Thursday, February 09, 2006

Understanding Accounting: The Short Version

I have been teaching a new course that includes two weeks explaining accounting to law students. To do so, I first had to understand it myself. I think I now do, and in the hope that the information might be useful to others … .

Rule 1: The terms "debit" and "credit" are only there to confuse. Most of the time they mean the opposite of what they should: An increase in assets is a debit, a decrease in assets (or an increase in liabilities) a credit. Equity–the net value of the firm to its stockholders–is an exception to that rule. A credit to equity is an increase, a debit a decrease. For closely related reasons, the income account is another exception: Revenue is a credit, expense a debit.

Rule 2: The essence of double entry bookkeeping is that every item appears twice, once on the left hand side of a T account, once on the right. If you buy some oil, that is a reduction in (credit to!) cash and an increase in (debit to!) inventory; the two amounts are equal because accountants measure the value of something, in this case oil, by what you paid for it. If someone gives you money, that is an increase in (debit to!) cash and a matching increase in (credit to) equity. Similarly, if you sell the oil for more than you paid for it the difference ends up in equity, although only after going through an extra pair of T accounts (income/expenses) intended to make sure that the transaction shows up on the income accounts as well as the firm's balance sheet.

Rule 3: The reason the left hand (debit) side of a T account is good if it shows assets or liabilities but bad if it shows equity or income is that an increase in assets can be balanced either by an increase in liabilities (you took out a loan, giving you cash, an asset; the money you owe is a liability) or by an increase in equity (you bought low and sold high, increasing cash without increasing liabilities, hence increasing equity). An increase in liabilities is bad, an increase in equity is good--but either can balance an increase in assets, so they have to be on the same (credit) side of a T account.

Rule 3': The reason liabilities are like equity is that equity is a "liability" the firm owes to its stockholders. This is shorter than Rule 3 but less enlightening.

Rule 4: When an item doesn't show up where you think it should in the accounts, the reason is that it is being shifted forward or backward in time in order to group expenses with the income they produce.

Read the rules three times, think about them, and with luck you will understand accounting considerably better than I did a week ago.

34 Comments:

At 7:42 AM, February 10, 2006, Blogger autodogmatic.com said...

David,

As a CPA, it's hard for me to evaluate your explanation as a good or bad one in terms of how effective it will be to students. My problem is that I already understand the system, so I ended up evaluating your explanation simply as either being true or false. By those terms, it was an accurate explanation.

I will say that from my own experience, in trying to understand accounting, I benefited most from learning some basic examples. For example, buying inventory is an exchange of assets for assets: the debit to cash is equal to the credit to inventory. Total assets remain the same. Paying off debt is an exchange of assets for debt payoff. The reduction in your asset is equivalent to the reduction in your liability (Or the other way for another example). By understanding the basic entries, you can understand almost any transaction by fitting it into those basic molds. That has been my experience.

I'd like to hear more of your thoughts on accounting. It is just a system to track information. It is hugely regulated and imperfect. The information it produces is stale and often meaningless. Accounting rules lead to many unforseen consequences. This is to say nothing about SEC requirements regarding external audit and 404 compliance, which enact huge costs on many businesses for questionable benefits.

Please post on.

 
At 8:38 AM, February 10, 2006, Anonymous Anonymous said...

Here is my experience of reading my financial accounting textbook in business school:

Chapter 1: This is obvious.

Chapter 2: This is easy.

Chapter 3: This is trivially simple.

Chapter 4: I'm completely lost and I have no idea how I got here.

For me, the light bulb went on when I finally, finally understood why balance sheets always balance (retained earnings).

 
At 10:49 AM, February 10, 2006, Anonymous Richard Nikoley said...

Even though I understood accounting and did well in college, it was many years before I would have to actually use it, and by that time, 1992, Quickbooks 1.0 existed.

You can do journal entries if you like (I sometimes do, as it's faster), or you can use the various tools integrated in the software (invoice, pay bills, receive payments, etc.) that pouts all the underlying credits and debits where they should go.

Best of all, you can print a balance sheet and P&L at the end of the year, see how you actually did, and hand it to your accountant to prepare your annual Robbery Itemization.

 
At 8:05 PM, February 10, 2006, Anonymous Siderea said...

AHA! It's not just me: "debit" and "credit" DO have occasionally reversed meanings in double-entry bookkeeping! Thank you for spelling that out!

 
At 12:09 PM, February 11, 2006, Anonymous mark torelli said...

Well, as a professional accountant I disagree with jason on the merits of accounting as a system to track information. Other then the unfortunately named 'credit' and 'debit' I think it's a very well designed basic system. How good the information it produces is heavily dependent on how well a particular set of books is set up and handled. Government regulations being stupid and expensive hardly discredit accounting as a whole.

I do agree on the way to learn accounting though. The best way is to simply follow some examples from beginning to end. To anyone with sufficient logical/mathematical skill it should come fairly quickly.

I have an issue with Rule 4. That is highly dependent on the accounting philosophy used.

 
At 12:22 PM, February 11, 2006, Anonymous Anonymous said...

I disagree that "an increase in liabilities is bad." In many circumstances it can be quite good -- you can gain leverage by using debt, for example. "Deferred revenue" is a liability that is often desirable -- you get the money now and your customers get the service later (that's why it's a liability -- you "owe" something in exchange for the money, but since you haven't rendered it yet you can't recognize the revenue).

Also, the way I remember the debit/credit rule is to keep in mind the "accounting equation": assets = liabilities + equity. "Debit" in accounting terms means "left" and "credit" means right, so increasing assets is a debit (assets being on the left side of the equation), increasing equity or liability (on the right side) is a credit. When the bank issues you a credit, from their perspective they are increasing a liability, which is what your money is to them (another instance where an increase in liabilities is "good").

Caveat lector: I'm not an accountant, nor have I ever taken an accounting course. I'm a business man, and ultimately I rely on the expert judgment of my controller.

 
At 3:03 PM, February 11, 2006, Blogger David Friedman said...

Mark argues that accounting is a pretty good way of tracking information. In my view, its main weakness is probably unavoidable. The rules have a sceptical bias--they tend to ignore any asset or liability for which there isn't a clearly defined value and choose clear values even when they are pretty clearly wrong.

Thus historical cost is preferred to market value, except sometimes for financial assets which have a very clearly defined market value. Intangibles are ignored unless they have been purchased, in which case they have a cost value. All probabilities are zero or one--a future liability that probably won't happen doesn't go in the accounts, one that probably will goes in with its value value.

This makes the information inaccurate--but also makes it harder to deliberately bias the information via judgement calls all of which are chosen to make equity or profit look larger (or smaller, depending on what result you want).

 
At 3:08 PM, February 11, 2006, Blogger David Friedman said...

"Anonymous" disagrees that an increase in liabilities is bad. But in each of his examples, what is good isn't the increase in liability but the increase in an asset that balances it.

When you borrow money, both cash (an asset) and debts (liability) increase. The increase in cash is good, in liabilities bad. Just think how much better it would have been if the bank had just given you the money, without expecting to be paid back.

When you accept payment in advance for services next year, cash increases and deferred income increases. The increase in cash is good, the liability--the fact that you are now obliged to do some future work for which you have already been paid--is bad.

I agree that the fundamental equation of accounting is one useful way of explaining the debit/credit distinction. But I thought it was clearer to make the same point in a verbal form, as I did.

 
At 11:57 PM, February 11, 2006, Anonymous Mark Torelli said...

David writes...
"Thus historical cost is preferred to market value."

I disagree with most of this post. What you're saying is true of basic basic accounting, but not accounting as practiced in real life.

Items are often revalued. For example if I bought 100 widgets at $100/ea I would have $10,000 in an inventory asset account. If these widgets were subsequently valued at $150, the asset would very likely end up at $15,000 at some point, either with a direct entry, with the credit going to an income account, or through a general periodic inventory accounting process. At my work we do this every month, we value the entire inventory based on CURRENT cost and do an entry to set the inventory asset account to that number. Another eaxmple is that a publicly traded company is very likely to keep the value of some of their major assets (say a large piece of land) current, recognizing increase in value as investment income.

Also, some accounting books do give value to intangible things. I've actually never done this myself, but I'm fairly sure big companies give book value to things like brands, and good will. I don't know how they do it.

Another thing is the probabilities. They are not always 0 or 1, and there is judgement calls. Here's an example. Most companies book revenue as earned before they actually have the cash in hand. Many companies choose to set aside a portion of that revenue in a 'bad debt' account. So if a company sold $10,000 worth of widgets they may credit $9,500 to revenue on their income statement, while creating a $500 liability for bad debt on their balance sheet. The amount of $500 is obviously a judgement call based on the perceived probability of actually incurring non-payment.

In regards to the idea of a skeptical bias, the accounting framework gives flexibility for the people who run the books to determine with their own policies and procedures exactly how conservative or aggressive they will be (to a certain extent, obviously booking completely phantom revenue is just cheating).

 
At 12:17 AM, February 12, 2006, Blogger David Friedman said...

Mark writes:

"Also, some accounting books do give value to intangible things. I've actually never done this myself, but I'm fairly sure big companies give book value to things like brands, and good will. I don't know how they do it."

According to the book I'm using, which is my main source on the subject, intangibles are given value when they have been purchased--a brand name, for example--because the purchase price provides a value. That's consistent with my general point.

"Another thing is the probabilities. They are not always 0 or 1, and there is judgement calls. Here's an example. Most companies book revenue as earned before they actually have the cash in hand. Many companies choose to set aside a portion of that revenue in a 'bad debt' account."

That's a partial exception. If the probabilty estimate is for each account payable separately, my zero or one rule would imply no allowance for bad debts. But if it's for the summed account payable, they can conclude that it is more likely than not that five percent will be bad debts.

 
At 12:51 AM, February 12, 2006, Anonymous Mark Torelli said...

re: intangibles.
I think you're right now that I've done a little internet research. Generally accepted accounting principles do not allow for the arbitrary valuation of intangible assets.

re: bad debts.
I guess you're right here. I'll bet some people do it though even if they shouldn't. Also most businesses deal in low dollar high volume, but I guess that's a different argument.

re: your point about forcing accountants to use simple rules wherever possible.
It's a good comparison with tort law, I agree with your main point. In practice accounting doesn't end up nearly as black and white as the rules would hope it to be, but that's another tangent I don't need to make here.

 
At 7:04 PM, February 12, 2006, Anonymous J.P. said...

Responding to mark torelli's : "Items are often revalued. For example if I bought 100 widgets at $100/ea I would have $10,000 in an inventory asset account. If these widgets were subsequently valued at $150, the asset would very likely end up at $15,000 at some point, either with a direct entry, with the credit going to an income account, or through a general periodic inventory accounting process."

According to GAAP inventory should be valued at LOWEST of cost or market value, so raising the cost through a "general periodic inventory accounting process" would not follow GAAP. If I am wrong I would appreciate it if someone corrected this.

 
At 10:40 PM, February 13, 2006, Anonymous Anonymous said...

OK, if liabilities are a bad that unfortunately must be taken on for the sake of acquiring assets (a good), then is equity a bad too?

 
At 9:19 AM, February 14, 2006, Anonymous Anonymous said...

In school, I learned the accountant's equivalent of the Ideal Gas Law (PV = nRT):

AED = LRC

Assets + Expenses + Dividends (Debits) = Liabilities + Revenues + Common Stock (Credits)

Perhaps the ideal gas law isn't the best analogy for law students, but it worked for me. I visualize one of the letters growing or shrinking and this being counteracted by another letter.

You can memorize this by "After eating dinner, let's read comics." However, you will remember it better if you invent your own naughty mnemonic device.

Dividends are like expenses to firm, but they are paid to the owners. Common Stock (or equity) is like a liability of the firm to the owners.

"Debit" means "Increases on the left, and only that.

"Credit" means "Increases on the right", and only that.

The only thing you have to learn after this is in which category the various things you're interested in fit.

Alex J.

 
At 11:43 PM, February 14, 2006, Blogger David Friedman said...

Alex writes:

""Debit" means "Increases on the left, and only that.

"Credit" means "Increases on the right", and only that.

The only thing you have to learn after this is in which category the various things you're interested in fit."

Eliminating "Debit" and "Credit" and substituting "increase on the left of a T diagram" and "increase on the right" doesn't solve the problem, as your final sentence make clear. It sounds as though you still have to memorize an arbitrary set of rules about what goes where.

But the rules aren't arbitrary. The central point is that if you balance one entry by another, they have to be on opposite sides of the T diagram. That's easy if you are reducing one asset and increasing another. It implies that increasing an asset must go on the opposite side from increasing a liability. The tricky part is realizing that if you increase an asset and don't increase a liability or decrease another asset, you have to balance the increased asset with an increase in equity. So increases in equity go on the opposite side from increases in assets. Income T accounts are an intermediate stage between asset/liability and equity, so if your increased asset isn't going directly to equity it has to go to an increase in income--which must therefore be on the opposite side from an increase in an asset.

I think I have now deduced all the basic rules, so you only have to memorize one thing--"Credit" means "increase in equity or anything on the same side of a T account as an increase in equity."

 
At 12:02 PM, February 16, 2006, Blogger autodogmatic.com said...

Debits = credits is an arbitrary rule. It's the rule off of which all accounting is built.

Regarding the one thing you say you need to memorize, "[A credit is an] increase in equity or anything on the same side of a T account as an increase in equity," this doesn't seem like a very useful distinction as it seems too esoteric to be useful (you have to understand T accounts, for example).

I understand debits/credits by what they do: debits increase assets and decrease liabilities. Credits decrease assets and increase liabilities. Debits increase expenses. Credits increase incomes. Add to these four statements the overarching rule that debits = credits and things start falling into place.

If you're burning some wood (an asset), you have to decrease the wood account (credit). This credit must have an equivalent opposite debit. Well which rule would make the most sense? Debits increase expenses. Burning wood is an expense. Thus a credit to the wood asset account = a debit to the wood expense account.

It's understanding these basic rules and remembering that for every debit, there must be a credit, that you can understand virtually any accounting transaction. Accounting is a system built on an arbitrary rule that debits = credits. Thus, it's just an exercise of 1) what information do you want to track and 2) how do you use debits = credits to track that information.

 
At 4:16 PM, March 14, 2006, Anonymous Anonymous said...

I suspect some of the credit/debit confusion comes from the fact that many people are used to bank statements saying things like, "We have credited your account..." meaning that your asset (the account) has increased. But, for the bank, it's a liability -- so it inverts the meanings.

But, changing the terminology slightly also makes the questions of where expenses/income go on T accounts, and how that matches to assets/liabilities, much simpler.

Take the earlier-mentioned:

Assets + Expenses + Dividends (Debits) = Liabilities + Revenues + Common Stock (Credits)

As also mentioned, if we think of dividends as expenses to stockholders (and treat them like expenses), and common stock as liabilities to stockholders (and treat them like liabilities), this simplifies to:

Assets + Expenses (Debits) = Liabilities + Revenues (Credits)

Now -- what do we mean by expenses or revenues? What we call, formally, "expenses", are reasons why we don't have assets (we spent them). What we call "revenues", likewise, are reasons we could make liabilities go away (we got something to pay them down).

So the equation simplifies to:

Assets + reasons not to have them = Liabilities + reasons not to have them.

So if we increase expenses (reasons not to have assets), then we decrease assets by the same amount -- and the equality continues to be true. And likewise with the other items.

At least, that's how I remember it from my accounting courses a few decades ago.

Ben

 
At 3:43 AM, October 02, 2006, Blogger Leanne said...

I am new to the accounting world and the part that confuses me the most is for example

Sold Stock for cash, in this case we debit cash and credit sales. Why are we debiting cash, when our cash is effectively increasing, therefore it would make sence that we are in fact crediting the cash that we have.

I understand the rules indicate that if asset increses it is in fact a debt. But for me its not good enough to follow a rule, I need to understand why this is the case, so I can apply my understanding to my work.

Can anyone help me out.

 
At 6:44 PM, October 05, 2006, Blogger Shoemaker said...

In reply to Leanne's request for a clearer understanding of the placements of debits and credit entries in accounting.

Leanne said...
I am new to the accounting world and the part that confuses me the most is for example....

Sold Stock for cash, in this case we debit cash and credit sales. Why are we debiting cash, when our cash is effectively increasing, therefore it would make sence that we are in fact crediting the cash that we have.

I understand the rules indicate that if asset increses it is in fact a debt. But for me its not good enough to follow a rule, I need to understand why this is the case, so I can apply my understanding to my work.

Can anyone help me out.


Leanne,

I think this explanation of the entries of debits and credits will help you clear the fog from your eyes. Like yourself, debits and credit placements use to drive me crazy. Your thinking on how they should work is actually the way they do work. Let me explain.

We've been taught that Debits go to the left and credits go to the right. Our confusions begins with the way we naturally think of debits and credits. For example at first glance, we think a debit equals a subtraction, and a credit equals an addition. But in accounting we answer that question with sometime they do and sometimes they don't. few examples:

ACCOUNTING EQUASION:

ASSETS = LIABILITIES + OWNER'S EQUITY

example of a asset with plus and minus included.

ASSETS

Ex: sold 3 gold watches for $500.00 cash. So, you DEBIT the CASH account and credit the OWNERS-EQUITY ACCOUNT. here's how the Tee accounts looks with the pluses and minus signs added in for clarity of what happends.

CASH
+ -
DEBIT CREDIT
-----------------

$500 |
|
|
As noted above in the cash account a debit (+) actually causes the cash account to increase, just as we though it should. In this case however its a debit that causes the account to increase. A credit would cause the acount to decrease, since a (-) is above the credit in the cash account.

That's the cse for all assets but the situtationis reversed when we jump to the other side of the equal sign. EX: lets say we bought five more watches, only this time we bought on credit which caused a liability on the books. In that case we our credit card balance to starts to increase. It looks likes this.

Debit the NEW WATCH (asset) account
Credit the liability account.

CREDIT CARD
LIABILITY
- +
DEBIT CREDIT
-----------------------------
| $500.00
|
|
|
Why is accounting set up in this way? Remeber the statement, every debit must be offset by a credit.

well this is done so that each transaction can be tracked to the reason that transaction occured.

EX: debit cash $500.oo
Credit inventory $500.00
Purchased five more watches


The information contained in the in the accounting equasion will yield at least three seperate and unique reports at th end of the accounting peroid, (the balance sheet)(the income statement) and(the statement of cash flows)

the terms DEBITS and CREDITS are use simply to keep track of where transactions came from and where they went. But it the placement of Plus and minus above each account that determine if this particular account should normally increase or decrease. which depends on what the account is used for.

Hope this explanation helps, just use the plus and minus signs until you get comfortable with it.

 
At 7:11 PM, October 05, 2006, Blogger Shoemaker said...

Now, I need a little help.

Help me understand the peroidic inventory accounting procedure using LIFO basis.

Specifically I don't understand how it determines ending inventory using LIFO.

Ex: Sales 10,000
Beg Inventory 1,400
Inventory Purchases 9.100
Ending Inventory 3.500

 
At 4:39 AM, April 07, 2007, Anonymous Anonymous said...

i cannot understand...what does credit'debit really means....please make it clear.so that i will be able to understand it.thanks a lot...bye

 
At 7:50 AM, April 17, 2007, Blogger Ily said...

This comment has been removed by the author.

 
At 8:01 AM, April 17, 2007, Blogger Ily said...

I agree with J.P.'s post, Mark Torelli is incorrect since you must value inventory at the LOWER of historical cost or the Fair Market Value. I have never heard of inventory being value at a higher amount than its historical cost. Tha t is not GAAP.

 
At 8:57 AM, April 17, 2007, Blogger Ily said...

In order to understand debits and credits in accounting terms you have to clear your mind of what normally is seen as a debit or a credit in our society. In our society a debit is a minus and a credit is seen as a plus an addition to something, and this might hold true also in accounting but you have to think "In Accounting" in terms of the "Natural Balance" of an account. Without this understanding you will be confused and will not understand
it at all.
In accounting we have T-Accounts the left side of it is always the debit side and the right side of it is always a credit.
Assets have a natural debit balance.
Liabilities have a natural credit balance.
Equity accounts have a natural credit balance.
Revenue accounts have a natural credit balance.
Expense accounts have a natural debit balance.
So if you want to increase an asset account you will have to debit it if you want to decrease it you will have to credit it.
And conversely if you want to increase a liability account you would credit it because it has a natural credit balance.
So you would apply this line of thinking to all accounts. It all comes down to what the natural balance of the account is and what are you trying to accomplish with the entry you are posting. If you are trying to increase cash then you will debit the cash account since the natural balance is a debit. If you are posting a sale you would credit the sales account because you are increasing sales and this account has a natural credit balance and you would debit cash or accounts receivable because these are asset accounts and asset accounts have a natural debit balance and you are increasing it.
Hope this helps.

 
At 7:22 PM, May 05, 2007, Anonymous Anonymous said...

I am studying Accounting at the moment and I am very confused about classifying the items that go into the statements and how to differentiate them. How do I know whatis classified as an Asset, Liability and Owner's equity? One mistake and they don't balance.. Mistakes in this area are something I cannot do come exam time. Any helpful ways to remember would be helpful.

 
At 7:28 AM, February 28, 2008, Blogger catkin said...

I've found a way of thinking about Credit and Debit that makes sense at last. Here goes ...

I like to start from the intuitively obvious:

The "value of the company to its owners" = "what it has" minus "what it owes".

Translating into accounting language:

Equity = Assets - Liabilities

The profession conventionally rearranges this to:

Assets = Liabilities + Equity

In mathematical convention this equation says that we vary the Liabilities and Equity resulting in the Assets. That's very odd, not what organisations usually do.

Now the common sense has been mangled out of the fundamental equation, we get explanations like Credit means "left side of a T account" and Debit means "right side of a T account" and which one increases the account depends on which side of the fundamental equation the account is on.

With significance thus obfuscated, understanding is lost and the entire profession, it seems, proceeds by rote: "Assets are increased by Debit", Equity is increased by Credit" and "Liability is increased by Credit".

Is there a better explanation? I think so; another form of the fundamental equation is:

Equity - Assets + Liabilities = 0

This says exactly the same thing as the earlier forms of the equation but a) it doesn't imply that any term is the "result" of the other two and b) it more accurately reflects the accounting concept that the sum of all the accounts is zero.

With this form of the fundamental equation we can easily see that a Credit increases the value of (Equity - Assets + Liabilities) while a Debit decreases it.

 
At 11:10 PM, December 09, 2008, Anonymous Anonymous said...

i am still a college student(freshmen).honestly,i really dont have any idea about accounting,the CPA's,the worksheets,etc. when i enrolled in this course(accountancy).as of now,we are studying the partnership and corporation accounting.i rally have difficulties in understanding the subject since i dont have a strong foundation on basic accounting.i wanted to become an accountant someday but i ask myself sometimes,"HOW?"if even now i already have difficulties about it...it is not an easy subject or course as will as it is really a challenging one....

 
At 4:56 PM, February 10, 2009, Blogger akanksha said...

well, for all new people in accounting world, there is just one way to understand , just remember one rule of (D)EAD = (C)LIC. where DEAD means debit, expenses, assets and drawings. and CLIC means credit, liabilities, income and capital. in this case all are increasing. simple and easy.

 
At 12:41 PM, September 04, 2010, Anonymous Gainesville Accounting said...

When you accept payment in advance for services next year, cash increases and deferred income increases. The increase in cash is good, the liability--the fact that you are now obliged to do some future work for which you have already been paid--is bad. I agree that the fundamental equation of accounting is one useful way of explaining the debit/credit distinction. But I thought it was clearer to make the same point in a verbal form, as I did.

 
At 2:15 AM, April 29, 2012, Blogger Duncan Williamson said...

I wonder how your students fared in your classes if you started by telling them that debit and credit are confusing.

i teach courses where i need to help the students to understand what accounting is and where it comes from and it is simple to build a logical picture of bookkeeping and accounting where there is no confusion at all

Duncan

 
At 7:26 PM, May 14, 2012, Anonymous Anonymous said...

I just started taking an accounting class & came here looking for a little 'clarity'. Well, now I'm more confused than I was before! Aarrgghhh!

 
At 12:46 PM, August 31, 2013, Anonymous Jwhelancpa@juno.com said...

Professor Friedman has exposed the great disservice that accounting texts perform, ie. sloppiness in nomenclature. His comments,to me, reveal the most understanding hum anly possible for the brief time he studied bookkeeping. (Yes, debits and credits are the tools of bookkeepers and, since accountants study little bookkeeping, they STILL do not understand it.
Accountants take the information collected by bookkeepers and adjust it, interpret it, and produce reports to inform decision makers.
Not one accounting book, in my experience-teaching since 1961, has done anything but confuse students.
I am readying my book, Accounting Revolution, which will correct this tragedy.

 
At 6:37 PM, March 24, 2014, Anonymous Anonymous said...

You'll be a better economist when you fully understand accounting. Of course not taking economics puts you ahead.

With the important accounting knowledge you will realize more ways that economic theories get it wrong.

Entity concept ---> Economic aggregation unrealistic. Distribution matters.

Balances (Stocks) of accounts are accumulations of flows. ----> Levels are important too. Economic flows with out the balances are devoid.

Accounting records movement of value ----> Equilibrium assumptions are unrealistic.

Economists that don't know accounting can't count properly what they are talking about.

 
At 6:38 PM, March 24, 2014, Anonymous Anonymous said...

You'll be a better economist when you fully understand accounting. Of course not taking economics puts you ahead.

With the important accounting knowledge you will realize more ways that economic theories get it wrong.

Entity concept ---> Economic aggregation unrealistic. Distribution matters.

Balances (Stocks) of accounts are accumulations of flows. ----> Levels are important too. Economic flows with out the balances are devoid.

Accounting records movement of value ----> Equilibrium assumptions are unrealistic.

Economists that don't know accounting can't count properly what they are talking about.

 

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