It’s All Theoretical, But the World Is Real

Another day in the real world, another day spent dealing with the ramifications of the “theoretical.” Now, I enjoy theoretical discussions and love new ideas and developing them into real-world applications. Where would we be without new theories, the innovations they produced, and the inventions that make our lives easier? But there is a difference between being theoretical and expanding beyond the foundations of where we are technologically today and ignoring reality. Let me back up and explain what has me “peeved.” Today (and unfortunately, not for the first time) I have a client suffering from “theoretical accountingitis,” a not-so-infrequently occurring malady that is infecting graduates of reputable accounting programs throughout the country.

“Theoretical Accountingitis” defined

What is theoretical accountingitis (TA)? TA is characterized by the following:

  • Lack of basic accounting knowledge, including:
    • Debits on the left, credits on the right
    • T-accounts (the structure that shows debits on the left, credits on the right)
    • Basic definitions of basic terms
      • Inventory: raw materials, work-in-process, finished goods, purchased materials
      • Cost of goods sold
      • Cycle counts
      • Shrinkage
      • Revenue recognition/customer deposits
      • Petty cash
      • Standard costs
      • Variances
  • Inability to generate a complete set of financial statements
  • Statements like:
    • “Details, details, details … I want to look at the BIG picture”
    • “Wow! I didn’t know financial statements could be more than one page!”
    • “QuickBooks™? Spreadsheets? What’s with that?”
  • Little or no understanding of pro forma or forecasts

Give them an “A” for…

May be it would be more accurate to say I have theoretical accountingitis, because I’m the one feeling the pain. I am dealing with clients who achieved straight As in accounting classes, but have no relevant knowledge in what comprises the balance sheet and income statement, or how to determine cash flow needs for the next month for the business. These same people can’t use Excel™ to develop a template for setting up a budget or read a QuickBooks™ income statement because it is two pages long and has multiple columns because of the details involved in the projects. And heaven forbid these people sit there and study the reports to figure it out: “Oh, and like, we didn’t do this kind of stuff in class, we were doing more high-level stuff like understanding the important things like the rulings and court cases and the theory behind all the changes in regulations.”

Well, and like, the theory doesn’t make the entries into the books to, like, calculate the taxes, and, like, write the checks to, like, pay the bills and the employees, and, like, to get the stuff to like make the products to, like, ship to the customers, like, to keep the customer in business! Like, this is the REAL world, which requires you to understand how to keep the books, record the transactions, read the numbers and the reports, and do the work because you are the entry-level accounting person who is supposed to be doing the entry of the information on the transactions. You aren’t a CFO, controller, or other executive-level person: You are the entry-level, first-time working accountant. If you don’t understand the real world underlying transactions and details that make up the information that generate the numbers that are being reported, then how would you “understand the ‘high level important stuff’”? Oh, yeah right, theoretically you did! Because you weren’t in the real world dealing with real money, real jobs, and the real impact of what happens when the business has wrong numbers, no numbers, or gets “theoretical” with the IRS.

Consequences of “Theoretical”

Unfortunately, all too often and more and more frequently it seems that the theoretical is taking the place of reality in the work that is being delivered. When it comes to your accounting, this can have far reaching and costly consequences because of compliance, taxes, and decision-making repercussions. Details matter, and finding accountants who know how to properly record your business’ transactions is one of the most critical aspects of your organizations activities. The less you personally know about accounting rules and requirements, the more your accountant needs to know and needs to be involved in understanding your business: How it works, what is happening, and what has happened. You can avoid costly mistakes by having more than a “theoretical” understanding of what is happening in your business. The details matter, especially when it comes to the details of YOUR business. After all, we live in the real world. Because theoretically speaking, wouldn’t things be a whole lot different if we were in control: Lower taxes, better roads, a chicken in every pot … world peace …

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