Accounting Information, Aggregation, and Discriminant Analysis

Anil Arya, John Fellingham and Doug Schroeder
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Anil Arya: Fisher College of Business, The Ohio State University, 2100 Neil Avenue, Columbus, Ohio 43210
John Fellingham: Fisher College of Business, The Ohio State University, 2100 Neil Avenue, Columbus, Ohio 43210
Doug Schroeder: Fisher College of Business, The Ohio State University, 2100 Neil Avenue, Columbus, Ohio 43210

Management Science, 2000, vol. 46, issue 6, 790-806

Abstract: Aggregation is a pervasive theme in accounting. The preparation of financial statements involves extensive aggregation---information regarding several transactions is summarized using a few account balances. In this article, we study linear, double-entry aggregation rules. The level of aggregation (transactions versus account balance information) affects a decision maker's ability to discriminate between two entities. We show that the orientation of the discriminant function relative to the row space and the nullspace (two fundamental subspaces) of the double-entry matrix determines the information loss due to aggregation. In addition, we observe that an interdependency in account balances is introduced by the double-entry process. The cause and effect property (debit and credit) translates into a negative covariance being introduced among account balances; this, in turn, affects the decision maker's optimal use of information. Finally, in discussing benefits to aggregation, we present an example in which adopting a double-entry aggregation rule serves as a commitment device for the owner.

Keywords: aggregation; double-entry bookkeeping; discriminant analysis (search for similar items in EconPapers)
Date: 2000
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Citations: View citations in EconPapers (5)

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