[gerdesj]

You are fixating on one tiny point which isn't really that important within OP's ... errm "opus".

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.

[LeanOnSheena]

Yeah CPA here. On the day you take out the loan you're not in debt 110, you are in debt 100; you would accrue interest expense over the term of the loan. What if the lender called the loan day 2 for some reason? You wouldn't pay 110, probably just 100 plus one day of interest. Goes back to fundamental definitions of financial statement elements. Liabilities are present obligations.

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.

[gerdesj]

You failed to check the terms of my loan and assumed it was on an interest basis. I literally told you I borrowed 100 and promised to pay 110. I also failed to note a term and you also assumed there was one. I do mention interest later on so that's a fair assumption, if misguided.

I might be guilty of abusing an industry term or two 8)

[danielmarkbruce]

You said interest. It's right there. In practice all loans have interest. No matter what you call it, it's interest as the word is understood in finance.

[talentedcoin]

What gets on my tits more is people who are pretty bright in one field (hacking) thinking that entitles them to just brute force their way through reasoning about some other field (finance) that in their arrogance they think is simpler.

[gerdesj]

... and yet somehow I have muddled along running an IT company for 25 years (I'm the MD) and I have a fair idea about finances, including surviving some rather unpleasant financial environments that have rocked up over those years.

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.

[talentedcoin]

This comment makes it very clear to me that we are not talking about the same things, lol.

[user3939382]

It bothers me that finance people think they’re smarter than everyone when all their jargon bullshit boils down to SQL statements any senior DB person would understand.

[danielmarkbruce]

Totally. Tech people don't have jargon that boils down to something simpler, nope. No "artificial intelligence" or "machine learning" or "back propagation" or "neural networks" or "big data" or "scaling up" or (one could continue for days....)

[user3939382]

SQL seniors can understand anything in finance. Senior finance people would be baffled from chapter 1 of anything serious in CS. That’s the difference between general purpose programming and a math DSL.

[consz]

My anecdotal experience is that both of those statements are untrue.

[danielmarkbruce]

This is laughable.

[user3939382]

Which part? You can’t find any mainstream finance concept that can’t be expressed in SQL, or it’s laughable that finance people don’t understand computing? Which part is laughable, would love to know.

[danielmarkbruce]

You can't have taken a class on finance and/or accounting and passed it. This is 101 material, literally. Read the CPAs take.

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.

[grog454]

Not OP and not an accountant.

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.

[danielmarkbruce]

It's not keeping future liabilities off balance sheet. It's marking them at their current value. Same thing for assets. Nobody wants to see a balance sheet where 30 year government bonds are written down at the sum of all interest payments to be received plus the principal. If you did that, you'd have balance sheets jumping all around the place as companies just managed cash on a day to day basis.

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.

[grog454]

Wouldn't the principle be a current liability, and the interest the future liability?

[danielmarkbruce]

No.

[grog454]

For those hoping for more elaboration (including myself):

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.