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Accountancy is 50% low-grade arithmetic and 50% guesswork
According to Wood and Sangster (2008) “Accounting is the process of identifying, measuring, and communicating financial information to permit up-to-date judgements and decisions by users of that information.” According to Richard Lewis ‘Accounting is 50% low-grade arithmetic and 50% guesswork’ because of the disclosure in 2014 that Tesco supermarkets may have misstated its profits by £250m.
Arguments for ‘Accountancy is 50% low-grade arithmetic and 50% guesswork’
Accounting is guesswork for those businesses who do not keep daily bookkeeping. The depreciation method used for fixed assets, for example, the vehicle will be treated as guesswork for some small businesses. Information in bookkeeping must be relevant for the decision-making. It should also be free from material error and bias otherwise; it would be considered a guesswork for the users because of the errors they see that should not have happened.
Financial statements must be prepared based on the concepts, procedures and assumptions given in the accounting standards. But for the statement, if manual bookkeeping is done by combining all the ledger accounts that mistakes are going to happen and the accountant will think that it is guesswork. If the transactions are recognised when they occur but are not recorded in the books of the period which they relate are often considered low-grade arithmetic. The main reason for the statement is that there is no consistency of accounting treatment due to which the information is not reliable. For example, some businesses may be measuring the inventory by First in First out method or Last in First out or by the average method. They are not consistent to follow the method in order to show the real value of the inventory. The result will therefore be overstated or understated profit. To make sure that the profit is correct, the business must operate for at least twelve months otherwise, the financial statements may not be trusted and reliable for the users.
Arguments against ‘Accountancy is 50% low-grade arithmetic and 50% guesswork’
Accounting is not 50% guesswork because as per the accounting standards and the legal framework, anyone preparing financial statements must show a fair and true view of the financial position of the organisation that are given in the rules by the accounting standards.
Tesco supermarkets may have misstated its profits by £250m due to the difference of methods they use to prepare their income statement and statement of financial position. For example, depreciation for vehicles is calculated by many ways like reducing balance, straight line, the sum of units' method. For Tesco, the depreciation method used might be different for other companies or organisations. Due to the different usage of depreciation methods, the profit might be understated or overstated. So, accounting is not guesswork as it is done the methods used.
Accounting is all about past events and it requires consistency and similarity that is the reason it involves the bookkeeping transactions to be recorded at their historical costs. Historical cost is used in accounting as a measure of value. When the asset is first bought by the company, the price of the asset in the balance sheet is based on nominal or original cost. In the balance sheet, it should be historical cost less accumulated depreciation. In profit and loss account, the current year depreciation amount must be charged based on historical cost otherwise the profit may be understated or overstated, as it is the case of Tesco supermarket. The concept of historical cost is important because market value changes frequently and the reporting of assets and liabilities at current values may change the entire texture of bookkeeping, the comparability and makes accounting information unreliable.
Another argument against ‘Accountancy is 50% low-grade arithmetic and 50% guesswork’ is that the matching principle states an organisation must record costs in the period in which the related incomes are earned. For example, when a company make sales they are on credit that is the customer receives delivery of goods or services but guarantees to make the payment within 30 days. As per revenue principle, revenue is received when the delivery is made. Now there might be a risk that the customer may not pay the due amount. This will result in as writing the debtors as bad debts in profit and loss account under expenses. This shows that expenses must be recognised at that moment when sales take place. It is significant to match costs with incomes because net amount earned in a period, is calculated by subtracting costs from incomes. On the other hand, if expenses are not recorded in the right time frame, the net income for a specific period might be overstated or understated and the balances in balance sheet.
The statement ‘Accountancy is 50% low-grade arithmetic and 50% guesswork’ made by Richard Lewis does not have any truth about it because of the arguments against are more than the arguments for the statement. If bookkeeping is done as per the accounting standards and the legal framework that it is not low-grade arithmetic and guesswork. To eliminate guesswork, fully automated software system must be used to process invoices, purchase orders and receipts all at once. This will result in making perfect profit and loss account and the statement of financial position and will reflect the true picture of the company.
Wood, F. and Sangster, A. (2008). Frank Wood's Business Accounting 1. 11th ed. Harlow, England: FT/Prentice Hall.
© 2018 Waleed Ahmed