merchant, K.A. 2007. Accounting: Text and cases. Singapore: McGraw-Hill/Irwin (International edition). Bedford Committee. 1986. Future Accounting Education: Preparing for the Expanding Profession. http://aaahq.org/aecc/future/cover.htm, download on 1 April, 2010. Big 8 White Paper. 1989. Perspectives on Education: Capabilities for Success in the Accounting Profession. http://aaahq.org/aecc/big8/cover.htm, download on 28 July 2010. Duff, A. and McKinstry, S. 2007. Students approaches to learning. Issues in Accounting Education, 22: 183-214. Ellerman, D.P. 1985. The mathematics of double-entry bookkeeping. Mathematics Magazine, 58: 226-233. Hatfield, H. R. 1924. An historical defense of bookkeeping. Journal of Accountancy, 241-253.
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Journal of Accountancy. 1987. Pacioli Revisited. May: 195-197. Lee, B.B. and Lee, J. 2009. Mathematics and academic success in three disciplines: Engineering, business and the humanities. Academy of Educational Leadership Journal, 95-105. Littleton, A.C. 1926. Evolution of the ledger account. The Accounting Review, 1: 12-23. Mohamed, E.K.A. and Lashine, S.H. 2003. Accounting knowledge and skills and the challenges of a global business environment. Managerial Finance, 29(7): 3-16. Nelson, I.T. 1995. Whats new about accounting education change? An historical perspective on the change movement. Accounting Horizons, 9: 62-75. Rabinowitz, A.M. 2009. Who was Luca Pacioli? The CPA Journal, February: 12-14. Sangster, A., Stoner, G.N., and McCarthy, P.A. 2007. Lessons for the classroom from Luca Pacioli. Issues in Accounting Education, 22: 447-457. Vangermeersch, R.G. 1997. Dropping debit and credits in elementary accounting: A huge disservice to students. Issues in Accounting Education, 12: 581-583. Warsono-bin-Hardono, S. 2010. The need of accounting reform to heal the global financial crisis: Back to the basic. Presented at Corporate Governance and Global Financial Crisis.conference, University Pennsylvania, Wharton School, 24-25 September. Weis, W.L. and Tinius, D.E. 1991. Luca Pacioli: Renaissance accountant. Journal of Accountancy, November: 91102. Weygandt, J.J., Kieso, D.E., and Kimmel, P.D. 2008. Accounting principles. Singapore: John Wiley & Sons (Asia) Ltd. Williams, J.R., Haka, S.F., and Bettner, M.S. 2005. Financial & managerial accounting: The basis for business decisions. Singapore: McGraw-Hill/Irwin (International edition).

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APPENDIX A Previous Research Proposing Change to Accounting Teaching Methods No 1 Author Patten, R. J. and Williams, D. Z. Title Theres TroubleRight Here in Our Accounting Programs: The Challenge to Accounting Educators Research Publication Issues 2, 1990. In Accounting Education, Vol. 5, No. Important Point 1. If be this accounting ill-prepared new order to of graduates continue to function effectively in organizational competitiveness, employers will have no choice but to turn to graduates in other disciplines to fill their needs. 2 Saudagaran The First Course , S. M. in Accounting: An Innovative Approach Issues 1, 1996. In Accounting 1. In recent years, there has been a demand for significant changes in the design and delivery of accounting education. 2. Research by accounting academics also found that the accounting curriculum was not adequately the needs doubleserving professions (AAA, 1986). 3 Pincus, Is Teaching Issues In Accounting 1. Traditional Education, Vol. 11, No.

K.V.

Debits and Credits Essential in Elementary Accounting?

Education, Vol. 12, No. 2, 1997.

entry bookkeeping is becoming the Latin of the business schoolinteresting and useful to study a from

historical perspective, but not in demand in everyday (Elam, 1995). 2. Traditional elementary course has its costs. Chief world changes do not, among around and we these us our are costs is that as the practice

introductory

courses

increasingly attracting the wrong majors. 4 Ingram, R. W. A Note on Teaching Debits and Credits in Elementary Accounting Issues 2, 1998. In Accounting 1. Debit and credits are not intuitive to most student. Consequently, they spend a lot of time memorizing rules and often fail to an the save develop information 5 Albrecht, W. S. and Accounting Education: Accounting Education 1. We cannot Education, Vol. 13, No.

understanding of the transactions convey. Series, Volume No. 16, accounting education

Sack, R. J.

Charting the Course through a Perilous Future

2000.

by continuing to do more of the same. 2. Most of the educational models we use are broken or in desperate repair. need of

DillerHaas, Amy

Time to Change The CPA Journal, April Introductory Accounting 2004.

1. The old curriculumwhich accounting pronouncements the mechanics and of emphasizes of memorization

recording transactionsdoes not provide a complete picture of todays environment.

APPENDIX B The Limitation of the Accounting Standards The use of the asset perspective to define the other elements of financial statements may result in an incomplete definition. In turn, accounting may provide financial information which does not faithfully represent the firms real condition. Many experts have revealed the inadequacy of accounting to represent the reality of business (Ball, 2008; Cheney, 2009). Before pointing out the limitations of revenue and expense definitions, we would like to present the definitions of revenues and expenses according to the FASB and IASC as follows. Revenues are inflows or other enhancements of assets of an entity or settlements of its liabilities (or a combination of both) from delivering or producing goods, rendering services, or other activities that constitute the entitys ongoing major or central operations. Income is increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants. Expenses are outflows or other using up of assets or incurrence of liabilities (or a combination of both) from delivering or producing goods, rendering services, or carrying out other activities that constitute the entitys ongoing major or central operations. Expenses are decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or the incurrence of liabilities that result in decreases in equity, other than those relating to distributions to equity participants. The above definitions are substantially similar, namely that the recognition of revenues and expenses must be followed by changes in assets and/or liabilities (see Diagram included in the FASB No. 6, 1985). Such a definition disregards revenue/expense transactions, such as

barter, that do not produce directly any change in assets/liabilities. Here are 5 cases which reveal limitations in the standards of the elements of financial statements, especially related to the definitions of revenues and expenses. Business event A: Merchandising firm Q, which is in the business of selling computers, and merchandising firm R, which is in the business of selling furniture, barter their merchandise. According to the standards, both merchandising firms Q and R recognize this event as a revenue transaction, as in this event there is an increase of assets into each firm. Business event B: Service firm S, which is in the information technology consulting business, and service firm T, which is in the accounting consulting business, barter their main service. According to the standards, both firms S and T should not recognize this business event as a revenue transaction because there is no increase of assets or decrease of liabilities in each of these firms. Accordingly this event cannot be classified as a revenue transaction by either firm. Business event C: Service firm S, which is in the accounting consulting business, is conducting barter with merchandising firm Q, which is in the business of selling computers. According to the standards, firm S should recognize this business event as a revenue transaction because there is an increase in assets in the form of computers. Firm Q, however, should not recognize this business event as a revenue transaction because there is neither an increase in assets nor decrease in liabilities even though firm Q delivers its services. This business event, therefore, is recognized as a transaction by firm S but cannot be recognized as such by firm Q. Business event D: Service firm V, which is in the business of advertisement, purchases a number of firm Ws shares (with the intention to own them). The payment is made directly and fully in the form of advertising services delivered by firm V. Firm V should recognize this business event as a revenue transaction because there is an increase in assets in the form of shared investment. According to the standards, however, firm W should not recognize this business event as an expense transaction because there is neither a decrease in assets nor an increase in liabilities as a result of this business event; what results is an increase in equity. Business event E: Service firm X, which is in the business of TV advertising, distributes revenue dividends in the form of services to firm Y, which owns more than 20 percent of the company shares. On the announcement date, firm Y immediately utilizes the revenue dividends. According to the standards, firm X should not recognize this business event as a revenue

transaction because there is neither an increase in assets nor a decrease in liabilities; what results is an increase in dividends distribution. On the other hand, firm Y should recognize this business event as an expense transaction because the firm receives advertising services and there is a decrease in assets in the form of shared investment (equity method). Therefore, this business event should be recognized as an expense transaction by firm Y but should not be recognized as such by firm X. In summary, the recognition of revenues can be balanced not only by increases in assets or decreases in liabilities, but also by increases in expenses or decreases in equity. Likewise, the recognition of expenses can be balanced by decreases in assets, increases in liabilities, increases in equity, or increases in revenues. Therefore, the current definitions of the elements of revenues (income) and expenses are incomplete. This occurs because the standards argue that revenues and expenses should make a direct impact on the assets and/or liabilities. The inadequacy of the definitions of revenues and expenses is also due to the placement of revenues and expenses under the category of equity.

APPENDIX C Mathematical Perspective to Solve the Current Issues Written documents show that accounting was included in Luca Paciolis mathematics book (Sangster et al., 2007). In its historical progress, however, accounting has developed a focus on rules (Penno, 2008). A large number of rules have been issued to the effect that accounting was well-known as a regulatory enterprise (AAA FASC, 2007). Nevertheless, the development of rules cannot completely protect the users from misleading accounting information (Scott, 2009). Besides focusing on the development of rules, accounting has also developed an emphasis on vocational skills. The teaching of accounting, as a result, has focused largely on vocational skills (Demski, 2007), with little contribution to the academic world (Fellingham, 2007). Financial reporting is not an end in itself. It is a means of communicating to the users of financial reports information that is useful in making choices among alternative uses of scarce resources (FASB, 2006:OB6) and The objective of general purpose financial reporting is to provide financial information . . . (FASB, 2008:OB2). Thus, financial accounting is a tool to be used to provide financial information. As a tool, accounting should be of the same nature as computing, aircraft technology, etc. All these technologies require established knowledge in order to function effectively; to give the best possible contribution to humanity, and to allow for continuous development. This study argues that three major pillars should be developed in a balanced manner to enable accounting to become an academic discipline, namely mathematics, rules, and art. The Joint Project IASB/FASB has been developing the Conceptual Framework for Financial Reporting that underlies financial reporting. Several topics are still debated up to the present. These debated topics usually become problematic when we have to choose between two extreme points which appear utterly irreconcilable but which eventually must be accommodated in order to serve the interests of all parties involved. For example, the Joint Project IASB/FASB originally stated in the Preliminary Views of the Conceptual Framework for Financial Reporting that the potential users of financial reports include equity investors, creditors, suppliers, employees, customers, governments and their agencies and regulatory bodies, and the public (FASB, 2006:OB6). Later, the Joint Project IASB/FASB revised the objective of external

financial reporting as to provide information that is useful for capital providers including equity investors, lenders, and other creditors (FASB, 2008:OB6). Below are two Joint Project IASB/FASBs objectives as mentioned in the Preliminary Reviews of the Conceptual Framework (FASB, 2006) that can be achieved through the development of the accounting equation. Stakeholder vs. Stockholder Approaches The objective of external financial reporting is directed to the needs of a wide range of users (stakeholder approach). However, as long as all sources of funds other than liabilities are contained in one element, namely the equity, it will be difficult for financial reporting to provide information that is useful to users other than equity investors and creditors (stockholder approach). As the equity contains various sources of funds the quality of information coming from the element may decrease. For example, current financial reporting is unable to provide a representative picture of the long-term contribution of the management to the company because their performance is periodically moved into the equity. This study argues that this could be the reason for the emergence of conflicts between principals and agents. Likewise, current financial reporting is unable to provide information that is specific about governmental subsidies, donations or facilities received by the firm, as the information about governmental support is mixed up with information about other sources of funds in one big basket called equity. In this information era firms need information that is more detailed and comprehensive in order to make informed decisions. Had the accounting equation consisted of elements that represented specific types of users, information that is useful to a wide range of users might have been produced. The accounting equation could be developed along the line of, for instance, Asset + Expenses = Liabilities + Owners Capital + Revenues + Management Contribution + Governmental Fund + Residual Sources. Relevance vs. Reliability The qualitative characteristics of financial reporting information should be relevant, faithful, comparable, and understandable. However, as long as the elements of accounting equation consist of financial information employing various measurements, it will be difficult to

fulfill these qualitative requirements. For example, when assets cover several accounts that employ some measures, the assets are unable to fully meet both the characteristics of relevance and faithful representation. Likewise, the use of various measurements in one element may weaken the comparability and understandability of the financial reporting. This also applies to other elements in the accounting equation, both in the element of balance sheet and income statements. Had the accounting equation consisted of various elements containing information measured with the same (homogenous) measuring tool, the accounting information produced would have acquired the long-awaited characteristics of relevance, faithful representation, comparability, and understandability. For instance, the elements of assets are divided into two, namely value-based assets and historical-cost assets, and the elements of expenses are divided into two, namely accrual-based expenses and cash-based expenses. Elements of the value-based assets reflect the provision of information which is relevant for decision-making, while the elements of historical-cost assets reflect information which is relevant for faithful representation.

APPENDIX D Mathematical Perspective of Debits and Credits Illustrative Case A: Supposed, Assets = 15, Expenses = 7, Liabilities = 4, Equity = 8, and Revenues = 10. The accounting equation is 15 + 7 = 4 + 8 + 10 (using mathematical accounting equation). Next, the amount of assets is the difference between 50 and 35 (50 35), and accounting does not recognize the negative number. The assets with the value of 35 can be recorded either on one side, i.e. 50 is recorded to the debit and 35 to the credit (alternative A) or 35 to the debit and 50 to the credit (alternative B). According to the mathematical formulation, however, the alternative A should be applied because the assets have a positive value and located on the left (debit) side of the accounting equation (see Figure 1). The interpretation is that number 35 on the credit deducts number 50 on the debit. As a result, the increase of assets is recorded on the debit while the decrease of liabilities is recorded on the credit (see Figure 2). Figure 1 The Mathematics of Numbers Debit/Left Side Debit/Left Side 15 50 35 + 7 = Credit/Right Side 4 + 8 + 10

Figure 2 The Rule of Debits and Credits Assets Debit/Left Side Assets + = Credit/Right Side 4 + 8 + 10

Illustrative Case B: Supposed, Assets = 15, Expenses = 7, Liabilities = 4, Equity = 8, and Revenues = 10. The accounting equation is 15 + 7 = 4 + 8 + 10. Next, the amount of expenses is the difference between 30 and 23 (30 23), and accounting does not recognize the negative

number. The expenses with the value of 7 can be recorded either on one side, i.e. 30 is recorded to the debit and 22 to the credit (alternative A) or 23 to the debit and 30 to the credit (alternative B). According to the mathematical formulation, however, the alternative A should be applied because the assets have a positive value and located on the left (debit) side of the accounting equation (see Figure 3). The interpretation is that number 23 on the credit deducts number 30 on the debit. As a result, the increase of expenses is recorded on the debit while the decrease of expenses is recorded on the credit (see Figure 4). Figure 3 The Mathematics of Numbers Debit/Left Side Debit/Left Side 15 + 30 7 23 = Credit/Right Side 4 + 8 + 10

Figure 4 The Rule of Debits and Credits Expenses Debit/Left Side Expenses + = Credit/Right Side

Illustrative Case C: Supposed, Assets = 15, Expenses = 7, Liabilities = 4, Equity = 8, and Revenues = 10. The accounting equation is 15 + 7 = 4 + 8 + 10. Next, the amount of liabilities is the difference between 18 and 14 (18 14), and accounting does not recognize the negative number. The liabilities with the value of 4 can be recorded either on one side, i.e. 18 is recorded to the debit and 14 to the credit (alternative A) or 14 to debit and 18 to the credit (alternative B). According to the mathematical formulation, however, the alternative B should be applied because the liabilities have a positive value and located on the right side of the accounting equation (see Figure 5). The interpretation is that number 14 on the debit deducts number 18 on

the credit. As a result, the increase of liabilities is recorded on the credit while the decrease of liabilities is recorded on the debit (see Figure 6). Figure 5 The Mathematics of Numbers Debit/Left Side Debit/Left Side 15 + 7 = Credit/Right Side 4 + 8 + 10

Figure 6 The Rule of Debits and Credits Liabilities Debit/Left Side = Credit/Right Side Liabilities + -

Illustrative Case D: Supposed, Assets = 15, Expenses = 7, Liabilities = 4, Equity = 8, and Revenues = 10. The accounting equation is 15 + 7 = 4 + 8 + 10. Next, the amount of equity is the difference between 80 and 72 (80 72), and accounting does not recognize the negative number. The equity with the value of 8 can be recorded either on one side, i.e. 80 is recorded to the debit and 72 to the credit (alternative A) or 72 to debit and 80 to the credit (alternative B). According to the mathematical formulation, however, the alternative B should be applied because the equity has a positive value and located on the right side of the accounting equation (see Figure 7). The interpretation is that number 72 on the debit deducts number 80 on the credit. As a result, the increase of equity is recorded on the credit while the decrease of equity is recorded on the debit (see Figure 8).

Figure 7 The Mathematics of Numbers Debit/Left Side Debit/Left Side 15 + 7 = Credit/Right Side 4 + 8 + 10

Figure 8 The Rule of Debits and Credits Equity Debit/Left Side = Credit/Right Side Equity +

Illustrative Case E: Supposed, Assets = 15, Expenses = 7, Liabilities = 4, Equity = 8, and Revenues = 10. The accounting equation is 15 + 7 = 4 + 8 + 10. Next, the amount of revenues is the difference between 70 and 60 (70 60), and accounting does not recognize the negative number. The revenue with the value of 10 can be recorded either on one side, i.e. 70 is recorded to the debit and 60 to the credit (alternative A) or 60 to debit and 70 to the credit (alternative B). According to the mathematical formulation, however, the alternative B should be applied because the revenues have a positive value and located on the right side of the accounting equation (see Figure 9). The interpretation is that number 60 on the debit deducts number 70 on the credit. As a result, the increase of revenues is recorded on the credit while the decrease of revenues is recorded on the debit (see Figure 10).

Figure 9 The Mathematics of Numbers Debit/Left Side Debit/Left Side 15 + 7 = Credit/Right Side 4 + 6 + 10

Figure 10 The Rule of Debits and Credits Revenues Debit/Left Side = Credit/Right Side Revenues +

Authors Curriculum Vitae

Sony Warsono bin Hardono

Author
PLACE/BIRTH DATE
Kediri/June 17, 1967

EDUCATION
2003, PhD, University of Kentucky 1994, MAFIS, Cleveland State University 1991, Bachelor, Universitas Gadjah Mada

POSITIONS HELD
2009-present, Coordinator of Center for Good Corporate Governance Faculty of Economics and Business Universitas Gadjah Mada 2009-present, Commitment Officer on Procurement of Goods Faculty of Economics and Business Universitas Gadjah Mada 2008-present, a Lecturer at Magister of Information Technology, Electrical Engineering Department Faculty of Engineering Universitas Gadjah Mada 2007-present, Reviewer of Dikti Grant and UGM Program 2005-present, a Lecturer at Doctorate and Master Program in Accounting Universitas Gadjah Mada 1996-present, a Lecturer at Magister of Management Universitas Gadjah Mada

1992-present, a Lecturer at Master of Accounting

Universitas Gadjah Mada Universitas Gadjah Mada

1992-present, a Lecturer at Master of Economics Development

1992-present, a Lecturer at Faculty of Economics and Business Universitas Gadjah Mada

HISTORY OF TEACHING

Primary Business Address: Center for Good Corporate Governance (CGCG) UGM Jalan Sosio Humaniora No. 1, Yogyakarta, Indonesia 55281. Phone: +62-0274-548550 Fax:+62-0274-548550 E-mail: swarsono@feb.ugm.ac.id

Introduction to Accounting Accounting Information Systems Advanced Accounting Information System Auditing Knowledge Management

PUBLICATIONS: RESEARCH PAPERS

The Need of Accounting Reform to Heal the Global Financial Crisis, 2010 Mathematics in Accounting as a Big Unanswered Question, 2009 Back to the Basic: Accounting as Number Crunching Courses, 2009 Using Mathematics to Teach Accounting Principles, 2009

Sony Warsono bin Hardono

Reforming the Accounting Standards to Improve Corporate Governance, 2009 Does Accounting Account for Knowledge? 2002

TEXTBOOKS (IN INDONESIAN LANGUAGE)

CGCG UGMS Rating Model, 2010 Accounting Reform: Breaking Down Bounded Rationality of Accounting Development, 2010 Accounting for Small and Medium Enterprise, 2010 Corporate Governance Concept and Model: Preserving True Organization Welfare, 2009 Mathematics-based Introduction to Accounting, 2009 Accounting is Logic and Easy, 2009 Accounting in Service /firmsfor High Schools Accounting in Merchandising Firm for High Schools

RESEARCH INTEREST

Accounting, Management Information System, and Corporate Governance

PROFESSIONAL ORGANIZATIONS

Indonesian Institute of Accountant (IAI)

PROFESSIONAL EXPERIENCE
2007-2008, Coordinator at Doctorate and Master Program in Accounting Universitas Gadjah Mada 2005-2007, Vice Secretary at Academic Accountant Association Compartment Indonesian Institute of Accountant 2005-2006, Coordinator at Magister of Accounting Program Universitas Gadjah Mada 2004-2005, Coordinator at Accounting Profession Education Program Universitas Gadjah Mada 1998-2000, Deputy Director of Administration Affair at Extention Program Faculty of Economics and Business Universitas Gadjah Mada 1997-1999, Treasurer at Academic Accountant Association Compartment Indonesian Institute of Accountant 1997-1999, Administrator of Quality for Undergraduate Education (QUE) Accounting Program Universitas Gadjah Mada 1994-1998, Rector Assistant of Administration Affair Universitas Gadjah Mada

Sony Warsono bin Hardono

ACHIEVEMENT

2009, Awarded Research Grant from World Class Research University Universitas Gadjah Mada 2008, Awarded Research Grant from Faculty of Economics and Business Universitas Gadjah Mada 2003, Awarded Research Grant from University of Kentucky for Accounting and Knowledge Management Research

Zaki Baridwan
Co-Author
PLACE/BIRTH DATE
Solo/January 03, 1947

EDUCATION
1999, Professor, Universitas Gadjah Mada 1989, DBA, University of Kentucky 1984, M.Sc., University of Kentucky 1973, Bachelor, Universitas Gadjah Mada
AWARDS

30 Years Satyalancana Karya Satya Awarded by the President of Republic Indonesia, 1996 Greatness Gold Medal of Service to Austrian Government (Grosse Goldene Ehrenzeichen Fur Verdience Um Die Rep. Osterreich), 1997

POSITIONS HELD
2009-2013, Member of National Education Standard Body (BSNP) 2008-present, President Commissioner of PT. Bank BTN 1989-present, a Lecturer in Graduate Program and Magister Management Program, Universitas Gadjah Mada 1974-present, a Lecturer at Faculty of Economics and Business Universitas Gadjah Mada

PUBLICATIONS: RESEARCH PAPERS

1975, Study of Development of Smoked Rubber Industry 1976, Study Cost Components of Small and Medium Enterprises 1978, Study Component and Structure of Iron Industry 1979, Study Development of Export Commodity 1993, Study Quality of Accounting Graduates 1994, Functional Currency and inflation Rate An Analysis of The Impact of Financial Statements An Indonesia Case Study 1997, Analysis of Value Added of Cash Flow Information 1997, Evaluation of the Effect of Different Accounting for Translation Gains and Losses

TEXTBOOK (IN INDONESIA LANGUAGE)

Primary Business Address Faculty of Economics and Business, Universitas Gadjah Mada. Jalan Sosio Humaniora No. 1, Yogyakarta , Indonesia, 55281. Phone: +62-0274-548508 Fax: +62-0274-563212 E-mail: zbaridwan@yahoo.com

1985, Intermediate Accounting-Special Issues, Yogyakarta: BPFE. 1985, Accounting Systems. 5th Ed, Yogyakarta: BPFE. 1991, Accounting Information Systems, 2nd Ed., Yogyakarta: BPFE. 1991, Intermediate Accounting, 7th Ed., Yogyakarta: BPFE.

CONFERENCE PRESENTATIONS
Presenter in Konvensi Nasional Akuntansi I, Surabaya, 1989. Presenter in Seminar Nasional Akuntansi Manajemen STIE YKPN, Yogya, 1990. Presenter in Kongres XI ISEI, Bandung, 1990. Presenter in Seminar Nasional Ulang Tahun IAI, Jakarta, 1991

Zaki Baridwan

Presenter in Sidang Pleno Konvensi Nasional Akuntansi II, Yogya, 1992. Presenter in Seminar Merger dan Akuisisi ibii, Jakarta, 1992. Presenter in Seminar Nasional Universitas Brawijaya, Malang, 1993. Participant in Asean Accounting Teachers Association Seminar, Kuala Lumpur, 1993. Chairman in Kongres IAI VII, Bandung, 1994. Participant in American Accounting Association Convention, New York, 1994. Participant in PACAP Conference, Jakarta, 1994. Presenter in Seminar Nasional Akuntansi Keuangan, IAI Cabang Banjarmasin, 1995. Presenter in Pekan Kuliah Perdana, UPN Veteran, Yogyakarta, 1996. Presenter in Nasional Internal Control Seminar, STIEB, Bandung, 1996. Presenter in Konvensi Nasional Akuntansi III dan KLB, Semarang, 1996. Participant in Seminar Asean Federation of Accountants, Bali, 1996. Presenter in Accounting Education Curriculum Seminar Yogyakarta, 1996. Participant in Asean Federation of Accountants Seminar, Kuala Lumpur, 1997. Presenter in Studium General STIE Widya Wiwaha Yogyakarta, 1997. Presenter in Internal Control Seminar, Universitas Lampung, 1997. Presenter in Seminar Nasional Pendidikan Akuntansi Memasuki Milenium Baru, Universitas Indonesia, Jakarta, 1997. Presenter in Seminar Akuntansi Internasional, Universitas Guna Dharma, Jakarta, 1997. Presenter in Lokakarya Nasional Penyusunan Silabus Akuntansi, Cisarua, 1997. Presenter in Seminar Nasional Pendidikan Akuntansi, Universitas Trisakti, Jakarta, 1997. Participant in PACAP Conference, Shanghai, RRC, 1997. Presenter in Seminar UU PNBP, Ditjen Anggaran, Jakarta, 1997. Presenter in Seminar of Statistical Sampling, BPK Jakarta, 1999 Presenter in Seminar of Auditing, IAI, Semarang, 2000 Presenter in Workshop on Sector Public Accounting, BPK Bali, 2001 Presenter in Seminar of Financial Disclosure, Project Siaga Jakarta, 2001 Presenter in Seminar of Corporate Governance, Komite GCG, Jakarta, 2001 Presenter in Seminar of Corporate Governance, UKSW, Salatiga, 2001 Presenter in Seminar on Professiomal Accounting Education

JOURNAL

The Effects of Translation Accounting Requirements and Exchange Rates on Foreign Operations Financial Performance - An International Comparison (Co Author), International Journal of Accounting Education and Research, USA, Volume 3,1989. Pengajaran Akuntansi Keuangan Menghadapi Perkembangan Di Masa Depan, Auditor, Yogyakarta, October,1992. Profesi Akuntansi di Indonesia. Yang Telah dan Masih Perlu Dilakukan. Kajian Bisnis, October,1993. Kerangka Konseptual Standar Akuntansi Indonesia. Jurnal Akuntansi dan Manajemen, October, 1993. FAS 52: A Blessing for Foreign Managers? Kelola, Yogyakarta, January,1994.

Zaki Baridwan

Pengaruh Informasi Akuntansi Terhadap Keputusan Kredit Yang Diambil oleh Bank dan Hubungannya Dengan Pengembalian Debitur di Propinsi Kalimantan Timur. BPPS UGM, 1995. Analisis Hubungan antara Polling Saham Unggulan Sepekan. Kelola, January, 1996. Kurikulum Program Pendidikan Akuntansi. Jurnal Akuntansi dan Manajemen, July, 1996. Strategi Pendidikan Akuntansi Menjelang Abad 21. Jurnal Akuntansi dan Manajemen. December, 1996. Analisis Nilai Tambah Informasi Laporan Arus Kas. Jurnal Ekonomi dan Bisnis Indonesia. Volume 12, No.2, 1997. Evaluasi Dampak Perlakuan Rugi Laba Penjabaran Laporan Keuangan. Kelola, No. 16/VI/1997, 1997. Perkembangan Teori dan Penelitian Akuntansi. Jurnal Ekonomi & Bisnis Indonesia. Vol.15, No.4, October 2000. Clean Government dan Pemberantasan Korupsi. Jurnal Akuntansi & Manajemen. December 2000. Asimetri Informasi dan Cost of Equity Capital. Jurnal Riset Akuntansi Indonesia. Vol.4, No. 1, January 2001. Analisis Faktor-faktor yang Mempengaruhi Perusahaan Berinvestasi pada Aktiva Likuid. KOMPAK. Jurnal Akuntansi, Manajemen dan Sistem Informasi. FE UTY, Yogyakarta. Ed January-April 2005 (Co author). The Effect of Ratings Announcement on Bond Performance. SosiaSains. Vol.19, No.1, January 2006 (Co author). Pengaruh Asimetri Informasi, Regulasi Perbankan, dan Ukuran Perusahaan pada Manajemen Laba dengan Model Akrual Khusus Perbankan. Jurnal Akuntansi & Bisnis. Vol.6, No.2, August 2006.

PROFESSIONAL ORGANIZATIONS

Indonesia Economist Association (ISEI) Indonesian Institute of Accountant (IAI) National Education Standard Body (BSNP)

PROFESSIONAL EXPERIENCE

1976-1979, Vice Dean for Administration, Faculty of Economics UGM. 1979-1982, Secretary of Accounting Research and Development Center UGM. 1980-1994, Advisory Council of STIE YKPN, Yogyakarta. 1980-1982, Director of Faculty of Economics Publishing Division (BPFE) UGM. 1993-1996, Chairman of Accounting Department UGM. 1994-1995, Director of Extention Program UGM. 1994-1998, Vice Rector for Administration and Finance UGM. 1995-2001, Chairman of Accounting Department. Lampung University. 1997-1998, Expert Staff for State Board of Auditing (BPK), Republic of Indonesia. 1999-2001, Director of Graduate School UGM. 2000-2004, Dean, Faculty of Economics UGM. 2000-2008, President Commissioner Bank BNI.

Ertambang Nahartyo

Co-Author

PLACE/BIRTH DATE
Solo/January 23, 1968

EDUCATION

2003, PhD, University of Kentucky 1994, M.Sc., University of Kentucky 1991, Bachelor, Universitas Gadjah Mada

POSITIONS HELD

2009-present, Deputy Director of Administration Affairs, Master of Development Economics Program Universitas Gadjah Mada. 2008 present, Assessor of the National Accreditation Body (BAN). 1996 present, Management and Accounting Consultant. 1992-present, Assistant Professor of Accounting at Faculty of Economics and Business Universitas Gadjah Mada 1992-present, a Lecturer at Faculty of Economics and Business Universitas Gadjah Mada 1992-present, a Lecturer at Master of Management Universitas Gadjah Mada 1992-present, a Lecturer at Master of Accounting Universitas Gadjah Mada 1992-present, a Lecturer at Master of Economics Development Universitas Gadjah Mada 1992-present, a Lecturer at Doctoral Program Universitas Gadjah Mada

PUBLICATIONS WORKING PAPERS

Budgetary Participation and Stretch Targets: Do People Care about Procedural Fairness in A Stretch Budget Condition, 2008 Determinants and Consequences of Performance Measures: A Literature Review and Research Agenda, 2008 The Effects of Strategic Mission and Managers Knowledge on Performance Measures Selection, 2008 How We Systematically Endorse Self-Interested Behavior: The Effects of Agency Theory and Justice, 2008

Primary Business Address Faculty of Economics and Business Universitas Gadjah Mada Jalan Sosio Humaniora No. 1 Yogyakarta, Indonesia , 55281. Phone: +62-0274-548550 Fax: +62-0274-548550 E-mail: ertambang@gmail.com

Ertambang Nahartyo

RESEARCH INTEREST
Judgment and Decision Making, Behavioral Management Accounting and Corporate Governance.

PROFESSIONAL ORGANIZATIONS

1997-1999, Indonesian Certified of Professional Accountant Exam Task Force, Ministry of Finance, Indonesia 1996-1999, Secretary of Indonesia Academic Accountant Association Compartment 1992-present, Indonesia Accountant Association (IAI)

PROFESSIONAL EXPERIENCE

2007-2008, Executive Director, Center for Good Corporate Governance Universitas Gadjah Mada

ACHIEVEMENT AND FELLOWSHIP

2007, PHK-B Grant, Directorate of Higher Learning, National Education Department 1999-2003, Quality for Undergraduate Education Project Fellowship 1993-1994, Accounting Development Center (PPA) Fellowship 1990-1991, Bank Rakyat Indonesia (BRI) Fellowship

Nidaul U. Prasetyaningsih
Co-Author
PLACE/BIRTH DATE EDUCATION
2010, Bachelor in Accounting, Universitas Gadjah Mada 2006, SMA Muhammdiyah I Yogyakarta 2003, SLTP Muhammdiyah II Yogyakarta 2000, SDN Percobaan II Yogyakarta Sleman/September 07, 1987

POSITIONS HELD
2010-present, Researcher at Center for Good Corporate Governance Faculty of Economics and Business Universitas Gadjah Mada 2009-present, Academic Assistant, Majoring in Financial Accounting Faculty of Economics and Business Universitas Gadjah Mada

RESEARCH INTEREST ORGANIZATION

Accounting, Islamic Economics, and Corporate Governance Sharia Economics Forum (SEF) Universitas Gadjah Mada

PROFESSIONAL EXPERIENCE

2008, Financial Assistant at Lab. of Islamic Economics and Business (LEBI) Universitas Gadjah Mada 2009, Financial Assistant at Center of World Trade Studies (CWTS) Universitas Gadjah Mada

ACHIEVEMENT

Semifinalist in Geography Olympiade, Universitas Negeri Yogyakarta, 2003 Best Student in Annual Performance Review, SLTP Muhammadiyah II Yogyakarta, 2003 Participant in Region Student Exchange Program, Yogyakarta-Pandeglang, 2004 Delegation in International Conference, Sharia Economics Activities, Universitas Diponegoro, 2007 Vice President of Sharia Economics Forum (SEF) Universitas Gadjah Mada, 2008

Primary Business Address Center for Good Corporate Governance (CGCG) UGM Jalan Sosio Humaniora No. 1, Yogyakarta, Indonesia 55281 Phone: +62-0274-548550 Fax:+62-0274-548550 E-mail: andprasetya@gmail.com