Budgeting Models and System Simulation: A Dynamic Approach

Abstract

In this paper the main idea is to create a flexible Budgeting Model which works in a dynamic framework capable of providing information about the financial position, income, assets and liabilities of an enterprise. This new tool should be considered the starting point for a new class of models able to adapt to the new informative requirements that come from different economic subjects. In order to create a similar model one has to analyze the procedures of double entry bookkeeping and find a mathematical formalization of them. Then, using the typical relationships presented in the balance sheet, it will be possible to build an initial quantitative model which uses accounting data to represent the dynamics of the company and to create a simulation associated with those dynamics. In succession we are showing how our accounting recordings formalization, based on the concept of difference equations, can be used to model the entire dynamic of the Budgeting Model and more in general the dynamic of a Balance Sheet. Afterwards a closed form solution will be proposed. This solution gives us information about the financial position, income, assets and liabilities of an enterprise after n-periods and it could be used both to simulate firm budget and for other financial purposes. However, this research wants also to introduce a new series of quantitative instruments to integrate the set of information at the disposal of companies, obtained, to begin with, from its accounting records.