Transaction Theory Stochastic Processes and Derived Accounting Measurement

The purpose of this paper is to demonstrate how the axiomatic theory of transaction cost measurement described in Willett (1987, 1988) can be used to determine precisely what accounting numbers represent. By a method of analysis supplemented with simulation experiments, transactions theory is shown to have a unifying character bringing together aspects of stochastic cost-volume-profit analysis, research into the distributional properties of accounting numbers, and income theory. The unifying character of transactions theory is due to the cost and production structures on which it is based being sufficient to describe accounting numbers of any complexity. The consequences of transactions theory are wide. Descriptions of accounting numbers as stochastic variables and statistical criteria for choice of income measurement arise naturally. The theory is a self-contained conceptual framework for understanding the measurement problem in accounting which does not depend upon the concepts of rational decision making and restrictive assumptions about market structures.