DIFFERENT ACCOUNTS FOR DIFFERENT PURPOSES

accountants are not supposed to be creative. creativity and so-called 'double accounting' usually refer to bad practice, and illegal or criminal activity where the accounting records are being falsified to misrepresent the actual state of a business:

• inflate assets and income
• understate debts and expenses
• keep selected transactions in full or in part out of the books altogether
• account for imaginary things

for a colorful and notorious illustration check out the Madoff scandal that broke at the time of the 2008 financial crisis

however, there is another side to creativity and to double accounting that is part of the DNA of the accounting profession. to explain this is the subject of this blog post

by nature, accountants need to be conservative, but - just like all other professions - accounting is developing, moving with the times and using innovation to better serve its customers. the customers (users) themselves are likewise continuously developing their requirements in a changing world

here is some perspective on the continuing evolution of accounting, and especially how 'double accounting' and 'different accounts for different purposes' as well as 'creativity' are core values to the profession and its customers rather than the tools of petty criminals

innovation goes back to the early days of modern accounting, when people in Renaissance Italy started to apply the high tech of the day (mathematics that were first developed in India, further refined in Arabia, and then made their way to Europe) to bookkeeping. double entry accounting ('double accounting' where there is always both a 'cost' and a 'benefit') was invented, and the concept of a balance was introduced. with this new technology financial management became possible that enabled the first capitalist enterprises to start up (attract investors) and as a consequence grow businesses more rapidly than anything seen before

for a trip back in time start with the mathematician that was named Fibonacci and compare his approach to the counting systems in use before. the mathematician Pacioli is credited with brilliantly applying the new mathematical concepts to business and move a profession from counting to accounting

in the first half of the 20th century the rise of management science lead to another big change in the profession. accounting became the basis for financial information that was used for decision making in the operational management of a business. as progress was made in business analysis, it became more and more apparent that traditional accounting did not deliver the necessary information

management accounting was introduced to complement traditional accounting (from then on usually referred to as financial accounting). management accounting has its own rules and concepts. the most important rule is that there are no rules except to deliver what is necessary in a certain situation to enable the best decision making. it is from management accounting that the concept of 'different accounts for different purposes' originates, the recognition by accounting and financial professionals that there is more than one way of looking at the financial numbers of a business - in fact there are many ways, depending on the purpose

pioneering work on implementing management accounting was done by General Motors under Alfred Sloan

the widespread implementation of management accounting enabled complex multinational businesses to grow (again faster than anything seen before) to the point that stakeholders in such enterprises were faced with real and new challenges in understanding the financial numbers. the accounts were in different currencies, prepared according to different local statutory and management requirements, and legal and tax structures could be different from management structure. Computers became necessary to keep track

as if that is not enough stakeholders put new requirements on business information, going from the purely financial to also encompass environmental and social impact

the solutions are still the same:

• different accounts for different purposes, in order to keep things simple, yet flexible
• advanced information technology to keep track

accountants are serious people. so are acrobats in a circus. both accountants and acrobats must keep their balance while putting on an interesting show. accountants maintain their balance by double accounting and by being creative. that is the way it was from the beginning - that is not tearing up the universe - it is how the universe was built


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