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Accounting

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Accounting is the the measurement, processing, and communication of financial information about economic entities and dates back to Italian mathematician Luca PacioliWikipedia's W.svg in 1494. In theory, all accountants are to adhere to the Generally Accepted Accounting PrinciplesWikipedia's W.svg (GAAP). In practice, not all do, and thanks to the actions of these few, the profession as a whole gets a bad rap.

Misuse of terms[edit]

As with any profession, accounting has its own definitions for terms, and how these differ from lay use allows for nasty slights-of-hand.

For example, a company says it made $1 million in revenue and people will falsely interpret this as the company making $1 million in profit. Profit in accounting means revenue minus expenses.[1] So if the said company had expenses of $1.5 million, it actually lost $500,000 dollars. Moreover "gross margin" or "gross income" are sometimes called Gross Profit or Sales Profit. This again is not how much the company made (Net Profit), but the profit made on its sales; it doesn't figure in things like interest on bought goods, salaries and the like.

Depreciation[edit]

This thing all things devours, Birds, beasts, trees, and flowers. Gnaws iron bites steel, Grinds hard stones to meal, Slays king, ruins town, And beats high mountain down
—Gollum in The Hobbit[2]

Few things last forever, and this is where depreciation comes in. To oversimplify it, depreciation is a way to represent the wear and tear on a material object such as a building or vehicle. Depreciation shows the mistakes of people who say we should use goods as the basis for money. The good decreases in value resulting in a deflationary spiral. Offsets to depreciation (effectively an expense) are seldomly seen in the records of publicly traded companies.

Cooking the books[edit]

Cooking the books is near the bottom of the barrel in accounting circles. Keeping two sets of books (one for internal use and one for the outside world) is the bottom of the barrel. Cooking the books is basically manipulation of accounting records toward making the records appear better then they actually are. Enron and WorldCom have become poster children of what is informally called creative accounting, but other ways to cook the books aren't so obvious. Misrepresenting credit sales channel stuffing (sending a host of unordered goods at the end of the quarter and recording them as credit), recording nonrecurring expenses on a regular basis, and misuse of depreciation are all ways the books can be cooked.

The Master Chefs[edit]

However, there is creative accounting beyond even what Enron and WorldCom did; this little gem is known as Hollywood Accounting. One example of the type of insanity this produces is seen in Return of the Jedi; the film cost $32.5 million and made $475 million at the box office...yet according to Lucasfilm the film "has never gone into profit"[3] Things are so screwed up that what actually makes a profit and what doesn't is, many times, obscured to the point that non one really knows what the sam hill is going on.

Tools and users[edit]

Accounting's goal is to provide information which can be used to keeps a business profitable but in of itself it is a tool to be use and like all tools it can be used or misused. Often accountants get the blame when a business does something for short term gains (laying a load of people off or raising a good's price for example) but in reality their reports are only as good as the information they are given. Furthermore how the business owner uses those reports is often outside of the accountant's control. Yes they can make recommendations but those recommendations are dependent on what the owner wants.

References[edit]