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J is for Journal

Journal entries are the backbone of accounting records. Despite the shift from quill pens to wi-fi chips, from clay tablets to vellum sheets to a blinking data entry screen, the accountants have always had to keep track.

Reducing Eggs Payable

Historians generally saw the ancient cuneiform notations as some of the earliest examples of writing–and accounting–in the world. The large-scale management of taxes, grain allotments, and army rations for the burgeoning Sumerian and Egyptian empires took a lot of tablets.

But local farmers had to keep track on their own, so researchers think that “primitive” bookkeeping, even based on barter, would have still included writing in a ledger. A neighbor might agree to take three chickens in exchange for a bag of seed when the harvest is completed. Or, suppose another neighbor made a sturdy cabinet for the kitchen in exchange for a year’s worth of eggs.

There would still need to be journal entries:

Bought one sack of seeds : Three chickens payable to Farmer Jones
Bought one kitchen cabinet: Year’s supply of eggs to Farmer Kozlowski

Then, one of the kids had to be sent over every day to Kozlowski with the day’s supply of eggs, while someone would make the daily journal entry. Because if something happened to the parties in the transaction mid-year, Mrs. Kozlowski would want to know that she was still owed 183 eggs. On your books, that would be sitting as eggs payable.

Gimme that old-timey journal! Photo at Fredrikstad museum.

Using money would make that easier. Not only would you be able to equate your remaining eggs to the same valuation as the cabinet, say $183, but it also would allow seeds, chickens, eggs, and furniture to all be logged in the journal combined. Otherwise, you’d need separate columns for all the items you were bartering, and those books would get heavier than they already are. Money made it easier, and more eggs-act. (you knew that was coming, didn’t you?)

Old-time business manual, photo at Pinterest.

What Keeping the Books Looked Like

Keeping the books was an intense task that required daily diligence and painstaking attention to detail. Most of the formal business keepers into the 20th century were men, with women never pictured in the earliest photos, even though women were long-known to keep household accounts.

San Francisco Mint accountants, @19th century. Photo at business-case-analysis.com.

If your business were somewhat shall we say “unconventional,” involving oh say opium dens, smashing parking meters, or running “protection” rackets for the local deli owners, you needed very savvy accountants to keep two sets of books. There was one set used for public consumption, in case any forensic accountants were trying to “follow the money.” Then, there might be another set.

My ex-stepmother was an auditor for Coopers & Lybrand (modernized now as PwC), and she once told me the funniest accounting joke ever:

First auditor: What would you do if you found your company had two sets of books?
Second auditor. Well! I’d only audit one of them…

My ex-stepmother was also homecoming queen as a senior at the high school when David Letterman was a freshman. Not all accountants had large moustaches.

Don’t all accountants look like this? My ex-stepmother, a fine woman and a very funny auditor. Photo courtesy of kajmeister.

Hard-working, Long-Suffering. At Least There is Symmetry.

They all worked hard, though. She would spend long evenings at the kitchen table with a lot of papers. Many accountants work long hours because handling all those journal entries is time-consuming. Accountants have to close the books at the end of the quarter and the year. All the revenue and expense accountants which added up over the days now have large balances which have to be zeroed out.

But, not so fast!

Before you can clear out all the revenue and expense accounts, you have to run a Trial Balance to make sure all your debits and credits balance. If they don’t, you have to track through the year’s worth of entries to find what’s off.

Then, you have to log any accrual journal entries for those categories business people invented to spread things over time and to make accountant lives difficult. For instance, once a year, you might enter the amortization of your relocated Irish patents or depreciation of equipment. After all the accruals and the closing entries, you run another Trial Balance and pray to whatever gods you have that you still balance.

And…you have to do this either right before New Year’s or right after it. So, while everyone is partying like it’s 1999, you’re late in the office trying to find out who lost a debit.

By the time you’re done, you just want to rip up every piece of paper in sight. Which is where New Year’s confetti comes from.

Confetti, i.e. after the books are closed. Photo from atlasobscura.com.

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I is for Ireland

“Leprechaun economics” is the term Nobel-prize winning economist Paul Krugman used. With all due respect to Ireland–that greenest land of wind, stories, and music to soothe the soul–their tax law sucks bilgewater.

Leprechaun economics, picture at ginokenny.com.

The Republic of Ireland has managed, in the last fifty years, to transform itself into the world’s largest tax haven. Meaning a place that allows multinational corporations, particularly those formed and operating in the U.S., to use creative accounting to pay very little in taxes. How little? How about 0.005%?

Apple Chooses Between Single Malt or Double Irish

Apple is a company that has always thought far in advance about packaging and design–including on their financial statements. Back in 1980, about the time when they were prototyping the Macintosh, Apple opened a small office in Cork, Ireland, lured by a deal to pay no taxes for several years. Such local tax arrangements aren’t that unusual–Twitter moved into a derelict building in downtown San Francisco for the same “no tax for years” deal, while Delaware has long been known as a favorable legal and financial place for companies to incorporate.

What Apple was also able to do, over decades, was use its growing economic power to support an Irish shift into a myriad of favorable tax strategies–favorable to corporations, that is. A so-called Base Erosion and Profit Shifting (BEPS) plan allows companies to put their huge patents as giant assets on their balance sheets, in Irish subsidiaries. These patents, the stock and trade for tech companies, are amortized (charged out over time) in a convoluted way that allows the income received to be located in Ireland–with very low tax rates–even if it was earned somewhere else.

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H is for Hedge

“Greed is good,” trader and arbitrageur Ivan Boesky told our MBA class of 1984. He arrived with a stretch limo and an entourage, wearing a fur coat and an expensive Italian suit. He explained that his job was to find opportunities that others missed and that the trade-off in risk and reward was real. Those willing to accept more risk–the risk of losing money because a ship sinks or a drug fails–should get the bigger payout when the exotic cargo comes into port or the cure for disease proves successful.

The risk part is the problem. How can you minimize the risk and still receive high enough payouts to cover costs? Entourages aren’t cheap. One answer is a hedge fund.

English hedge maze. Photo at atlasobscura.com.
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G is for GAAP

GAAP illustration design from Oracle Netsuite marketing site.

GAAP. FASB. AICPA. APB. If you studied accounting formally, the first few pages of your textbook typically listed a set of acronyms that would make your eyelids flutter. The Financial Accounting Standards Board, the American Institute of CPAs, the Accounting Principles Board, etc. Buncha old (white) guys doing boring talking, as my son used to describe it. Except that what these guys do (and a handful of gals*) is remarkable. Because they set the standards for every other company in the United States.

GAAP stands for Generally Accepted Accounting Principles, and it’s the prodigious set of rules that dictate how businesses should report their financial results. FASB is an independent group, elected from the community of practicing accountants. That means accountants are part of a guild.

G is also for Guild

If you remember your history of guilds, they arose in the Middle Ages as artisans developed their crafts and wanted to set their product standards. Rules were developed for certification to become part of the guild, and the guild stamp of approval reflected its authenticity and craftsmanship.

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F is for Fraud

Design from si.interactive.com.

Enough of the accounting philosophy, let’s talk about something more fun. Fraud!

If accounting is as old as the hills, so is fraud. If you recall my post about Clay Balls a few days ago, you may remember that they were storage for tokens carried by tax collectors. The tokens were stored inside hollowed balls to “prevent tampering.” In other words, tampering–tax collectors collecting a few of the tokens to barter for their own purposes–was already a common practice in 3000 B.C.E. Where there are tax collectors, there are corrupt tax collectors, apparently.

Oops! My Warehouse Burned Down…Insurance Fraud

There was also ancient insurance, and with that came ancient insurance fraud. Ancient merchants purchased “bottomry” contracts (now there’s a word!) in Babylon as early as the third millennium BCE, as did Hindus, Greeks, and others. A trader would get a loan for his cargo and pay an extra fee for insurance, with the interest on the loan also helping cover the loss. When the ship came in, if he defaulted on the loan, the insurer would keep the cargo.

Design from antikytheramechanism.com.

The Greek merchant Hegestratos decided to try an end run around his bottomry contract, in 360 BCE. He had received a cash advance and figured to keep it–and the corn–and claim an insurance loss. He put the corn in secret storage and sailed the ship, but empty. However, there were other passengers on the ship, and they were not too keen when they noticed him trying to scuttle the empty vessel. They chased him off, and he drowned. So much for early insurance fraud!

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