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What's it all about?

What is accounting, particularly public accounting, all about? Why have so many people chosen this profession as a livelihood? Accountants are characterized as stodgy, studious, boring and dull individuals and as nothing more than bean counters. just what is an accountant?

Apparently opinion has varied over the years. According to an article in the CAIA newsletter, the ancient Greeks circa 1400 B.C. had little use for arithmetic or accounting. Slaves were often used to keep the king's records. The law at the time forbade torturing free men. The statements of a slave under torture were considered more conclusive evidence than that of a free man under oath. This method of obtaining reliable financial data was an effective and generally accepted procedure. Things did improve over time, and the profession of accounting grew and became more important.

The development of "double entry" bookkeeping is attributed to a Franciscan monk named Luca Pacioli. The first description of the system was published in 1494. Goethe, the German poet and scientist, wrote about double entry: "It is one of the most beautiful inventions of the human spirit, and every good businessman should use it in his economic undertakings." And so we go from the ridiculous to the sublime.

Members of the accounting profession know that their work is not only necessary for the maintenance and development of a strong economy, but in most cases they find the preparation and analysis of financial statements both interesting and challenging. Sound business decisions depend on good accounting records.

But have you, as an accountant, ever tried to explain any of the basic concepts to one of your clients? just for fun, go sit on the other side of your desk. You now own a hardware store and you've just brought your records in so that your accountant can prepare the year-end financial statements and your federal and state taxes. You have a bookkeeper who handles receivables and payables and who does the payroll including all payroll reports. You keep your books on an accrual basis. Your accountant looks at your records and asks the first question: "What's your ending inventory? We have to figure out just what it cost you to sell your merchandise." You comment that inventory doesn't matter. You know you spent $80,000 on purchases this year. That's what it cost.

Now this accountant is trying to tell you that it really didn't cost that much, that your cost of sales depends on what you had left in inventory. This doesn't make any sense. You know you bought $80,000 worth of merchandise. So that's it. Once the money's gone, it's gone ! Well, your accountant takes the time to explain what he or she calls the matching concept. If you bought 20 hammers at $10 apiece and sold them for $15, you would have a gross profit of $5 per hammer. If you sold half of them this year and half next year, your total gross profit for each year is 10 hammers times $5 each or $50. If you tried to say they cost the full purchase price of $200 this year, then you would have a loss of $50 this year and when you sold the remaining hammers you would have a profit of $150 for the second year. Overall you have the same $100 profit, but the cost isn't matched to the sales. Okay, this seems to make sense, and, after all, the accountant is the professional, so you go back to the store and take inventory.

Your accountant calls and wants to make an appointment to go over your completed financial statements with you. But business is good and you haven't got the time. A few weeks later, you decide to buy a special anniversary present for your spouse, so you figure you'll take a somewhat bigger weekly draw. But there isn't any cash there, and boy are you confused. The bottom line of your Income Statement showed a good profit. Something must be wrong. You call this accountant because you want an explanation and you want it right now ! Well, the accountant tells you to calm down and says you can't just look at the Income Statement, you have to understand the Balance Sheet and the Statement of Cash Flows in order to have a complete picture. The balance sheet is really a snapshot of your year-end position. It shows just how much cash you have and it shows the status of your loans. The statement of cash flows shows just what you did with your cash during the year. Your accountant then points out you bought a new computerized cash register system and you took out a loan to cover part of the cost. The total loan payments don't show on the income statement, but the cash was paid out every month. Again, it all begins to make some sense. You have a better understanding of your finances. But, then, would you believe, this accountant reminds you that after all, you did purchase $80,000 worth of inventory? Now isn't that what you said?

Every practitioner has faced these situations and many more. My favorite true story concerns the newly elected treasurer of a small condominium association. She came into the office and announced that all the former treasurers had been keeping the books incorrectly. They had debited all the expenses when they should have entered them as credits. After all, the money had been spent, hadn't it? How could you possibly add the amounts. She went on to say that she had corrected the errors and had erased all the entries and reversed them. No manner of explanation seemed to convince her that she was wrong. She even offered to take the office ledgers and correct them. Needless to say, the offer was graciously declined.

To all of you with similar stories to tell, help me put together a column of Life in These Accounting States." Please send any humorous incidents you may have encountered to NSPA, Marlyn Schwartz, Director of Education, 1010 N. Fairfax, Alexandria, fax them to (703) 549-2984. VA 22314-1574, or you can (TABULAR DATA OMITTED)
COPYRIGHT 1991 National Society of Public Accountants
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1991 Gale, Cengage Learning. All rights reserved.

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Title Annotation:Accounting Scene
Author:Schwartz, Marlyn A.
Publication:The National Public Accountant
Article Type:column
Date:Jul 1, 1991
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