Friday, April 15, 2011
Accounting and Imagination
In my experience a common perception about accounting is that it is a discipline dominated by dogma, complicated rules and opaque calculations. From these views it follows that the study of accounting must involve lots of rote learning and infinitely boring calculations but little thinking. I guess one day, a long time ago, I also thought like this. Until, that is, I took a course from Professor Bob Swieringa at Cornell University. At that point it was the hardest course I had ever taken, including my entire engineering degree! Two things happened after that: (1) I chose to concentrate my studies in accounting; and (2) I resolved that I would always try my best to understand how accounting works, starting from first principles, much as I had learned to do as an engineer.
So, on the first day of intermediate accounting I invariably ask my students why they think this has a reputation for being such a difficult course. I hear references to the heavy reading load, complicated language, convoluted transactions, and lots and lots of number crunching. But I say it’s none of these reasons really. It’s imagination! Financial statements are in essence a model of a real business. And to be a good model builder one needs above all imagination.
But what kind of model is accounting anyway? Is it really so different from other models we know from economics, science and engineering? No it isn’t! The language may be unique, but the building blocks are familiar: stocks, flows and a conservation principle. Balances, debits/credits, and the balance sheet identity. I play a lot with T-accounts—sometimes I pretend to be one, and at break time I recommend the “T-account stretch”—with the intention of helping my students remember to use these fundamental building blocks of the accounting model. I also like to ask them to reinvent accounting: “close your eyes, try to imagine what is going on, and then try to determine the effects of this real world transaction on the financial statements.” Whether the textbook’s solution is the same or not is not as important as whether the thinking makes sense. Specially because the environment of business and accounting are changing so fast and our students will be there as professionals so soon!