Accounting in three dimensions: a case
for momentum
Eric Melse
Eric Melse is external PhD
student at the Maastricht
Accounting, Auditing &
Information Management
Research Center (MARC),
Maastricht, The Netherlands.
DOI 10.1108/09657960410514661
Introduction
H
owever complete and accurate ®nancial statements might be, the information they
contain is exclusively ``historical'' for the simple reason that the accounts contain data
pertaining to facts that can be proven to have happened. This, of course, is a gross
simpli®cation because not only does the balance sheet include data from the past but also data
that points to the future. The obvious example is debtors that record the amount of money
owed by customers to the ®rm. From the standpoint of the accountant that data is a historical
fact but for the treasury department only a marking of future cash in hand. More important, we
can characterize all balance sheet data as point measurements, i.e. a record of the source and
use of wealth at a given date and as such, it is a static or ``non-moving'' representation of
economic information. To account for the business dynamics in between two such moments of
measurement we account for income and expenses, hopefully the ®rst being the larger sum
then the second and then report a pro®t. This pro®t increases owners' equity, or net wealth, and
is equal to the wealth increase between the balance sheet total at two successive dates,
excluding equity raised or retired through ®nancing. Likewise, a loss reported is then equal to
the decrease of wealth. Consequently, the pro®t & loss accounts are period related.
Conceptually, they constitute the second dimension of the ®nancial accounting system and
explain the change of magnitude of the ®rst dimension: wealth.
Yuji Ijiri proposes a system of accounting with three dimensions[1]. Beside wealth and income,
he proposes force as a more reliable and relevant alternative to our current ``point-and-period''
measurement to meet managerial demand for more information about business dynamics. The
fundamental notion is to account for the income capacity of a ®rm in terms of levels rather then
differences. Ijiri seeks at any particular point in time to report the growth level instead of (only)
explaining the growth of net wealth as the lump sum difference from the previous point. This he
calls the momentum by which net wealth changes or the growth rate per month, week or day.
By comparison with car driving, Ijiri wants to measure the speed at which the car travels instead
of only measuring the distance travelled so far. When aggregated, during the accounting period,
income momentum equals the annual income reported with the pro®t and loss statement. Ijiri's
objective is to account for existing momentum and new momentum created by management
during the period in between the opening and closing balance sheet. He wants to reward
management differently for maintaining existing momentum and for any action that they
undertook to create momentum anew. Naturally, we can extend this concept to any accounting
measurement. Examples are brand accounting (Farquhar et al., 1992) and revenue accounting
(Glover et al., 2002). In this paper, we give an example of an integrated analysis of income
VOL. 12 NO. 1 2004, pp. 31-36, ã Emerald Group Publishing Limited, ISSN 0965-7967
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 momentum and balance sheet momentum. We explore not only the dynamics of the rate of net
wealth growth but also of the rate by which the composition of balance sheet accounts
changes. With a factor analysis method, we expose the unsuspected structure of wealth
accounts, to ®nd this in the measurement of momentum, and force as well. We argue that a
dynamic structure exists between the various items in the balance sheet, which points at the
fact that the three accounting dimension form an integrated model of business dynamics.

Accounting dimensions
To explain the dimensional relationship of economic accounts Ijiri borrows a metaphor from
physics. In classical mechanics, we de®ne the velocity of an object in a friction free environment
as the product of its speed and mass. Acceleration is then the change of velocity. In analogy the
de®nition of mass by Sir Isaac Newton as quantitas materiae (Cohen, 2002), Ijiri proposes to
de®ne (net) wealth as the microeconomic mass that has a certain velocity or momentum to
create new wealth. Ijiri posits that ®rms can reach a level of continuity as pro®t making entities.
Depending on the strength of opposing forces that might wear down this momentum, Ijiri
expects the ®rm to continue to create new wealth at the level reached. To measure the creation
and maintenance of such momentum, Ijiri proposes to administer accounting measurements
with three dimensions:
(1) Wealth ± the ®rst dimension or composition of wealth, with all the various items to be
classi®ed as assets, liabilities and owners' equity. These reside only the balance sheet
statement.
(2) Momentum ± the second dimension or change of magnitude of wealth, with items to be
classi®ed as income and expense accounts. Accounts of this dimension reside on the
momentum statement as well as on the pro®t & loss statement.
(3) Force ± the third dimension or capacity to acquire new wealth in the future. Through the
administration of negative and positive impulses, accounts have to be distinguished to
record the momenta that will chance the capacity to create new wealth in the future.
Accounts of this dimension reside on the force-, impulse- and action-statement.
Figure 1 explains the framework between the three accounting dimensions. This is not a
Cartesian system determined by three geometrical dimensions. We do not measure or project
microeconomic facts as a spatial position. Instead, we measure the temporal aspect of
business transactions. We have to view the three accounting dimensions as temporally
determined information sources. Figure 2 illustrates the framework of accounting measure-
ments that constitute the three dimensions. We ®nd at the top right wealth as a point
measurement (). These accounts we use for the balance sheet. Below them, there is income

Figure 1 A temporal system of three accounting dimensions

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 Figure 2 A framework of accounting measurements

WEALTH
τ
↓↓↓

↓↓↓
MOMENTUM INCOME
∆π π
↓↓↓

↓↓↓

↓↓↓
FORCE IMPULSE ACTION
∆2π ∆π π

and these are the accounts used for the pro®t and loss statement. They are a period
measurement () and as the framework shows, income aggregates into wealth ("). So far, the
framework involves only two dimensions, wealth and income, and it is identical to the model of
double-entry bookkeeping. However, Ijiri introduces a new set of accounts he calls momentum
that are on the same level as income. Although they are also period related, they have a different
temporal position because they explain the rate of (new) income (
) and their values aggregate
dynamically into income (!) in the same manner as income aggregates into wealth. Suppose, a
®rm realizes net income at a rate of 10 per month, its ``level'' of income momentum, assuming
no changes whatsoever, then annual income should be 120. But, momentum does change and
to be able to distinguish between changes for better or worse, as well as to account for the
causes of such changes, Ijiri proposes a third dimension of accounting measurements: force.
Reading in Figure 2 from left to right, we ®nd at the bottom of the framework: force, impulse and
action. These measurements also aggregate horizontally (!). The idea is to account for causes
of changes, the forces that aggregate into an impulse at a single measurement of the period
change (that could be a month, week or day). It is the impulse we understand changes net
income momentum and hence it aggregates vertically (") into momentum. For example, when
we launch a new product and then, as a result, for a certain period new income will be realized.
This we measure as force times duration when the force is stable and aggregate it as an
impulse. The impulse we add to the existing momentum. By aggregating such impulses
separately into Action, management is then able to separate income realized by existing
momentum from that realized by new momentum created during the current accounting period.
The objective of this framework of interlocking accounts of momentum accounting is to
measure continuous income during the accounting period in contrast to discrete income after
the period close. However, we can also apply it to explore and determine other dynamics
present in a ®rms' business model. We can use this mathematical framework of aggregation of
accounts for the analysis of ®nancial statements although we do not necessarily have full
disclosure in each accounting dimension.

Ratios or momentum measurements?

An intriguing question to answer is: what meaningful information can we expect from
momentum accounting? The ®rst place to look is the balance sheet and the ratios computed
from it to analyze operating performance. We compare return on total assets (ROTA) and return
on equity (ROE) with the measurement of momentum of net wealth (equity) and pro®t after tax
(net margin). The data used is of Robert Half International Incorporated, an US based ®rm
whose principal activity is to provide specialized staf®ng services (Table I)[2]. There is no special
reason to use this company's ®nancial statement data other then for the purpose to illustrate the
capability of momentum accounting and compare it to ratio analysis. We use the data in Table I
to draw Figures 3 to 6[3]. Ratio analysis from 1987 up to 2002 does provide a clear view of the
trend in the operating ef®ciency of the total business (ROTA) and the return made to the equity
shareholder (ROE). The period from 1989 up to 1994 when both ROTA and ROE show a steep
decline and reach a very low point during 1991 and 1992, to gradually increase again to reach

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Table I Robert Half International Incorporated (data in millions USD)

Point Point Period Period Period/point Period Period/point Momentum Momentum Momentum Momentum

Net Net wealth

Year Wealth wealth Sales PBIT ROTA PAT ROE Wealth Net wealth Net margin composition

1986 128.81 48.63

1987 155.69 48.13 105.69 15.66 12.16% 7.25 14.91% 26.89 ±0.50 6.86% ±1.85%
1988 194.87 61.70 182.05 24.49 15.73% 12.03 24.99% 39.18 13.57 6.61% 34.63%
1989 184.41 68.68 234.50 30.31 15.55% 13.47 21.83% ±10.46 6.97 5.74% 66.65%
1990 188.37 77.29 248.56 23.53 12.76% 9.32 13.57% 3.95 8.62 3.75% 217.96%
1991 178.95 84.42 209.46 14.65 7.78% 4.12 5.32% ±9.42 7.13 1.96% 75.68%
1992 181.76 90.97 220.18 12.21 6.82% 4.38 5.19% 2.81 6.55 1.99% 233.12%
1993 204.60 133.60 306.17 25.55 14.06% 11.72 12.89% 22.84 42.63 3.83% 186.65%
1994 227.76 177.00 446.33 46.78 22.86% 26.12 19.55% 23.16 43.39 5.85% 187.34%
1995 301.14 227.93 628.53 69.09 30.33% 40.30 22.77% 73.38 50.94 6.41% 69.41%
1996 416.01 308.45 898.64 103.65 34.42% 61.10 26.81% 114.87 80.52 6.80% 70.09%
1997 561.37 418.80 1302.88 158.83 38.18% 93.70 30.38% 145.36 110.36 7.19% 75.92%
1998 703.72 522.47 1793.04 221.18 39.40% 131.58 31.42% 142.35 103.67 7.34% 72.83%
1999 777.19 576.10 2081.32 235.44 33.46% 141.44 27.07% 73.47 53.63 6.80% 73.00%
2000 971.03 718.54 2699.32 302.49 38.92% 186.10 32.30% 193.84 142.44 6.89% 73.48%
2001 994.16 805.70 2452.85 197.08 20.30% 121.11 16.85% 23.13 87.16 4.94% 376.76%
2002 935.67 744.97 1904.95 4.40 0.44% 2.17 0.27% ±58.49 ±60.73 0.11% ±103.83%

their highest points in 1998 and 2000. The last two years of this time-series show a dramatic
decrease and it arrives at almost 0 percent. When we compare Figure 3 with Figure 4, which
graphs net margin, it is remarkable to observe that pro®t after tax (PAT) displays a symmetric
pattern during the period 1989 up to 1994. The question we now want to answer is how to read

Figure 3 Return on equity & return on total assets (y1/x0)

40% ROE
ROTA
35%
30%
25%
20%
15%
10%
5%
0%
87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02

Figure 4 Pro®t After Tax (Net Margin, y1/Y1)

8%
7%
6%
5%
4%
3%
2%
1%
0%
87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02

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this pattern comparing it to ROTA and ROE. Our ®rst concern is that these accounting ratios
have a ``mixed dimension'' since we divide a period measurement, PBIT or PAT, by a point
measurement, total assets or equity (in Ijiri's terminology: wealth or new wealth). Pro®t margin, is
a period quotient of income; the second accounting dimension. To be consistent dimensionally
we should compare it with a period quotient of wealth. Figure 5 graphs such a quotient
calculated by the division of the difference between the two point measurements of net wealth
by that of wealth as a whole. In other words, we compute the change of net wealth during the
period relative to the change of wealth (total assets). As Figure 5 shows, in the period 1989 up to
1994, considerable dynamics have occurred in the composition of wealth. Both in 1990 and
in 1992 net wealth increases by a rate of 200 percent compared to wealth itself. Figure 6
combines this momentum with that of pro®t after tax (net margin). This is a consistent time
period comparison of accounting quotients. When we again compare the year 1989 with 1994,
1990 with 1993, and 1991 with 1992, it is striking to observe that in each case pro®t after tax is
about the same. However, net wealth momentum, is in each case very different, as Figure 5
already indicated. Figure 6 clearly points at the importance of the measurement of momentum,

Figure 5 Momentum net wealth composition ((x1±x0)/(X1±X0))

400%

300%

200%

100%
0%

-100%
-200%
87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02

Figure 6 Period based analysis of net wealth growth momentum vs. momentum of
net wealth composition

0.08
97
0.07 00
87
88 95
Profit After Tax (Net Margin)

0.06
89 94

0.05
01

0.04
93 90
0.03

91 92
0.02

0.01
02
0.00
-1.5 -0.5 0.5 1.5 2.5 3.5
Momentum Net Wealth

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 or rate of change, in comparison to ®nancial ratios we are accustomed to use. One cannot fail to
notice the cluster of years at the left top corner with those years plotted that have a healthy
margin as well as a strong growth of net wealth. Moreover, to be able to tell apart the years that
have the same net margin or similar return ratios, but very diverse net wealth momenta, add
new insight. It signals that although the net margin rate is the same, net wealth is growing faster,
pointing at dynamics of balance sheet management, something of interest to equity owners.

Conclusion
Our result exposes the intricate structural relation between the three accounting dimensions
that are a temporally determined source of information about company wealth, change in
its composition or magnitude. We can disclose new and relevant information through this
framework. Our notional example about return on total assets, return on equity, net margin and
net wealth momentum indicates that it can be bene®cial to compare accounting quotients that
are dimensionally consistent. Preferably, we should not compare time-period data with time
step data. We conclude with the contention that implementing momentum accounting might
be bene®cial for strategic accounting purposes as well as for ex post analysis of ®nancial
statements. Possibly, our result will prompt a renewed interest in the practical use of triple-entry
accounting and momentum accounting as an improved performance measurement tool, and
provide more forward-looking information.

Notes
1. The theory of Yuji Ijiri was published in a series of articles and monographs to which we refer the reader
for a more detailed explanation of foundational concepts and logic: Ijiri, 1982, 1984, 1986, 1987, 1988
and 1989.
2. Data from Datastream.
3. Observe that the computation of composition momentum requires a formula that incorporates the
direction of wealth momentum: decrease or increase. When wealth decreases the result of the division of
the difference between the two point measurements of net wealth by wealth is inversed when wealth
decreases during that period.

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