Tag: #FOWC

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L is for Liabilities

Why do people always make liabilities sound so complicated?

An online lesson making liabilities simpler. Photo from Youtube.

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.

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K is for Kiting

Anyone remember E.F. Hutton?

From E. F. Hutton 1980s ad, “When Hutton talks…” Photo from The Retrosite.com.

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.

A Special Type of Fraud

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.

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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.

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