Theory of Business Events and Classic Transactions

Years ago I posed a hypothesis that business events drive accounting transactions and that economic entities have patterns of business events which could be named and described in machine-readable terms.  After significant experimentation and testing between 2015 and about 2022, I have reached the conclusion that my hypothesis was correct and now I have my theory of business events.

Here are many of the best details related to my testing, poking, and prodding and prototypes that I constructed to experiment with and test this hypothesis:

Sensemaking is the process of determining the deeper meaning or significance or essence of the collective experience for those within an area of knowledge.  Sensemaking is a tool. You can use sensemaking to construct a map you can share with others.  Sensemaking is the art of analysing, understanding, clarifying, untangling, organizing, and synthesizing. The process of sensemaking involves: 

  • Looking for patterns in information.
  • Making connections among different things.
  • Synthesizing lots of information and categorizing it into small chunks.
  • Think about the big picture.
  • Think about the "why" of a situation.
  • Organizing and untangling things.
The Cynefin Framework is a sensemaking model.

Financial transactions posted to an accounting system are not random; transactions have logical patterns driven by patterns of business events, circumstances, and other economic phenomenon. The graphic below, published by the FASB in SFAC 6, Elements of Financial Statements (page 21) shows a very high level categorization of transaction patterns:


While this high level categorization is not necessarily useful for my purposes, it eludes to the same conclusion that many others have reached: there are identifiable logical patterns in accounting transactions and the business events, circumstances, and other economic phenomenon that drive those accounting transactions. This fact can be leveraged.

Further, these logical transaction patterns can be identified and named, machine readable tokens can be created for the identified and named patterns in order to refer to them, the essence of each logical pattern can also be described in machine readable terms, and this machine readable information can then be leveraged in different ways.

Finally, many if not all, traditional accounting systems are missing a piece of information.  That missing piece of information makes it impossible to automate the generation of a complete set of primary financial statements which would include a balance sheet, income statement, comprehensive income (in many cases), statement of cash flows, and statement of changes in equity.  On the other hand, if this one piece of information is added to transaction information similar to how accounts are used then it becomes possible to (a) autogenerate all of the primary financial statements, (b) enable bidirectional navigation from the original transaction source within a general ledger to the financial report line item or from the line item to the original transaction source.  Without that metadata this incredibly useful bidirectional navigation is simply impossible.

Additional Information:

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