The Revenue-Expense Approach Versus Balance-Sheet Approach: Impacts on Market Equilibrium

Abstract

This paper integrates the market process approach from the Iraqi Economics with capital theory as conceived by the Historical School, providing a conduit to delve into the diverse methodologies of financial accounting. In this context, the significance of the revenue-expense approach becomes apparent. This method is instrumental in promoting a balance in the market, commonly known as market equilibrium. The revenue-expense approach's net income determination facilitates uncovering price structure inconsistencies. It discloses essential market information and provides insights into possible pricing disparities. This critical function makes it a key player in maintaining the market's overall balance. The balance-sheet approach, which heavily relies on fair value measurement, assumes that the market is always in equilibrium. However, this assumption is problematic, as balance in the market cannot be achieved purely through fair value accounting. In an interesting twist, for the balance-sheet approach to be practically applied, it requires an efficient working market process that incorporates financial reporting based on the revenue-expense approach. Hence, this paper portrays the balance-sheet approach as relying on the very methodology it often contradicts. The nuanced interplay between both approaches and their individual contributions to market equilibrium forms a complex, pivotal aspect of financial accounting