Debits Don’t Equal Credits
by Ron Baker
The present accounting model is over 500-years old and it is in bad shape. The traditional Generally Accepted Accounting Principles (GAAP) financial statements are based upon a liquidation value of a business, essentially historical cost assets less liabilities—an heroic attempt to assign static value to a dynamic concern.
The balance sheet dates from 1868, while the income statement from before World War II. The P&L statement was set up to account for the most important cost in an industrial society: cost of goods sold. But in an knowledge economy, cost of goods sold&mdashor cost of revenue—is less meaningful, with Microsoft averaging 14 percent of sales, Coca-Cola roughly 30 percent, and Revlon 34 percent.