Learning accounting
There are lots of things I know nothing at all about. It annoys me not to understand a subject at all, because it often means I can’t follow a conversation that I care about. The list includes, just as a start: accounting, law, and politics.
Of those three, accounting seems like the easiest thing to tackle by far. This is partly because the space between what it’s theoretically supposed to be and how it’s practiced is smaller than with law or politics. Or maybe the kind of tricks accountants use seem closer to the kind of tricks I know about from being a quant, so that space seems easier to navigate for me personally.
Anyway, I might be wrong, but my impression is that my lack of understanding of accounting is mostly a language barrier, rather than a conceptual problem. There are expenses, and revenue, and lots of tax issues. There are categories. I’m working on the assumption that none of this stuff is exactly mathematical either, it’s all about knowing what things are called. And I don’t know any of it.
So I just signed up to learn at least some of it on a free Coursera course from the Wharton MBA Foundation Series. Here’s the introductory video, the professor seems super nerdy and goofy, which is a good start.
So in my copious free time I’ll be watching videos explaining the language of tax deferment and the like. Or at least that’s the fantasy – the thing about Coursera is that it’s free, so there’s not much incentive to keep up with the course. And the fact that all four Wharton 1st-year courses are being given away for free is proof of something, by the way – possibly that what you’re really paying for in business school is the connections you make while you’re there.
mathbabe 
Accounting, for me, is one of the most boring subjects, so I took challenge exams (by reading boring textbooks) to be exempt from 2 of the introductory B-school accounting classes. Then I still had to take 2 or 3 more accounting/tax classes. If someone told you that one introductory class in math would be sufficient to become proficient in math, what would you say? Finishing MOOCs is hard. I’m struggling to finish a Udacity Java class, one edX Python class, and I started auditing 2 more classes at Hunter. So my hats off to you and have lots of fun.
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Abe,
Yeah I’m wondering what I would take next. But first things first, I need to at least learn the definition of these terms.
Cathy
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My wife is a CPA, and I approached accounting the same way you are — it won’t work. For many reasons I ended up referring to it as “accounting mysticism.” Too arbitrary, too reliant on “consensus” (i.e., FASB, and especially GAAP, etc). Wait til you get to the OMB Circulars! Sheesh!
What you should come away from this foray with is a sense of the professionalizing project (i.e., guild development and creation), just like in mathematics. It is socially constructed.
Oh, another gripe with so-called definitions: Hilbert’s project failed, right?
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Yes, and another part you are paying for is getting your résumé read or interview scheduled come job time. Going to Wharton is a form of signalling. You are buying into a brand that will allow employers to make assumptions about how good you are (to get into the program in the first place).
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I liked “Jay”‘s talks on Banking and Finance at the Khan Academy. (Sorry, no handy link here — it’s stuck on a Raspbmc system.)
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Cool, thanks.
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Ages ago I took a few accounting courses and the concepts seemed simple. The tons of rules needed to implement the concepts seemed arbitrary and made the classes dull for me. Years later, I chaired a department that included an undergraduate accounting program and recruited/advised future bean counters. Wished I’d paid more attention.
Financial Accounting describes how management communicates the state of the business with it’s owners. Income statements and balance sheets are common tools. Follow on financial accounting courses are often labeled “Intermediate Accounting,” “Consolidations,” “Not-for-Profit” and “Auditing.” A CPA must audit the financial statements of publicly traded companies in the U.S. The CPA is typically the only government-required “license” supported within U.S. business schools.
Managerial or Cost Accounting is the other major branch of the discipline.
http://en.wikipedia.org/wiki/Cost_accounting.
These folks try to assign costs to specific activities and provide input into pricing, internal management decisions and control functions. Their reports are not externally audited or subject to rules that govern financial reports. You don’t need a license or even a degree to work in managerial/cost accounting. In some sense, it requires more creativity and approaches vary widely between firms.
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I have learned quite a lot of elementary accounting by working in Quickbooks on the data of small nonprofit organizations. Obviously, they have different issues than General Motors, but the basics of double-entry, P&L and balance sheets, restricted and unrestricted funds, short- and long-term liabilities…. all these become meaningful and second-nature when you’ve dived into the numbers and pulled the reports and transactions yourself.
Furthermore, small and even mid sized nonprofits have trouble finding people who are not intimidated by numbers to serve as treasurer. This is especially the case for advocacy groups, since they are generally not attractive to your average CPA who might be willing to volunteer time for “charity” but does not desre fundamental political/economic change.
So you could get some first hand experience with basic accounting, read audits, etc., while also providing a much-needed service to lefties without money savvy.
If you want to know more about this, feel free to email me. And keep up the good resistance work!
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Managerial / cost accounting only took off about 1910, when Taylorism and standardization started — riding the emergent corporate organizational structure (or, made necessary by it).
Please note that we can blame cost accounting on the engineers, the ones that really wanted to know what a unit cost to produce, and devised indirect cost (primary and secondary) schemes to cover it.
Andrew Carnegie built his empire using only direct costs, and then low balling production to crush the competition until there wasn’t any. Carnegie was obsessed with his unit cost reports, and never considered indirect costs.
David F. Noble, who stood with proto-OWS in Seattle, is the master of this history: American By Design. Somewhere I saw a picture of him in protest garb, ready for tear-gas.
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Cathy, I worked as an accountant for 2 years at a Big 4 firm in NYC until a month ago when, for the sake of my sanity and soul, I decided to quit. True story…reading your blog regularly helped me to make this decision (I was in financial services). Anyway, I would love to hear your take on the subject on this blog. I couldn’t bear accounting in grad. school and sucked at it, and working in the profession was even worse so a fresh perspective from an “outsider” is highly welcome.
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I’m a little worried that you’re equating “the math isn’t that hard in accounting” (true) with “accounting isn’t that hard” (false). I’ve never seen anything beyond solid 8th grade math used in accounting, but I spend a fair bit of time in the field and I would never describe accounting as easy or simple.
Here’s a quick thought on why: the complexity in accounting lies in the fact that the life of business enterprises in the real world are incredibly wide-ranging, varied and complicated. And accounting *must* find an answer to the results to the accounting statements for every single action taken by any business enterprise. Thus, the accounting rules are incredibly wide-ranging, varied and complicated, and also not always internally consistent or following a cohesive framework.
Anyhoo–I definitely think it’s a worthwhile thing to learn about, even at the introductory level. It’s the language of business and if you don’t speak the language…
FoW
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True and I didn’t mean to say accounting is easy! But since i understand nothing, even a basic course will be helpful.
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Such a benevolent crew over at Penn. Free first year of MBA studies at Wharton. OY. Just saw this on Bloomberg while smiling over Summers’ withdrawing from Fed Chair consideration. And meanwhile, here you is, Cathy O’ doing it already. Right on, babe.
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cathy – focus on bookkeeping first; it’s rational, consistent, and rules-based. IE, it’s the “scientific” foundation for accounting. Then move on to finance – a college intro level course will take you a long way. Then you will have the discriminatory tools to deal with accounting. It’s all just arithmetic, no math involved.
When you get into accounting, that’s where the bullshit starts to creep in. The judgement calls and fancy pleadings in favor of the monied interests and the gold plating of rank financial turds for hire. Subjective and often messy – kinda like economics… Not for those of weak moral temperament.
Love your blog!
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I have to rely on Twitter to occasionally catch good posts and a few with RSS where I can blaze through titles quickly so don’t feel bad on not reading blogs. I think Coursera is fantastic and surprisingly not enough folks know it’s out there.
By the way Happy Larry Summers Day! Somewhat on this same topic I just read a review about a book on the McKinsey company..I’ll leave the Amazon link here and I feel that’s going on my book list like real soon:) These folks have to be all over the place accounting, modeling, BS, you name it and they compete with Bain.
The Firm: The Story of McKinsey and Its Secret Influence on American Business
Bloomberg has interview with the author, really sounds like a very interesting book to get a hold of. He pretty much says the consulting is becoming a racket and it costs $10M a year to hire McKinsey. He said they are a “CEO” factory, producing more of then out than anyone else. CEOs find value with them but not necessarily the same felt by the rank and file.
http://www.bloomberg.com/video/the-book-mckinsey-doesn-t-want-you-to-read-VUOuFs3HQEerp0od3MvmUQ.html
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I’m an actuary, so I’m right at the intersection of math and accounting.
Math is (conceptually) hard, but not complicated (there are general rules). Accounting is complicated (lots of specific rules), but not hard (the concepts are easy). Here’s my comment-box summary.
Accounting is always answering one of four questions:
1) What do I own and what is it worth?
2) What do I owe?
3) How much did I spend and what did I get for it?
4) How much did I earn?
One and two are balance sheet questions; three and four are income statement questions.
Now we get to the complicated part.
Different people ask the above questions, for different reasons; thus there are legitimately multiple answers to them. (Multiple “sets of books”.) Each set of books has its own rules. Tax books are designed to maximize current income; GAAP books are designed to stabilize income; Statutory books are designed to ensure that assets are sufficient to satisfy liabilities.
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Nice summary and explanation. Thanks
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Sam’s 4 fundamental questions don’t have universal answers or universal methods to answer them. Theoretically, accounts will give you information organized in a clear and standardized form so that, depending on what question you want to answer (and what you really mean by that question) you can derive your own answer (with some associated error bands).
Two other pointers to complement Sam’s helpful note:
(1) Stocks and flows. Keeping stocks and flows clear is critical, but generally seems poorly communicated, in my experience. Balance sheet items are stocks, income statement and cash flow items are flows.
(2) Accounting symmetry: your liabilities are someone else’s assets, your revenue is someone else’s expense, your expenses are someone else’s revenue, etc.
Wish I could suggest some good references, but most I’ve seen focus too much on confusing details and obscure the essential points. I vaguely recall some of the CFA I material offering a fairly good introduction, so see if you can find an old copy of the schweitzer summary notes. Anyone who still has them will be happy to part with the accounting bits as that was the second most hated subject in the exams. Most hated? Ethics, ha!
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A couple additional points that occurred to me this morning:
Accounting 101/Introduction to Accounting is a comparable class to pre-calculus algebra. It’s intended to drill a language and conventions, which you will need later; it isn’t a good guide to actual practice. A lot of what you are learning is conventions–like x and y are variables and a and b are constants, there’s no particular reason to do them that way other than “everyone does, so it’s easier for others to understand.”
Double-entry book-keeping: this is a fundamental convention of business accounting, because it enables easy answers to the question of “what did I spend” and “what did I get”. I spent cash (one entry) and I got a computer (the offsetting entry), and so on.
I would note that trying to learn accounting to follow the business press by taking accounting classes is like trying to learn statistics to follow op-ed discussions by studying statistics–it’s a bit of a long way around.
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An alternative high level distinction is:
book keeping is the methods and rules that you follow to summarize and represent a complex system
accounting is the theory behind the methods and rules.
The two are very similar at the novice level, but accounting will take you in a different direction eventually. Different accounting methods reflect different theoretical models for how to measure and present a simplified view of the real world in order to make effective decisions. (Perhaps that also makes it clear why accounting rules for tax purposes may be completely different than accounting rules for manufacturing decisions.)
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