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Accounting for Companies – II

notes 7.2.3 keeping good accounting records

Even a seemingly simple transaction like this one raises a host of accounting issues.

Example: Date: Suppose you had already agreed by phone to buy the lamp on April 15,
but the paperwork wasn’t done until April 19. And the lamp wasn’t delivered on the 19th, but the
23rd. Or even as you bought it, you were thinking that you didn’t like it that much, and there’s a
strong chance you’ll return it by the 30th, when the sale becomes final. On which date - 15th, 19th,
23rd, or 30th - did an economic event occur for which a transaction should be recorded?

Amount: The sales price is $250, but you get a 10% discount (to $225) if you pay in 30 days;
business is bad, though, so you may need the full 90 days to pay. Similarly, however, you know
the antique business is also lousy; even though you agreed to pay $250, you can probably chisel
another $50 off the price if you threaten to return it. On the other hand, being in the stationery
business, you know one of your customers has been looking for a lamp like that for a long time;
he told you in February he’d pay $300 for one.

So what amounts should you record on April 19 (if indeed you record a transaction on that date)?
$250 or $225 or $200 or $300?

Accounts: You’ve debited the Office Furniture account. But actually you buy and sell antiques
frequently to your customers, and you’re always ready to sell the lamp if you get a good offer.
Instead of an Office Furniture account used for fixed assets, should the lamp be recorded in a
Purchases account you use for inventory? And if this was a big company, there might be dozens
of office furniture sub-accounts to choose from.
Accountants rely on various resources to answer such questions. There are basic, time-honoured
accounting conventions: standards set forth by various rules-making bodies, long-standing
industry practices and, most important, their own judgment honed through years of experience.

But the important point is that even the most basic accounting questions – when did an economic
event take place? What is the value of the transaction? Which accounts are affected by the
transaction? – can get very complex and the right answers prove very elusive. There’s no excuse
for out-and-out misrepresentation of company results and sloppy auditing that certainly occurs.
But the seeming precision of financial statements, no matter how conscientiously prepared, is
belied by the uncertainty and ambiguity of the business activities they seek to represent.

7.2.4 Debits and credits

We’re accustomed to thinking of a “credit” as something “good” – our account is credited when
we get a refund; you get “extra credit” for being polite. Meanwhile, a “debit” is something
negative – a debit reduces our bank balance; it’s used to mean shortcoming or disadvantage.

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