Storytelling with equal doses of statistics and compassion.
Halfway through the alphabet, it seemed a good time for a little poem to talk about one of the core accounting principles. Hope you’re learning some interesting things about Accounting.
Materiality relates to a question of which
Only accountants would ask it
What value is served on an annual report
If you depreciate a wastebasket?
Why do people always make liabilities sound so complicated?
For example, *ahem* the semiannual interest payment for a five-year, $1,000 par-value bond with an annual 8% coupon is $40: ($1,000 x 0.08) / 2 = $80 / 2 = $40… or… if the bond was issued at a premium of $200, the semiannual amortization using the straight-line method is simply $20: ($200 / 5) / 2 = $40 / 2 = $20. Therefore, debit interest expense by $20 ($40 – $20), credit cash by $40 and debit premium on bonds payable by $20.
See? Nothin’ to it.
Easy for you to say.
Liabilities are complicated because people are forward-thinking. Humans do not live on cash flow alone. There must be accrual. And accruals are the stuff of science fiction because they suggest the future.
Continue reading “L is for Liabilities”Anyone remember E.F. Hutton?
The brokerage company was famous for a 1980s ad campaign, “When E.F. Hutton talks… people listen.” E.F. Hutton became famous for something else. It was complicated, it was company-wide, and it went on for three years, until they were found guilty of thousands of counts of fraud involving millions of dollars.
The fraud was for kiting.
Check kiting is a type of bank fraud that occurs because banks and merchants extend credit on customer checks, when they don’t know whether the customer has enough funds in the other bank. Criminals could open two bank accounts, then write checks between them, covering each bad check with another bad check.
Continue reading “K is for Kiting”