This is bad, don't read it. When you borrow $100 you do not create a liability which includes the interest to be paid.
People who don't understand the very basics of finance and accounting shouldn't write about finance and accounting.
People who don't understand the very basics of finance and accounting shouldn't write about finance and accounting.
In the context of this post, does it matter? He’s not teaching bookkeeping here. He’s explaining the time value of money.
As such, it's a self indulgent piece of writing, not a helpful one.
Over the course of the borrowing period the borrower would accrue interest expense commensurate with the passage of time that would increase the borrowers total liabilities. The author misunderstands the fundamental accounting definitions of liabilities (and also assets). Liabilities (under US GAAP but same core idea under IFRS) are present obligations. At the initial time of borrowing the borrower does not have a present obligation to pay interest on the liability. Similarly, an asset is a present right, and at the time of initial borrowing the lender is not owed the interest.
It's not the worst thing I've read, the author has clearly spent time learning things in good faith. That said, there are lots of indicators the author is not an expert in accounting / finance.
I agree completely on your "thorough grounding" comment. I spend a lot of time explaining to finance people how tools like python, SQL, AWS stuff can be leveraged in simple ways for analytical purposes, and I spend a lot of time explaining to technology people what all the finance and accounting stuff is really about. In both cases my experience is it always comes back to explaining fundamental ideas or concepts over and over, but applying them to different situations and contexts (I do so much more confidently when explaining accounting and finance stuff since I have deeper education & experience there).
A lot of times these fundamental ideas and concepts can be explained very simply and intuitively using toy examples. the problem is it can take years and years to build up enough experience to really separate the signal from the noise and see clearly what is truly fundamental (yes that's where formal education is helpful but it can be hard to really grok absent experience imo... In the same way learning a programming language can be easier if you just try to build something).
A deep understanding of fundamental concepts is what allows you to pick apart very complex and novel problems into it's component parts. A deep understanding of fundamental concepts is one of the things that separates professionals from non-professionals in my opinion.
Common and/or various ways the two groups misunderstand each other, and how you help them to anchor to the underlying base concepts? Yes please. For example, we know that interest accrues over time, but we still use shorthand for the annual interest as a step function because it makes intuitively more sense.
The people who are in a position to influence the world are those who understand it, and if this article nudges people with a hacker mindset towards having more influence, then that's a good thing.
are those who can pay people who understand it*
Nonsense. To the extent some small group of people have an outsized influence it's politicians and the rich of the rich (who at this point are overwhelmingly tech guys).
Why not critique the entire work?
Anyway:
I borrow 100 from someone. I am now in debt and they are in credit - to balance, both are 100.
However, they require a return on investment - usury: 10 for 100 (or a 10% margin - call it what you like).
When I take out my loan, I am in debt for 110 and they are in credit for 100 with a promise of 10 later. So we have some accounts - my one account is 110 in debit (I borrowed 100 and promised to pay 10 on top) and they have two accounts - one for the principal (100) and another for the 10 interest. To me, in this case, the principal and interest are part of the same account but to the lender they are separated out because the interest is probably taxable as income.
However, it might be the case that I can set off my debt or the interest on my debt against some tax. In that case I will maintain two accounts - the principal and the interest.
All those interests will also end up in additional accounts related to probably banking.
I've probably pissed off a few accountants with my choice of terms but in the end I do understand how fiat money works.
What gets on my tits is assertions such as "People who don't understand ..." with no working.
Anyways, recognizing the interest over time would debit an expense account and credit some liability account... Could be the same account as the loan or could be an interest payable account, doesn't really matter in the context of the example.
Also you would not be "in debit"; the liability is on the credit side of your balance sheet.
I might be guilty of abusing an industry term or two 8)
And, in my initial comment i explicitly point out the error - the interest amount should not be there. People don't tend to show the working for zero * x = zero. This misunderstanding of a very fundamental piece makes any material on this topic by this author not worth reading. It might render everything they write not worth reading because they also don't know where their circle of competence stops.
I see the reasoning for accountants keeping future liabilities off of the balance sheet. I do this myself in multiple contexts.
Still, when making decisions about whether to take out or grant a loan (personal or business) I need to consider future "value" and cash flows. To someone running a business this is probably more important than the balance sheet. So I think the interest recording criticism is valid but relatively minor in the context of the whole article.
The vast majority of the article is trash. It's wrong in many situations. The only reason the accounting issue was brought up is it's early, and so incredibly stupid that it renders the rest of the thing untrustworthy. The rest is bad. If you don't think so, you don't know the subject and are learning from bad sources.
1. Only the portion of the principal that is due to be paid within the next 12 months is considered a "current liability".
2. Interest is a "future cash flow" that becomes a liability as it accrues over time.
One month in 25 years, my partners and I didn't pay ourselves. That's as close as we have got to having issues. We keep six months payroll, corp. tax and VAT in readies. The property mortgage is nearly paid off.
I'm no hacker and I treat finances as a means to an end - no more and no less.
See also https://en.wikipedia.org/wiki/Archegos_Capital_Management which had Goldman Sachs as a counterparty and was not bailed out.
All the examples I brought up are about counter-parties owing money to GS.
> And I don't think goldies lost money on archegos.
At most trivial amounts, yes. Goldman got out of the position really quickly. But your earlier claim was a bit more universal than that.
Goldman ain't stupid: if there were a treasury 'put' on Goldman's counterparties (and Goldman knew that), then Goldman would exploit that and monetise that 'put'. Instead of getting out early as they did in real life, they would demand and get ridiculous compensation for staying in the position, and then enjoy the bail-out.
(Disclosure: I used to work for Goldman for a few years, but not as a proper banker. I liked the place, but I also think they are much less important than people think they are. And I suspect Goldman is partially playing into the perception, because being a villain is cooler than being a middling also-ran bank.
You might like the book 'What happened to Goldman Sachs'. They have never been the same since the IPO in the late 1990s.)
It's just another confident fool spouting off about a topic they don't understand. The article is 90% trash.
In avg, the normal way it creates the liability over time and i would argue that in a colloquial its absolutly fine and doesn't change the message at all.