10 ms·

Financial Statements: A Beginner's Guide

247 points by refrigerator 6y ago

mdszy 6y ago
"Every month a notable company goes public. Every week a hot startup raises millions of dollars. And every day moms, pops, and teens check on their stocks." "Once the shoeshine boy and the taxi driver offer stock tips, it’s time to sell."
Havoc 6y ago
Looks pretty solid to me. The part about brands and patents being treated as an expense is wrong though Even stuff like website development cost can be capitalized as an asset under some circumstances https://www.ifrs.org/issued-standards/list-of-interpretations/sic-32-intangible-assets-web-site-costs/ https://www.ifrs.org/issued-standards/list-of-interpretation...
- jsmith99 6y ago
  To be pedantic, although most intangible assets can be capitalised, IFRS does not allow capitalisation of internally generated brands. If you buy a company then you can capitalise any brands you obtain on acquisition. Development expenditure on patents can be capitalised only in certain circumstances.
injb 6y ago
So if Assets - Liabilities = Shareholders Equity Then Liabilities & Equity = Assets So why are there separate totals (showing the same amount) for "Assets" and "Liabilities & Equity", if they are by definition the same thing?
- refrigerator 6y ago
  (author here) I think it’s just as a sanity check to make sure they’re equal :)
  - jsmith99 6y ago
    Yes, that's why it's called a Balance Sheet because it shows that net assets = equity, meaning it 'balances'.
- deleted 6y ago
  [deleted]
- toyg 6y ago
  Accountants often work by reaching the same number in two different ways, effectively performing a parity check. It spurs from double-entry, the foundation on which accounting is built.
- Naga 6y ago
  The purpose of financial statements is to provide value to the users. It should be assumed that assets equal liabilities and equity. There's value in providing a separate liability total, since it gives a snapshot of the financial position of the company, more so than having to derive that from the total liabilities and equity.
rebolyte 6y ago
Nice overview. Khan Academy[1] actually has some resources on the basics of financial statements as well. [1]: https://www.khanacademy.org/economics-finance-domain/core-finance/accounting-and-financial-stateme https://www.khanacademy.org/economics-finance-domain/core-fi...
tlcba 6y ago
The double entry for purchasing raw materials would be the other way round: Dr Materials; Cr Cash. Cash is an asset so debiting it would increase your cash balance. Likewise, Materials is an expense code in the P&L and debiting it will show it as a cost. You would only credit to the P&L for income transactions.
- refrigerator 6y ago
  (author here) Thanks for raising this — I intended for that example just to illustrate the underlying concept of having balanced entries for a transaction, rather than to show how double entry is practiced today. The focus of the post is on the underlying concepts rather than the implementation details — I didn't want to introduce the whole thing about debiting assets vs debiting expenses etc because it's a little confusing for a lay person. Hope that makes sense. I've added a caption to the image explaining this.
  - abakker 6y ago
    I don't think this is a useful response. The concept of accounting is deeply integrated with the rules of accounting. The implementation details are the concepts, really. I'd suggest making the examples conform to the actuality of how accounting will get used.
    - kqr 6y ago
      I agree. Basic pedagogy: if you are about to introduce an example where you think you might have to choose between being truthful or confusing, you should not introduce that example. Or, if you have to, do it the confusing way. Lying to beginners to shield them from confusion does not help them. Find a way to do what you want to do while still telling the truth.
      - ricopags 6y ago
        Do you mean, if you have to, do it the truthful way?
  - 6y ago
pjungwir 6y ago
For another light but slightly more in-depth introduction, you might enjoy Financial Statements by Thomas Ittelson. It uses running an applesauce factory as an ongoing example throughout the book. As a programmer with no accounting/finance background, I found it very easy to follow.
calderarrow 6y ago
As a student, I really started to grokk accounting when I started thinking of double-entry accounting as the business application of Newton's law "For every action, there is an equal and opposite reaction." Whenever a change happens to one side of the financial statements, an exact and simultaneous change happens to the other side. Aggregated over a period of time, the financial statements both categorize and summarize these various changes. The rule that Assets = Liabilities + Equity is important because Liabilities and Equity can be viewed as opposing forces. Notwithstanding the financial engineering and nuance around debt, liabilities in their purest sense are a balance of how much you've taken beyond what you've earned, while equity is a measurement of how much you've earned beyond what you've taken. The assets show what you have, but L&E show how everything was acquired. As I get older, I've come to appreciate how accounting also serves as a prism through which to view the world, because the financial concepts that apply to billion dollar businesses also apply to small mom-and-pops and individuals. One can think of themselves as a company, of which they are the CEO and sole employee. They earn revenue (from a job), incur expenses, and may have physical assets (homes, cars, computers) or liabilities (student/car/home loans). Every decision that's made is financial in nature, and thinking about decisions as an exchange of money or time helps me prioritize what I do personally and professionally. Accounting is a wonderfully beautiful system and I hope it becomes more common knowledge because it is absolutely fundamental to living in our modern time. The largest governments and businesses are bound by the same rules of accounting, and so are we -- whether we are aware of it or not.
- krackers 6y ago
  This is made more clear by the graph theoretic viewpoint in kleppmann's excellent guide: https://martin.kleppmann.com/2011/03/07/accounting-for-computer-scientists.html https://martin.kleppmann.com/2011/03/07/accounting-for-compu...
- saadatq 6y ago
  100% agree. I’ve been saying that the two topics that need to be learned early in life are accounting and statistics.
- ak39 6y ago
  Good comment. Fully agreed. The accounting equation and therefore the double-entry system, once fully appreciated, probably ranks high up there in the pantheons of Humanity's achievements right alongside E=mc2. The non-"scientist" may scoff at that but A=O+L is as sacronsanct as the laws of conservation of energy.
kqr 6y ago
To people who haven't tried keeping track of their personal finances using double-entry bookkeeping, I strongly recommend it. It's not just about reducing error (although it does that really well too.) It's also about increasing transparency, for two reasons: it makes many things explicit that would otherwise be easy to hide, perhaps by accident; it also provides very strong support for querying your finances in various ways. Whenever I'm budgeting for something (a project among friends, the wedding with my wife, and so on) I always try to start out "simpler" but I also always end up doing something like double-entry bookkeeping because all other "simpler" solutions make it very hard to figure out where money is actually coming from and where it is going. This is as good a place as any to start: https://plaintextaccounting.org/ https://plaintextaccounting.org/
- xur17 6y ago
  I currently use a spreadsheet to track my expenses, and have looked into moving to something like plaintextaccounting in the past, but I struggle to figure out how to migrate over all of my existing data. Any suggestions?
  - kqr 6y ago
    Do what the accountants do: close the old books and open new ones. Initialise relevant accounts with sums from the old books. Edit: that said, I've found spreadsheets to be some of the most convenient ways to do high-level double entry. Just so you don't assume you need to learn a new tool to do it.
- Metus 6y ago
  Could you expand on the benefits of double-entry bookkeeping, beyond reducing errors? Personally I am looking into it, because the run-of-the-mill personal finance software applications can't even deal with the fact that paying off a credit card statement is not income and expense, but a mere change between assets and liabilities. Or buying some stock is not an expense, but a change between two types of assets. And so on. However, the run-of-the-mill software is a bit better with categorizing things and integrating with other applications. Currently, I am looking for - Connecting PDFs or images as invoices with transactions - Marking transactions as relevant for my tax income statement - Estimating my tax return in advance and some more I can't think of off the top of my head. What weirds me out, is that everyone has to deal with personal finances, yet there isn't a single personal finance app that deals with everyone's situation. Do I massively underestimate the complexity of the problem domain?
pinky07 6y ago
Another good, and dynamic, introduction to accounting, with examples of entries for all documents: https://www.odoo.com/documentation/functional/accounting.html https://www.odoo.com/documentation/functional/accounting.htm...
dharma1 6y ago
I really liked causal.app when I tried it briefly. Nice way to build interactive dashboards from spreadsheets, with a range of outcomes - and they have some excellent templates
GoodJokes 6y ago
How much time do you all spend counting your fat stacks?
drapery 6y ago
I like this and explains the basic mechanics in a simple way for me to understand. I want to highlight the What counts as revenue section because I think it is the most crucial. Deferred Revenue is well explained and very necessary for SaaS. I think it will also be good to highlight account receivables, where you have delivered the good but haven't received the cash. Even though this rarely occurs in a SaaS model, but it is important to state that account receivable is not revenue, which some awkward mistake can be easily made.
- kqr 6y ago
  > I think it will also be good to highlight account receivables, where you have delivered the good but haven't received the cash. Even though this rarely occurs in a SaaS model Hah! You'd be surprised at how much businesses suck at paying their bills. And it's not really customer friendly to shut them off either. As far as I know, huge amounts in accounts receivable is industry standard.
  - drapery 6y ago
    You mean account payable?
EvanAnderson 6y ago
I think at least a 100-level knowledge of bookkeeping is beneficial to nearly every developer. Bookkeeping is, arguably, one of the oldest and longest-practiced "data processing" disciplines. It seems arbitrary and somewhat old-fashioned until you grok the reasoning and history behind it (double-entry sourced from summaries of various different "journals" to facilitate separation of duties, closing periods and rolling-up detail entries into totals because human computational power is limited, an equation that balances implicitly when there aren't entry errors, etc.) Odds are that your work somehow impacts the revenue or expenses of your business and will need to interface with accounting or finance people at some point. I found it increased my perceived credibility when I could speak using terminology from the accounting or finance person's area of expertise. I also agree with other posters who would argue that everyone should have some basic proficiency in double-entry bookkeeping. That's probably way too optimistic, though.
every 6y ago
I was thrown into the deep end of the bookkeeping pool when I began managing an establishment owned by three CPA's. It proved to be a valuable and highly transferable skill that served me throughout my working life...
mmckelvy 6y ago
For those still confused about Assets, Liabilities, Equity, Credits, and Debits, let me see if I can give you a more intuitive primer: Assets = Money you have. Liabilities = Money you borrowed from someone else. Equity = Money you earned. All the money you have you either (i) borrowed from someone else or (ii) earned. In other words: Assets (money you have) = Liabilities (money you borrowed) + Equity (money you earned). When recording a transaction all you have to do is ask yourself two questions: 1. Where did the money come from? (what is the Source) 2. Where did the money go? (what is the Use) Suppose you borrow $100 from a bank: 1. Where did the money come from? -> you borrowed it from someone else, so increase Liabilities by $100. 2. Where did the money go? -> to your checking account (money you have), so increase Assets by $100. Adjustments to Source accounts (where money comes from) are Credits, adjustments to Use accounts (where money goes) are Debits, so we could revise the above statement to: 1. Credit Liabilities $100 2. Debit Assets $100 That's basically it. The rest is just breaking things down into sub accounts (e.g. Assets:Checking or Equity:Income). Hope that helps.
- stevievee 6y ago
  This is a good overview in layman's terms - but as with most things it can get much more complex. e.g. deferred revenue is a liability and although close, it is technically not really money that is borrowed. (It reflects services/goods owed)
  - mmckelvy 6y ago
    Instead of "borrowed" you could say "owed" as you state. The basic idea is it represents money you have that you're on the hook for. Could be deferred revenue, accounts payable, bank debt, etc. I say "borrowed" because that's a concrete term that maps to a transaction with which most people are familiar. I'd also argue that you can work through even the most complicated accounting transaction and build the most complex financial statements by repeatedly asking the questions I've outlined in the above framework. Accounting was meant to be simple and accessible for the layman, but for some reason every Accounting 101 class teaches things like "debit means left and credit means right," which causes most people to throw up their hands and just rely on bookkeepers and accountants for all things money related.
strife25 6y ago
"These backwards-looking representations aren't terribly useful when thinking about the future. Financial statements now account for only 5% of the information that investors use to evaluate companies, and key accounting metrics, like Earnings and Assets, have stopped correlating with stock prices. To fill these gaps, almost all companies report custom non-GAAP metrics in their financial reports, to paint a better picture of their business. WeWork famously defined a Community Adjusted EBITDA metric that ignored most of their costs to suggest that they were actually, sort of, profitable. You can decide for yourself whether WeWork's metrics made sense. But that's precisely the problem — without consistent standards, "creative accounting" can cloud our judgment and our economy suffers." This has been a topic i've been curious about for a while now - if the way business performance is measured has changed, why have the standards not evolved as well?
- iav 6y ago
  Accounting standards do change all the time. Enron forced a change in how variable interest entities are treated. Rise of multi national conglomerates added comprehensive income accounting to account for FX. Most recently, rise of SaaS changed the way revenue and costs are accrued for multi year contracts. The debate is what is the point of accounting standard - is it to calculate standardized figures like revenue and earnings in the most consistent way possible across all industries? Or is it to splinter the accounting world by adding a myriad of industry specific terms like “subscribers” and “churn” and even “EBITDA” that only apply to some companies but not all? I prefer the former but it’s a debated topic.
- stevievee 6y ago
  Standards are always evolving and act more as a compliance tool than anything right now. There have been and probably always will be better metrics for "valuing" a business than GAAP financial statements alone. Companies choosing to disclose non-standardized metrics are attempting to give you a better picture of the business. The problem, as you noted, is that sometimes companies will stretch the truth. I don't think accounting standards are going to fill this gap anytime soon unless the SEC chooses to restrict that type of reporting altogether. I doubt this will happen because investors want more information, not less (even if you have to read between the lines)
victor106 6y ago
Any recommendations on books/resources to learn accounting?

247 points by refrigerator 6y ago

"Every month a notable company goes public. Every week a hot startup raises millions of dollars. And every day moms, pops, and teens check on their stocks." "Once the shoeshine boy and the taxi driver offer stock tips, it’s time to sell."

Havoc 6y ago

Looks pretty solid to me. The part about brands and patents being treated as an expense is wrong though Even stuff like website development cost can be capitalized as an asset under some circumstances https://www.ifrs.org/issued-standards/list-of-interpretations/sic-32-intangible-assets-web-site-costs/ https://www.ifrs.org/issued-standards/list-of-interpretation...

jsmith99 6y ago
To be pedantic, although most intangible assets can be capitalised, IFRS does not allow capitalisation of internally generated brands. If you buy a company then you can capitalise any brands you obtain on acquisition. Development expenditure on patents can be capitalised only in certain circumstances.

injb 6y ago

So if Assets - Liabilities = Shareholders Equity Then Liabilities & Equity = Assets So why are there separate totals (showing the same amount) for "Assets" and "Liabilities & Equity", if they are by definition the same thing?

refrigerator 6y ago
(author here) I think it’s just as a sanity check to make sure they’re equal :)
- jsmith99 6y ago
  Yes, that's why it's called a Balance Sheet because it shows that net assets = equity, meaning it 'balances'.
deleted 6y ago
[deleted]
toyg 6y ago
Accountants often work by reaching the same number in two different ways, effectively performing a parity check. It spurs from double-entry, the foundation on which accounting is built.
Naga 6y ago
The purpose of financial statements is to provide value to the users. It should be assumed that assets equal liabilities and equity. There's value in providing a separate liability total, since it gives a snapshot of the financial position of the company, more so than having to derive that from the total liabilities and equity.

rebolyte 6y ago

Nice overview. Khan Academy[1] actually has some resources on the basics of financial statements as well. [1]: https://www.khanacademy.org/economics-finance-domain/core-finance/accounting-and-financial-stateme https://www.khanacademy.org/economics-finance-domain/core-fi...

tlcba 6y ago

The double entry for purchasing raw materials would be the other way round: Dr Materials; Cr Cash. Cash is an asset so debiting it would increase your cash balance. Likewise, Materials is an expense code in the P&L and debiting it will show it as a cost. You would only credit to the P&L for income transactions.

refrigerator 6y ago
(author here) Thanks for raising this — I intended for that example just to illustrate the underlying concept of having balanced entries for a transaction, rather than to show how double entry is practiced today. The focus of the post is on the underlying concepts rather than the implementation details — I didn't want to introduce the whole thing about debiting assets vs debiting expenses etc because it's a little confusing for a lay person. Hope that makes sense. I've added a caption to the image explaining this.
- abakker 6y ago
  I don't think this is a useful response. The concept of accounting is deeply integrated with the rules of accounting. The implementation details are the concepts, really. I'd suggest making the examples conform to the actuality of how accounting will get used.
  - kqr 6y ago
    I agree. Basic pedagogy: if you are about to introduce an example where you think you might have to choose between being truthful or confusing, you should not introduce that example. Or, if you have to, do it the confusing way. Lying to beginners to shield them from confusion does not help them. Find a way to do what you want to do while still telling the truth.
    - ricopags 6y ago
      Do you mean, if you have to, do it the truthful way?
- 6y ago

pjungwir 6y ago

For another light but slightly more in-depth introduction, you might enjoy Financial Statements by Thomas Ittelson. It uses running an applesauce factory as an ongoing example throughout the book. As a programmer with no accounting/finance background, I found it very easy to follow.

calderarrow 6y ago

As a student, I really started to grokk accounting when I started thinking of double-entry accounting as the business application of Newton's law "For every action, there is an equal and opposite reaction." Whenever a change happens to one side of the financial statements, an exact and simultaneous change happens to the other side. Aggregated over a period of time, the financial statements both categorize and summarize these various changes. The rule that Assets = Liabilities + Equity is important because Liabilities and Equity can be viewed as opposing forces. Notwithstanding the financial engineering and nuance around debt, liabilities in their purest sense are a balance of how much you've taken beyond what you've earned, while equity is a measurement of how much you've earned beyond what you've taken. The assets show what you have, but L&E show how everything was acquired. As I get older, I've come to appreciate how accounting also serves as a prism through which to view the world, because the financial concepts that apply to billion dollar businesses also apply to small mom-and-pops and individuals. One can think of themselves as a company, of which they are the CEO and sole employee. They earn revenue (from a job), incur expenses, and may have physical assets (homes, cars, computers) or liabilities (student/car/home loans). Every decision that's made is financial in nature, and thinking about decisions as an exchange of money or time helps me prioritize what I do personally and professionally. Accounting is a wonderfully beautiful system and I hope it becomes more common knowledge because it is absolutely fundamental to living in our modern time. The largest governments and businesses are bound by the same rules of accounting, and so are we -- whether we are aware of it or not.

krackers 6y ago
This is made more clear by the graph theoretic viewpoint in kleppmann's excellent guide: https://martin.kleppmann.com/2011/03/07/accounting-for-computer-scientists.html https://martin.kleppmann.com/2011/03/07/accounting-for-compu...
saadatq 6y ago
100% agree. I’ve been saying that the two topics that need to be learned early in life are accounting and statistics.
ak39 6y ago
Good comment. Fully agreed. The accounting equation and therefore the double-entry system, once fully appreciated, probably ranks high up there in the pantheons of Humanity's achievements right alongside E=mc2. The non-"scientist" may scoff at that but A=O+L is as sacronsanct as the laws of conservation of energy.

kqr 6y ago

To people who haven't tried keeping track of their personal finances using double-entry bookkeeping, I strongly recommend it. It's not just about reducing error (although it does that really well too.) It's also about increasing transparency, for two reasons: it makes many things explicit that would otherwise be easy to hide, perhaps by accident; it also provides very strong support for querying your finances in various ways. Whenever I'm budgeting for something (a project among friends, the wedding with my wife, and so on) I always try to start out "simpler" but I also always end up doing something like double-entry bookkeeping because all other "simpler" solutions make it very hard to figure out where money is actually coming from and where it is going. This is as good a place as any to start: https://plaintextaccounting.org/ https://plaintextaccounting.org/

xur17 6y ago
I currently use a spreadsheet to track my expenses, and have looked into moving to something like plaintextaccounting in the past, but I struggle to figure out how to migrate over all of my existing data. Any suggestions?
- kqr 6y ago
  Do what the accountants do: close the old books and open new ones. Initialise relevant accounts with sums from the old books. Edit: that said, I've found spreadsheets to be some of the most convenient ways to do high-level double entry. Just so you don't assume you need to learn a new tool to do it.
Metus 6y ago
Could you expand on the benefits of double-entry bookkeeping, beyond reducing errors? Personally I am looking into it, because the run-of-the-mill personal finance software applications can't even deal with the fact that paying off a credit card statement is not income and expense, but a mere change between assets and liabilities. Or buying some stock is not an expense, but a change between two types of assets. And so on. However, the run-of-the-mill software is a bit better with categorizing things and integrating with other applications. Currently, I am looking for - Connecting PDFs or images as invoices with transactions - Marking transactions as relevant for my tax income statement - Estimating my tax return in advance and some more I can't think of off the top of my head. What weirds me out, is that everyone has to deal with personal finances, yet there isn't a single personal finance app that deals with everyone's situation. Do I massively underestimate the complexity of the problem domain?

pinky07 6y ago

Another good, and dynamic, introduction to accounting, with examples of entries for all documents: https://www.odoo.com/documentation/functional/accounting.html https://www.odoo.com/documentation/functional/accounting.htm...

dharma1 6y ago

I really liked causal.app when I tried it briefly. Nice way to build interactive dashboards from spreadsheets, with a range of outcomes - and they have some excellent templates

GoodJokes 6y ago

How much time do you all spend counting your fat stacks?

drapery 6y ago

I like this and explains the basic mechanics in a simple way for me to understand. I want to highlight the What counts as revenue section because I think it is the most crucial. Deferred Revenue is well explained and very necessary for SaaS. I think it will also be good to highlight account receivables, where you have delivered the good but haven't received the cash. Even though this rarely occurs in a SaaS model, but it is important to state that account receivable is not revenue, which some awkward mistake can be easily made.

kqr 6y ago
> I think it will also be good to highlight account receivables, where you have delivered the good but haven't received the cash. Even though this rarely occurs in a SaaS model Hah! You'd be surprised at how much businesses suck at paying their bills. And it's not really customer friendly to shut them off either. As far as I know, huge amounts in accounts receivable is industry standard.
- drapery 6y ago
  You mean account payable?

EvanAnderson 6y ago

I think at least a 100-level knowledge of bookkeeping is beneficial to nearly every developer. Bookkeeping is, arguably, one of the oldest and longest-practiced "data processing" disciplines. It seems arbitrary and somewhat old-fashioned until you grok the reasoning and history behind it (double-entry sourced from summaries of various different "journals" to facilitate separation of duties, closing periods and rolling-up detail entries into totals because human computational power is limited, an equation that balances implicitly when there aren't entry errors, etc.) Odds are that your work somehow impacts the revenue or expenses of your business and will need to interface with accounting or finance people at some point. I found it increased my perceived credibility when I could speak using terminology from the accounting or finance person's area of expertise. I also agree with other posters who would argue that everyone should have some basic proficiency in double-entry bookkeeping. That's probably way too optimistic, though.

every 6y ago

I was thrown into the deep end of the bookkeeping pool when I began managing an establishment owned by three CPA's. It proved to be a valuable and highly transferable skill that served me throughout my working life...

mmckelvy 6y ago

For those still confused about Assets, Liabilities, Equity, Credits, and Debits, let me see if I can give you a more intuitive primer: Assets = Money you have. Liabilities = Money you borrowed from someone else. Equity = Money you earned. All the money you have you either (i) borrowed from someone else or (ii) earned. In other words: Assets (money you have) = Liabilities (money you borrowed) + Equity (money you earned). When recording a transaction all you have to do is ask yourself two questions: 1. Where did the money come from? (what is the Source) 2. Where did the money go? (what is the Use) Suppose you borrow $100 from a bank: 1. Where did the money come from? -> you borrowed it from someone else, so increase Liabilities by $100. 2. Where did the money go? -> to your checking account (money you have), so increase Assets by $100. Adjustments to Source accounts (where money comes from) are Credits, adjustments to Use accounts (where money goes) are Debits, so we could revise the above statement to: 1. Credit Liabilities $100 2. Debit Assets $100 That's basically it. The rest is just breaking things down into sub accounts (e.g. Assets:Checking or Equity:Income). Hope that helps.

stevievee 6y ago
This is a good overview in layman's terms - but as with most things it can get much more complex. e.g. deferred revenue is a liability and although close, it is technically not really money that is borrowed. (It reflects services/goods owed)
- mmckelvy 6y ago
  Instead of "borrowed" you could say "owed" as you state. The basic idea is it represents money you have that you're on the hook for. Could be deferred revenue, accounts payable, bank debt, etc. I say "borrowed" because that's a concrete term that maps to a transaction with which most people are familiar. I'd also argue that you can work through even the most complicated accounting transaction and build the most complex financial statements by repeatedly asking the questions I've outlined in the above framework. Accounting was meant to be simple and accessible for the layman, but for some reason every Accounting 101 class teaches things like "debit means left and credit means right," which causes most people to throw up their hands and just rely on bookkeepers and accountants for all things money related.

strife25 6y ago

"These backwards-looking representations aren't terribly useful when thinking about the future. Financial statements now account for only 5% of the information that investors use to evaluate companies, and key accounting metrics, like Earnings and Assets, have stopped correlating with stock prices. To fill these gaps, almost all companies report custom non-GAAP metrics in their financial reports, to paint a better picture of their business. WeWork famously defined a Community Adjusted EBITDA metric that ignored most of their costs to suggest that they were actually, sort of, profitable. You can decide for yourself whether WeWork's metrics made sense. But that's precisely the problem — without consistent standards, "creative accounting" can cloud our judgment and our economy suffers." This has been a topic i've been curious about for a while now - if the way business performance is measured has changed, why have the standards not evolved as well?

iav 6y ago
Accounting standards do change all the time. Enron forced a change in how variable interest entities are treated. Rise of multi national conglomerates added comprehensive income accounting to account for FX. Most recently, rise of SaaS changed the way revenue and costs are accrued for multi year contracts. The debate is what is the point of accounting standard - is it to calculate standardized figures like revenue and earnings in the most consistent way possible across all industries? Or is it to splinter the accounting world by adding a myriad of industry specific terms like “subscribers” and “churn” and even “EBITDA” that only apply to some companies but not all? I prefer the former but it’s a debated topic.
stevievee 6y ago
Standards are always evolving and act more as a compliance tool than anything right now. There have been and probably always will be better metrics for "valuing" a business than GAAP financial statements alone. Companies choosing to disclose non-standardized metrics are attempting to give you a better picture of the business. The problem, as you noted, is that sometimes companies will stretch the truth. I don't think accounting standards are going to fill this gap anytime soon unless the SEC chooses to restrict that type of reporting altogether. I doubt this will happen because investors want more information, not less (even if you have to read between the lines)

victor106 6y ago

Any recommendations on books/resources to learn accounting?