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”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.
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.
Continue reading “J is for Journal”