I recently read several scholarly articles (which I will not cite here as I do not wish to debate such intelligent authors) concerning accounting theory over sustainability of our environment for future generations. That ignited me to thinking about GAAP accounting conceptual framework. Different people have different realities concerning what is “profit”.
For instance, equipment used to generate revenue should be capitalized, which means depreciated over the life of the asset. In other words, expense the asset partially each year over the life of the asset. To expense the total cost of the asset during the first year of use would not fairly represent the income statement during those years of use. If the income statement is off, then so is the balance sheet.
Overhead is paid from a markup on labor. For small businesses, such as sole proprietors, the owner’s salary is the profit. Many business owners put in many hours for small profits, thus a small hourly wage. Large businesses are able to skim a percentage off all cost centers. These cost centers include, at a minimum, labor, material, and subcontracts. The larger the business holdings are, the more cost centers there are to dip into.
Capital purchases, like equipment, are handled differently depending on the size of the company. Some sole proprietor’s go against GAAP and just expense the equipment with each monthly payment. Large corporations depreciate the equipment as quickly as possible. The only time they know the true cost of equipment is when it is sold. Large corporations seldom have equipment that is fully depreciated and paid for.
Sole proprietors can’t wait for the day when their equipment is paid for! No more equipment payments translates to more profits in their pockets. Same with other expenses. Materials and consumables cost money. Using left over or salvaged materials will increase profits. Small companies convert unused materials from one job to profits on another job.
Large companies throw away unused materials for several reasons. Mostly because it is too costly to save it. To save unused material, would require the accountants and warehouse people to inventory it. Again, just too costly.
Now modern accounting is taking another look at their GAAP accounting conceptual framework. Seems like businesses should be responsible for assigning costs to make them sustainable for future generations. To make it even more interesting, these costs should come out of profit!
Being a sole proprietor myself, I know my profits don’t have room for these additional costs. I will go out on a limb here and speculate that Shell Oil’s profits don’t have room to replace all of the natural resources they have diminished.
So, in summary, FASB’s GAAP accounting conceptual framework should fit all. It takes an intelligent mindset to keep the framework simple. Accounting is complex. That is the whole reason why the framework was developed in 1973. Mega large multinational corporations may have, what appears to be, unlimited profits, but that does not mean unlimited resources. Sole proprietors certainly do not have extra funds or resources. An accounting framework should fit all size companies.
Brett Bickham
7/9/2018
Clifton, TX