Here at Color Accounting we like to underscore the fact that it is often the words used in accounting - not the numbers - that create the most confusion.

Different words are used to express the same concept - or a single word can take on different meanings depending upon the context.

Often, the confusing word in question is a noun - a name.

In today's example, the word that creates the confusion is an adjective, and that adjective is "pre-paid."

When you pre-pay expenses - such as paying for a year's cleaning service in advance - you are actually creating an asset on your Balance Sheet, called something like "Pre-Paid Cleaning Services."

The expense is reflected on your income statement when the cleaning actually happens. And at that time, the Pre-Paid Cleaning asset decreases.

So, a pre-paid expense is not an expense… it’s an asset. And the language of business is full of such language paradoxes.

Regards, Peter

​When people express confusion regarding accounting, that confusion generally stems from the words and not the numbers.

"Revenue" is an excellent example of a word that confuses people. How can it be that the $400 million in deposits Tesla has received for its upcoming Model 3 does not represent revenue?

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Because money is not Revenue and Revenue is not money.

​Revenue is recognized when - and only when - a sale is made, irrespective of whether any money changes hands.

Any Revenue recognized from the future sale of Tesla Model 3s will be counted as such at that time - when the sale is completed and the car is delivered to the customer.

Until that occurs these deposits are accounted for in two places on Tesla's balance sheet: 1) as assets represented by cash in the bank and; 2) as liabilities represented by obligations owed to customers.

But you will not find any deposits on the income statement listed as Revenue.

So, in fact, Revenue is not money.

This one disconnect - the incorrect definition of Revenue - is perhaps the most pervasive and destructive misunderstanding in all of accounting.

Regards, Peter

Color Accounting International was represented at a conference of global education providers in Amsterdam recently. We never tire of this wonderful northern European city with its canals and pragmatic approach to life. 

But more than that, we love that Amsterdam has a unique role in the history of accounting.

Hundreds of years ago the locals developed a talent for bookkeeping and financial control. Every household kept a set of books and conscientiously managed their finances.

This commitment to accounting literacy allowed the Dutch to build the world’s first truly global commercial enterprise, the Dutch East India Trading Company.

On the back of accounting and trade, Amsterdam became one of the richest cities in the world in the 17th and 18th Centuries.

The moral of the story? Financial acumen is as important today as it was then - only much easier to acquire!

Regards, Peter

It's not just everyday people who get confused about terms like Liabilities and Equity. 

Even Wall Street mavens like Ron Perleman and "Chainsaw Al" Dunlap can get one term confused for the other and find themselves in trouble.

That's how Sunbeam got in trouble in 2001.

You may remember the story from the turn of the millennium where the old-school, trusted American company decided to go on an acquisition spree, gobbling up other firms in their industry in an effort to impress the financial markets.

Unfortunately they layered on over one billion dollars in debt to finance their purchases and ended up not able to make their loan payments - even though they were supposedly building equity with every purchase.

The end result was that Hacksaw Al lost his job and the banks ended up owning the company for a period of time. Bad news and bad business for everyone involved.

Perhaps a little more clarity regarding the true nature of the "equity" they were building would have left fewer people with a bad taste in their mouth.

Regards, Peter

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