Move Beyond 20th Century Accounting Principles to Accurate 21st Century Records Management

By Harry Greene

From accounting to professional facility records management in the 21st century

20th century management follows generally-accepted accounting principles and lays an accounting structure over the business to account for a portion of business finances in actual and accrued income, expenditures, known assets, and liabilities. This may be supplemented by some statistical record keeping. Cost accounting may record some known costs against a final product, or meaningless contrived entities like activities or centers. Capital is not recorded by the solutions utilized by the business and much high-worth capital is not recorded at all, but is labeled as "intangible assets". Economic output results that produce value and income are not accounted for as a set. Some results such as product produced, sales order booked, and revenue received may be recorded as a separate account entity. The costs and actual expenditures incurred when capital is utilized or consumed to produce an output result cannot be recorded. Non-financial data in the quantity and effectiveness of capital utilized to produce a volume and quality of results cannot be recorded. In most enterprises, facility records produced beyond accounting records in documentation, correspondence, agreements, etc related to business transactions are not managed as capital and many important records on the business are not kept.

20th century accounting is driven by adherence to principles rather than completely and accurately recording all actual business transactions involving capital developed and utilized, all economic output results produced by the business, and all results entering and leaving the business. A chart of accounts is produced by accountants and laid over the business to provide the accounts that can be debited and credited. The accounting general ledger system and other financial system information is only as good as the chart of accounts that dictates and limits what can be recorded. These accounts only incidentally record pieces of the business and are maintained separate from actual changes to the business. The chart of accounts is by definition incomplete and inaccurate compared to the information that should be recorded and the records that should be maintained on the actual business.

For some time, there has been a need for professional records management to manage both the financial and non-financial facility records capital of the enterprise. The explosion in information technology and Internet utilization has magnified the problem. This has provided the opportunity for the accounting profession to expand their outlook to professional records management. Now, many enterprises are setting up separate records management functions and information systems as additional structures laid over the business to meet the growing need. However, more structures and IT overheads just compounds the problem.

What is needed is professional facility records management to manage all financial and non-financial records for all capital invested in the business, all utilization of capital in the business, all output results produced by the business, all business media related to business transactions, all enterprises interacting with the business, and all historic and future time periods used for business planning and control.

Result-performance Management (R-pM) is the solution to organize facility records as part of the business and provide professional 21st century records management. R-pM organizes the business of the 21st century enterprise through the only three components directly involved:

  • Results: Economic outputs of value that are to be produced by business performance
  • Capital: Investments in performance solutions of worth available to produce specific results
  • Performance: Utilization of a solution to incur costs and provide effectiveness to produce a specific result

The business organization can be viewed as a structure of results produced, capital available in the business as performance solutions to produce the results, and the deployment and utilization of each performance solution to produce each result. The business structure is defined for the current business and a strategic business structure is defined to plan the strategic business and strategic value creation. Result goals and performance expectations are set to include the financial and statistical budget and management plans to connect the current business to the strategic business.

20th century accounting does not account for results as a set of business outputs, capital as a set of business investments, and performance to incur business costs and create business value. In order to record and account for the business tangible and intangible asset investments in the business must be accurately recorded as specific performance solutions of a specific worth, all outputs from any economic activity conducted by the business must be identified and accurately recorded as a result of a specific value within the value of customer revenues received, and the utilization of each performance solution utilized to produce each result must be recorded to know the costs of performance against the result, the total performance costs to produce the result, and the value-added to the result that goes to business profits.

R-pM uses modern information technology to automate business records and to generate performance transactions automatically each time a result is produced. Any part of the business can be structured for the results to be produced, the capital available, and the performance solutions utilized to produce a result. The business structure can be set up in a modern general ledger system and structures laid over the business can be eliminated. The current and strategic business structures are used for all organization, planning, direction, control, reporting, and governance.

The 20th century business organization problem

The main obstacle to professional records management has been the lack of a definition of the actual business to record. This is due to the 20th century definition of "performance" that defines not only the action executed or use of capital but also the economic outputs or results accomplished as performance. This has prevented the 20th century enterprise from organizing, managing, and accounting for the business. Tangible capital utilized and certain results produced as separate entities are listed in charts of accounts and are mixed to together in key performance indicators, and other structures used to describe the business. Most capital utilized, the utilization of the capital in performance, and results produced are not recorded. We describe the business through contrived entities like center, activity, object, account name, etc.

Because of this, the 20th century approach to financial records management produces many unsolvable problems, such as intangible assets, unknown costs, unrecorded value, distorted capital worth, incomplete and inaccurate management information, mismanaged capital development, and ill-informed corporate governance.

The 20th century Accounting Problem

The need for professional records management has existed since the beginning of business. However, the need has never been fulfilled in the 20th century enterprise. Another reason is the limitations set by accounting. Accounting started out as bookkeeping to keep financial records, which are a sub-set of tangible facility record capital. Accounting was built up to be synonymous with record-keeping. But financial management and accounting restricts record-keeping to financial records on cash and accruals, which are only a small part of enterprise capital, rather than keeping records on the business. So, instead of being managed as enterprise capital to produce results, records are spotty and scattered with various units and individuals.

Since we cannot account for business results and performance, a contrived chart of accounts is laid over the business, so most financial records are kept on entities that are not the business. Since the objective is to record cash and accruals, rather than recording the business, accounting keeps financial records on only a part of the business cycle from the point that money comes in to the point that money goes out. This is the routine business administration part of the cycle that is easy to record, but involves enormous expenditures. The other part of the business cycle from the point money goes out is the business operations part that creates value to reach the point money can come in. The business operations part of the cycle is not recorded by accounting. Records are not kept on the value of economic input results to the business from expenditure and investments, the transformation of input results to economic output results and the added value created to produce revenue results. No records are kept on investments to develop and improve specific solutions to be utilized in performance, the worth of these specific solutions, the utilization of solutions in performance to produce specific results, and the return on the solution investment from the value added to results. No records are kept on costs generated through the utilization of specific solutions in performance to produce specific result value that gives the value added by the performance. Methods are contrived to account for some known costs, but the costs have little meaning and usually are charged to the wrong things, such as centers and activities. Professional records management must include financial records that record the full business cycle.

Barriers to the move from accounting to 21st Century Records Management

The accounting profession faces barriers to move from 20th century accounting to 21st century records management:

  • The inability to record the actual business, because the business is not organized and managed
  • The traditional focus on controlling cash and accruals, rather than the complete capital of the enterprise
  • Capital asset records or registers that record expenditures for tangible assets but do not record the assets as solutions used by the business, and do not record supporting capital developed or intangible assets
  • The legacy of rules and regulations that dictate how books are kept, rather than how to accurately record the actual business

The basic problem with records management is that we are not able to record the actual business. Our records relate to structures laid over the business. The account structure and chart of accounts is an overlay on the business. Actual business entities in all tangible and intangible capital invested in the business and output results produced across the business are not recorded. Much of the information produced by accounting and financial management information systems is not related to the business, causing much waste and unproductive work. Actual business information used for management accounting and the management intelligence capital that can be derived is limited by accounting and much effort is spent analyzing irrelevant information. Because of this, 20th century accounting has never been able to record and management has never been informed of returns on specific capital investments, the worth of capital available to the business and the enterprise business, all costs incurred in business performance, and the value of output results produce across the business.

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