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.