Monday, September 7, 2015

The Day The Father of Accounting Rolled in His Grave



Not many people will know who Luca Pacioli is. Luca Pacioli is the Father of accounting and bookkeeping. He is the accounting equivalent of Albert Einstein to the Theory of General Relativity and Tony Hawk to skateboarding and at 9:48am (SGT) yesterday, he rolled in his grave.

The reason for this was because two members of parliament (names and identity removed to protect them) could not tell the difference between a balance sheet item and an income and expense item. And worst of all, they had the audacity to add an asset (a balance sheet item) to a deficit (an income and expense item) and claimed that it turned a deficit into a surplus!

Pictorial evidence below:


 
Names and photos redacted to protect their identities and to prevent personal attacks against these MPs

To summarise MP #2, he said that although there was a deficit of $282,009 (accumulated deficit as of 30 April 2013), there was a $303,372 receivable from CCC. So adding the 2 together, would result in a net surplus of $21,363 (see below).



For those not trained in accounting, a receivable is an asset. It is not a form of income but is a balance sheet item. 

Sounds confusing? Let me give you an example:

If you own a house, that is an asset and is therefore a balance sheet item. 

If you have $50 in your bank, that is cash and is an asset and is therefore a balance sheet item. 

If you performed a service for somebody and the person writes you an IOU, the IOU is "technically" a receivable for cash at a later stage but you would have recorded the transaction as an income in the income statement at the time of the sale.This IOU is an asset. 

However, you CANNOT add it to your income statement because at the time of the transaction (when the IOU was issued to you), you would have recorded that transaction as an income in your income statement. 

So technically, if you add the asset to your income statement, you would be double counting, but you can't do that in the first place because it's ridiculous to add an asset to a deficit and I will explain why below:

Let's say that this year the following happened:

1) You had income of $1
2) You had expenses of $3
3) You own a house that is worth $7

What is your deficit/surplus for the year?

Your deficit/surplus would be 
= income - expense 
= $1 - $3 
= -$2

However, what the 2 MPs did would be equivalent to adding the $7 value of the house to the deficit and claiming that they made a surplus of $5 for that year!

In conclusion, in our Parliament, it appears that basic accounting skills are very lacking. On the one hand, we have the AHPETC issue which shows signs of bad book-keeping since no auditor was willing to give an unqualified opinion. 

On the other hand on the opposing side, we have MPs confusing balance sheet items and income and expense items and adding and subtracting them together.

Either way, both sides have demonstrated a startling lack of accounting knowledge and discipline.

L.A.M.

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Still confused? Let me give you another example:

Let's say you performed a service for somebody and that person paid you USD100 worth of gold. Let's say the gold is 1kg (although this is not important).

At the time when you performed the service, you would have recorded the transaction as income of $100 (even though you received gold and not cash).

So in your income statement you would have earned $100 from this transaction. 

5 days later, you sold this gold to the goldsmith for USD $100 cash.

Do you then go and record this $100 as an income in your income and expense line?

If you did, you would have $200 of income but the only thing you did was a $100 service. This completely doesn't make any sense, how did this one service become a $200 income? That is because you treated an asset worth $100 (the gold) as income.

Replace the gold with accounts receivables and the logic stays the same.


16 comments :

Anonymous said...

Not to nitpick, but for your 2nd example of the car sale there would only be income of 100 if the car is held at 0 dollars on the books. If car is worth 100 there is no impact to income since all the transactions are just movements in the balance sheet and cash flow statement.

John Lam said...

Thanks, you are right and this is a good point, I am changing the example to performing a service instead, so that it is less confusing.

Danielboy said...

Who are the two MPs? Don't see why you need to protect their identities considering 1/ they made public statements and 2/ they are MPs.

Anonymous said...

but in ur 2nd example its a service and a car pops up. which confuses people who dont know about the car

John Lam said...

Thanks for highlighting! Sorry typed too fast but I corrected it already.

Anonymous said...

Hi John,

Just wondering how do you interpret sect 2.5 in the all TCs' financial reports
"(ii) Payments from Citizens' Consultative Committees are granted to provided funding support for community improvement projects under the CIPC scheme.
Government grants are recognized at fair value when there are reasonable assurance that the attached conditions will be complied with and that the grants will be received. Grants in recognition of specific expenditures are recognised as income over the periods necessary to match them with the related expenditure that they are intended to compensate, on a systematic basis unless the accounting treatment is specified."

Does it imply CIPC grant is not immediately recognized as revenue, i.e not included in P/L. It's put into CIPC fund. As when there is a need to use this fund for CIPC projects, a pair of equal income/expenditure entries will be booked in P/L. If this is the case, when handing over everything, this outstanding fund in CIPC should be taken into account right?

An analogy would be children's education fund, government puts money into it but we can't use it in our monthly P/L statement unless we really pay something with it correct?

Anonymous said...

Lam,

Thanks for helping to clarify the facts from the "facts" put up by politicians. Great examples to help us better understand these accounting terms.

Don't these politician have access to accounting experts to help them to get these "facts" right, if he/she is not that accounting knowledgeable? Or is it another genuine mistakes made by them? Or are they trying to argue their ways out by confusing the general public? Or are they, again, putting out soundbites for our mainstream media, to "bite" onto them. Ha ha.

I would agree with @DanielBoy above that there is no needs to hide their names, as they are making public these information through very public medium.


Anonymous said...

To the lay-person like me, when you tell me the town council is "in deficit" I would automatically assume that the balance sheet shows a deficit. So by claiming that the TC was in deficit at handover was totally misleading. Sure it was in operating deficit that year, but I don't think that should be an issue right?

nofearSingapore said...

John
The whole of Sg owe a gratitude to you!
But the PAP would not be so happy as you showed them to be not so financially literate!
Great job!
Dr Huang

John Lam said...

Whether it is an issue to a "lay-person" is subjective. To be honest, I don't understand why we are focusing on localized issues such as AHPETC at a general election which is a national event. We should be highlighting national issues such as healthcare, immigration, housing, etc and not localized issues such as the finances of 1 of the 16 town councils in Singapore. Using a national platform to talk and debate about this is not fair to the residents of the 15 other town councils.

Secondly, I say it is subjective because, if this is not an issue to you, then similarly, it shouldn't be an issue to you that AHPETC ran a deficit since it has significantly large levels of assets as well.

So, I think we have to ask ourselves, whether an AHPETC deficit is an issue or not. Because if it is not an issue to us, then neither should the Punggol East deficit be an issue and vice versa. We cannot just take issue with AHPETC's deficit and ignore the the Punggol East one or vice versa because that would be a double standard and would make us hypocrites.



Anonymous said...

"Whether it is an issue to a "lay-person" is subjective. To be honest, I don't understand why we are focusing on localized issues such as AHPETC at a general election which is a national event. "

Strange that I wonder which part you don't understand. Didn't it is the modus operandi of PAP to divert attention as shown on past elections ? Just see how much rubbish and nonsense they did to mislead the public with divert-ion, making themselves look stupid just to do a quick one. Moreover putting minimal number of days for election campaign, and much more.

At this point if we still do not understand what PAP is up to then the problem don't lie with PAP, it lies with us, the naive and gullible lesser mortals.



Katie Zoey Ho said...

Find your recent blogposts rather interesting. And thanks for sharing! But both your images file names have revealed the names of the MPs. But I think that's ok...

John Lam said...

I think you are thinking about contingent assets which is a "potential" asset associated with a contingent gain.

A contingent gain is a gain that is realized contingent on certain events occurring, for example a lawsuit in your favor.

However, a contingent gain doesn't violate the spirit of what I mentioned above because it is not recorded as an asset in the balance sheet until the contingent event occurs (I.e winning the lawsuit with a contingent gain in your favor)

In this case, the grant is a receivable and not a contingent asset. It has already been recorded as an asset and the grant is likely to have already been recorded in income statement at the time it was granted. Therefore, the receivable cannot be added to the deficit to make a surplus as it would then be double counting and also as I mentioned, it doesn't make any sense.

Tally Training said...

Nice explanation. This will be helpful for me.....:)

joecoles222 said...
This comment has been removed by a blog administrator.
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