Accounting and Finance: Complementarity and Divergence

Penman (2023. Accounting for Uncertainty. Accounting, Economics, and Law: A Convivium) develops a conceptual framework which reconciles accounting and finance in view to provide information for financial investment. His framework is based upon resolution of uncertainty over expectations as a convenient basis for accrual accounting. In this context, accrual accounting can be interpreted as a convenient instrument to protect the corporate capacity to generate future earnings on which the expected financial value is based upon. However, in order to fulfil this control function, accounting applies an additive process (simple return), while financial valuation imposes a multiplicative process (compound return) over the invested financial capital. This divergence between accounting and finance enables disentangling business profit – as determined by accounting – from money interest and ownership rent, paving the way to a theory of the business firm based upon its accounting structure, and enabling measures of financial performance consistent with this divergence.