This is an extract of an article recently published at fin week.com, and authored by our own Peter Frampton.
The language of accounting has not been updated in 500 years – and, according to Peter Frampton of Color Accounting International, businesses are failing because of it.
“The words we use to describe fundamental accounting concepts, like ‘income’ and ‘expense’, were used by 15th-century Venetian merchants to describe trade in physical goods like silk and spices,” says Frampton. “Businesses and transactions have become a lot more complex since then, but the language hasn’t evolved. For example, most people have no idea what an expense actually is -most dictionaries, and even most accountants, get it wrong.”
Frampton says when a colleague recently asked a room full of senior financial officers in the UK to choose a definition of “expense”, “75% of them defined it as cash going out of the business, which was the worst possible choice. An expense is better described as any activity, specifically one that reduces net value in the business. If even professional accountants are unclear in their definitions, what hope do ordinary business owners have?”
The confusion between income, expenses and cash has profound real-world consequences, says Frampton. “People may be earning income, but that doesn’t mean they are receiving cash – they might just be generating accounts receivable. This fundamental vagueness of accounting language is the cause of many business failures.”
Continue reading at: http://finweek.com/2014/09/10/insight-accounting-language-relevant-anymore/
The language of accounting has not been updated in 500 years – and, according to Peter Frampton of Color Accounting International, businesses are failing because of it.
“The words we use to describe fundamental accounting concepts, like ‘income’ and ‘expense’, were used by 15th-century Venetian merchants to describe trade in physical goods like silk and spices,” says Frampton. “Businesses and transactions have become a lot more complex since then, but the language hasn’t evolved. For example, most people have no idea what an expense actually is -most dictionaries, and even most accountants, get it wrong.”
Frampton says when a colleague recently asked a room full of senior financial officers in the UK to choose a definition of “expense”, “75% of them defined it as cash going out of the business, which was the worst possible choice. An expense is better described as any activity, specifically one that reduces net value in the business. If even professional accountants are unclear in their definitions, what hope do ordinary business owners have?”
The confusion between income, expenses and cash has profound real-world consequences, says Frampton. “People may be earning income, but that doesn’t mean they are receiving cash – they might just be generating accounts receivable. This fundamental vagueness of accounting language is the cause of many business failures.”
Continue reading at: http://finweek.com/2014/09/10/insight-accounting-language-relevant-anymore/
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