CONVENTIONAL ACCOUNTING
from QuickBooks All-in-One For Dummies
By Stephen L. Nelson 2011
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TRUE VALUE METRICS
Enabling radical accountability
to suit the 21st century
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Understanding the Basic Principles of Accounting
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The Basic Principles of Accounting emerged more than 400 years ago and were important in facilitating trade and the merchant adventurers. It has evolved over time to be a very poerful foundation for the management of business and enabling the optimization of business profit.
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TrueValueMetrics (TVM) builds on the foundation of conventional double entry accounting. The main enhancement is that conventional accounting only accounts for money related transactions as they pertain to the reporting entity, and does not include any of the externalities that impact other entities and society and the environment.
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Generally Accepted Accounting Principles (GAAP)
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Accounting rests on a rather small set of fundamental assumptions and principles. People often refer to these fundamentals as generally accepted accounting principles (GAAP). Understanding the principles gives context and makes accounting practices more understandable. It's no exaggeration to say that they permeate almost everything related to business accounting.
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With TVA, the goal is to develop a small set of principles that are widely accepted to handle the very complex challenge of accounting for everything.
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Revenue principle
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The revenue principle, also known as the realization principle, states that revenue is earned when the sale is made, which is typically when goods or services are provided. A key component of the revenue principle, when it comes to the sale of goods, is that revenue is earned when legal ownership of the goods passes from seller to buyer. Note that revenue isn't earned when you collect cash for something.
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With TVA ... the same idea ... except that the impact of the transaction is not only money revenue but also a range of other impacts that are accounted for with impact specific units of account.
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Expense principle
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The expense principle states that an expense occurs when the business uses goods or receives services. In other words, the expense principle is the flip side of the revenue principle. As is the case with the revenue principle, if you receive some goods, simply receiving the goods means that you've incurred the expense of the goods. Similarly, if you received some service, you have incurred the expense. It doesn't matter that it takes a few days or a few weeks to get the bill. You incur an expense when goods or services are received.
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With TVA ... the same idea ... except that the impact of the transaction is not only money cost but also the full range of other impacts that are accounted for with impact specific units of account.
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Matching principle
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The matching principle is related to the revenue and the expense principles. The matching principle states that when you recognize revenue, you should match related expenses with the revenue. The best example of the matching principle concerns the case of businesses that resell inventory. for example, if you own a hot dog stand, you should count the expense of a hot dog and the expense of a bun on the day you sell that hot dog and that bun. Don't count the expense when you buy the buns and the dogs. Count the expense when you sell them. In other words, match the expense of the item with the revenue of the item.
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With TVA ... the same idea ...
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Accrual based accounting
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Accrual-based accounting, which is a term you've probably heard, is what you get when you apply the revenue principle, the expense principle, and the matching principle. In a nutshell, accrual-based accounting means that you record revenue when a sale is made and record expenses when goods are used or services are received.
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With TVA ... the same idea ...
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Cost principle
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The cost principle states that amounts in your accounting system should be quantified, or measured, by using historical cost. For example, if you have a business and the business owns a building, that building, according to the cost principle, shows up on your balance sheet at its historical cost; you don't adjust the values in an accounting system for changes in a fair market value.
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The idea of historic cost has been contentious in the conventional accounting community since the 1960s ... and most financial analysis takes into consideration this aspect of conventional accounting. With TVA the impact of all of the past, and the impact of a place, and the impact of the future are all brought into account in a way that has meaning. This is very important in a world where change is rapid and there are a multitude of important risks that change over time.
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Objectivity principle
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The objectivity principle states that accounting measurements and accounting reports should use objective, factual, and verifiable data. In other words, accountants, accounting systems, and accounting reports should rely on subjectivity as little as possible. An accountant always wants to use objective data (even if it's bad) rather than subjective data (even if the subjective data is arguably better). [This assertion that accountants have a preference for objective bad data over subjective data that is meaningful is NOT my personal experience. TPB]
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TVA has the goal of 'numbering' everything. When something is 'numbered', it can be managed. There is not a serious sport on planet earth where the teams do not keep score using numbers to determine the winner. However in the game of life, such numbers do not exist unless one considers money wealth to be an appropriate proxy for winning. In the matter of climate change, there are numbers, but they are not organized in a way that relates cause and effect in an easy believable, actionable, way.
TVA has expanded the accounting from a single unit of account (money) to several units of account so that all the transactions can be accounted for as they impact all of the capitals that exist in the complete socio-enviro-economic system ... a system that is far more complex and complete in every respect that the money accounting financial system that has dominated the management of everything since long before the start of the industrial revolution and financial capitalism.
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Continuity assumption
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The continuity assumption states that accounting systems assume that a business will continue to operate. The importance of the continuity assumption becomes most clear if you consider the ramifications of assuming that a business won't continue. If a business won't continue, it becomes very unclear how one should value assets if the assets have no resale value. If a business won't continue operations, no assurance exists that any of the inventory can be sold. If the inventory can't be sold, what does that say about the owner's equity value shown in the balance sheet?
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Unit-of-measure assumption
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The unit-of-measure assumption assumes that a business's domestic currency is the appropriate unit of measure for the business to use in its accounting. In other words, the unit-of-measure assumption states that it's okay for U.S. businesses to use U.S. dollars in their accounting. The unit-of-measure assumption also states, implicitly, that even though inflation and, occasionally, deflation change the purchasing power of the unit of measure used in the accounting system, that's still okay.
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Separate entity assumption
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The separate entity assumption states that a business entity, like a sole proprietorship, is a separate entity, a separate thing from its business owner. And the separate entity assumption says that a partnership is a separate thing from the partners who own part of the business. The separate entity assumption, therefore, enables one to prepare financial statements just for the sole proprietorship or just for the partnership. As a result, the separate entity assumption also relies on a business being separate and distinct and definable as compared to its business owners.
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