Accounting is simple. Simple if a person likes math. Should it be so difficult to balance the national chart of accounts and set things straight, and right? Accounting on QuickBooks, Peachtree, and money is based on starting a chart of accounts. A chart of accounts is a file set that categorizes assets, liabilities, and owner’s equity. All the charts that categorize expenditures, intakes, and delayed payoffs are characteristic of basic accrual accounting.
Assets are anything worth money or that costs money. Liabilities are debts, meant to be paid within a given period, normally one year. Owners’ equity is the cash and valuables that start the business and keep it running. Owners’ equity is the treasury and the national trust of the United States. Supposedly, this amount is a fixed or increasing sum that stabilizes the equation and cannot be loaned, borrowed from, or invested. Investment is a liability; Prepaid services are a contra-asset. Assets are the amounts of money and things amassed by the business mainly to keep the equation balanced and to utilize efficiently owners’ equity. For people of the executive class, not the legislative or judicial, the equation must be in balance. If the equation does not balance there might exist a data entry error or more commonly, someone is STEALING. All the chief executive has to do every month is check if the equation is in balance and his staff is working efficiently.
In big businesses, like Microsoft, General Motors, United States Steel, and Oracle sometimes the chart of accounts becomes voluminous, overbearing, and complex, and when this happens, Kiting can occur,
Kiting is when a transaction is in the air and not credited (deducted) or debited (added) in a timely fashion. The more charts (files) that exist in the chart of accounts, the greater the probability that money seemingly disappears because of the mathematical nature of the accounting equation, charts all influence each other directly or indirectly. When the equation is not equal, there might exist a deficit due to the overwhelming number of accounts that become hard to keep track of. For this reason, all accountants, eliminate unnecessary accounts whenever possible and when the equation does not balance the books are closed and an interim statement generated. The most common charts that lose money in accounting are petty cash (which in the US might be billions of dollars) and charitable deductions which are an expense or contra asset. All accountants keep a deft eye on these two accounts and the shrewd the cunning and the nefarious create a multitude of these petty cash accounts so they can kite or ordain transfers that have no logical or sound basis. The chief executive must see the equation in balance and check on these two accounts as often as they can or an executive might do something like gift an African nation with high-tech weaponry and expense the donation to the charity of foreign aid. This is all the chief executive must know for he or she is too busy with politics and plans to have time to do anything else.
Most accounting courses taught in college teach accrual accounting. Accrual accounting gives the most accurate, up-to-date information on how a business is running. Money accrues disappears, or changes form. The main deficit of accrual accounting is because of its exactness, kiting, falsification of accounts, and dispersal might occur, and the remedy might not be so apparent. The national debt is a product of accrual accounting.
For big businesses, businesses that deal with a lot of money, cash-based accounting is the answer. In cash basis accounting money never enters the chart of accounts unless an actual transfer of money exists. Money does not disappear or change forms until it appears as money and is added to or subtracted from the chart of accounts. There exist no receivables, prepaid items contra assets, or contra liabilities. Cash basis accounting is gold on the hoof. In cash basis accounting the chart of accounts is a lot smaller and easier to keep track of and there is no kiting, money is either transferred or it is not. Bartering is hard in cash-based accounting because cash has a number associated with it and that number enters the accounting equation with each action. The accounts do not have to be closed and a statement is generated. It is either yes or no. It is hard to sell your relatives into slavery with cash-based accounting because this action generates a number that is logged on a file. Computer scientists know how hard it is to manipulate a log file in the configuration settings of a Linux or Windows system. The main disadvantage of cash-based accounting is either you have the money to transfer or you don’t and there are no credits or partial allotments of resources. As Jerry Maguire said, “Show me the money”’. All big transfers in cash-based accounting show up on computerized banking systems so there is no fussing fuming or promising. It is just there.
Accounting texts are thick, voluminous, wordy, exact, and meticulous. An accountant can spend a whole career learning the intricacies of the accrual system which is the most exact and timely mathematical representation of the health of a business. This author thinks this essay is all an executive or master planner needs to know to run a large ship. “You don’t have to be a mathematician or logician to run a company, but to know a certified accountant helps.” Good luck to the brave and the earth belongs to the intrepid.