To the novice, accounting often looks like a street corner shell game. The accountant places a pea under one of three walnut shells. He then moves the three shells swiftly over the felt tabletop while saying a bunch of magic words like “financial ratios transfer to the balance sheet while the equity pie becomes an expense to third parties,” claps his hands, and steps back with a smile. You gingerly lift shell after shell to discover that 1) the pea is not where you thought it was, 2) the pea has magically become two peas, or 3) the pea has disappeared entirely.

This discussion of GAAP shows that there are reasons for the apparent contradictions and inconsistencies. In an ideal world, the typical financial statement is the product of several carefully considered competing and, in some cases, mutually exclusive activities. Wise judgment has considered the competing claims and resulted in the most accurate picture of the firm’s financial condition.

Many situations develop where two or more GAAP concepts either overlap or contradict. There is no right or wrong answer to these conundrums. Much depends on the volume and nature of the transaction and the industry practices to which they relate. As a manager, you have to decide for yourself whether you’ll perform ethically. Be secure that the vast majority of managers are ethical. Bad managers, like airplane crashes, still draw headlines. When they don’t, it’s time to get very worried.

Back: The Four Constraints

[ HOME ]

Next: Checks and Balances