| Subject: | [socialcredit] To: Tim Carpenter AND Tim Knight | | Date: | Tuesday, May 3, 2005 09:10:58 (-0700) | | From: | William B. Ryan <w_b_ryan @.....com>
|
| In reply to: | Message 1200 (written by Timothy Carpenter) |
(While addressing these comments directly to Tim
Carpenter, I am also addressing them peripherally to
Tim Knight.)
Remember, Tim, we were going to discuss double-entry
accounting as our next step in the extrapolation of
the A+B theorem, you and me together, with me guiding
the discussion.
We never got to that point, for various reasons, but
mostly because you wouldn't do your homework. Now,
you're writing as if you know something about
accounting, but from your comments today, and
earlier, it appears that your understanding is
superficial and confused.
I do not believe it is possible to really understand
A+B, in full analytical detail--which is not required
for most of us--without prior, valid, knowledge of
the rules and procedures of accounting. It is
prefatory (though not sufficient) to UNDERSTANDING
the theorem, as opposed to ACKNOWLEDGING (or DENYING)
its conclusions. Other knowledge prefatory to the
understanding is Calculus, its basic rules, etc.,
which is another subject we could discuss, but likely
won't. I might add, parenthetically, that Douglas
had profound knowledge of both. :-
[CARPENTER] "Depreciation is not a cost, it is about
managing book value i.e. how the resale value of the
asset falls, not how long will the asset last before
replacement."
------------------
-------------------
Depreciation is about the allocation of costs against
sales. It has virtually nothing to do about "resale"
value, or how long the asset will last before
replacement. Balance sheets almost invariably
OVERSTATE the present resale or liquidation value of
its various assets, for the simple reason that the
firm AS A GOING CONCERN is presumed to have greater
value than the sum of its parts.
-
[CARPENTER] "Depreciation is already 'expensed'
against the capital account – you cannot expense it
twice."
------------------
-------------------
Categorically, no, depreciation is most definitely
NOT "already 'expensed' against the capital account."
It has nothing to do with expensing it "twice." Your
response here reflects a profound confusion as to the
fundamental rules of accounting. The Asset account
representing the depreciating item is credited
according to its depreciation schedule. Expense is
debited SIMULTANEOUSLY, in accordance to the rule of
equality of debits and credits. Capital, Assets
minus Liabilities, has been reduced BY THAT
TRANSACTION considered in isolation. Without Sales
there is no Profit. In a simple schedule of
accounts, Expense and Sales are closed directly to
Capital. In a more complex schedule, they are closed
to Capital through intermediate steps through
subsidiary accounts. The result is the same.
-
The very most basic double entry accounting system
has at minimum four accounts, plus a fifth account--
Capital, following Pacioli. Every more complex
system is in extrapolation from the conceptual basic
system:
Assets
Liabilities
Sales
Expense.
The first two in the above schedule are reported in
the Balance Sheet.
The last two are closed to Capital, periodically, as
reported in the Profit-Loss Statement.
-
http://www.geocities.com/socredus/compendium
--- Timothy Carpenter <timbeau_hk@yahoo.co.uk> wrote:
> Hi Jim,
>
> I shall respond in green.
>
> On 2/5/05 4:59 pm, "Jim" <jschroeder@shaw.ca> wrote:
>
> > Hi Tim:
> >
> > I will respond in blue.
> >
> > This example states that the machinery has been
> built with retained earnings,
> > not bank credit. We need to explore further what
> would happen to that
> > machinery and the costs. To say it is a charge on
> further production is too
> > nebulous and needs to be walked through. I
> recognise that a gap exists when we
> > are discussing financing via retained earnings,
> but I want to walk this
> > through as I have seen odd expressions and
> handling of depreciation in the
> > past which I as yet do not agree with.
> >
> > Say you depreciate the machinery. This is to truly
> depreciate it by crediting
> > depreciation and debiting the capital account so
> the asset value of the
> > company declines over time.
> >
> > It is wise to reflect depreciation amounts in your
> costs to build up
> > sufficient retained earnings so the machinery can
> be replaced without calling
> > on additional capital from further share issues
> (dilution). What happens in
> > this case – building up retained earnings - is
> that we repeat the same cycle
> > but this time the company is “saving up” to
> replace the machinery, not the
> > thrifty worker. Once the savings are complete and
> the machinery is replaced,
> > the money is spent on the machinery and yet again
> appears as wages. In this
> > case I believe it is still about retained earnings
> causing the gap.
> >
> > In the above walk through, as time marches on the
> assets of the company are
> > steady inasmuch as the capital equipment value
> decreases over time but cash
> > balances in retained earnings increase, so the
> share price holds steady.
> > Depreciation a/c does not get ‘cancelled’ by costs
> you recoup from sales AT
> > ALL, it is just a sink ledger to allow the books
> to balance as asset prices
> > drop.
> > But the depreciation expense does show up in the
> price. It is added to the
> > cost of goods sold. It is a true cost that must
> be recovered.
> >
> > Depreciation is not a cost, it is about managing
> book value i.e. how the
> > resale value of the asset falls, not how long will
> the asset last before
> > replacement. A computer can last 5 years but will
> be worthless for resale in
> > 2. You depreciate it over 2 years. To remain
> competitive you may wish to
> > reflect the cost in production over 5 years.
> Depreciation is already
> > Œexpensed¹ against the capital account you
> cannot expense it twice. Even if
> > you reflect it over 2 years, you cease to reflect
> it for the next 3...so
> > lowering prices without this cost for those years,
> therefore not absorbing any
> > more purchasing power than was originally
> re-introduced during the spending of
> > the retained earnings.
> >
> > In the first round of production, the retained
> earnings are used to pay for
> > capital equipment that goes into the wages of the
> people who made the capital,
> > so the "deficiency" is gone, but shows up later as
> the capital is depreciated.
> >
> > Agreed in the first part, but not the second. The
> deficiency that occurs later
> > is because the company is retaining earnings, not
> transferring monies to a
> > depreciation account. That account is already
> balanced by the fall in the
> > capital asset account.
> >
> > This is again about retained earnings – people
> wanting a profit “we must have
> > a profit, Mr Bumble”... Profits are saved as
> retained earnings, or spent.
> >
> > That is savings, or retained earnings, but the
> actual deficiency doesn't show
> > up until the physical capital is depreciated.
> >
> > Again, there is no Œdeficiency¹ by the
> depreciation. No money disappears or is
> > torn up.
> >
> > In the first cycle the retained earnings are spent
> on the asset and so the
> > deficiency caused by the retained earnings is
> undone. The people who made it
> > get the money and a lump of metal is now on the
> shop floor to show for it.
> > Over time the business will attempt to recoup the
> retained earnings it spent
> > on it. At the end of it all the company will again
> have retained earnings to
> > the value of the original machinery, there will be
> a worthless worn out lump
> > of metal on the shop floor and the economy will be
> back where it was before
> > they bought the machinery with a positive cash
> balance that has drawn back
> > into the company the money spent to buy the
> machinery . No money has
> > Œdisappeared¹ into depreciation, it is sitting
> there ONCE AGAIN in a tin in
> > the company safe.
> >
> > The issue here is “if they carry on the business
> on orthodox lines”. If they
> > do, the company would have to handle somehow the
> concept of the $1000 house it
> > has as an asset all-of-a-sudden. Note that no loan
> or share issue exists in
> > this example. If the money has gone to another
> planet, then this house as
> > appeared as if from outer space!
> >
> > Read the example again. The loan appeared when
> the man purchased the house
> > (with money from a loan) from the people who built
> it. Now they are in
> > possession of the $1000, and he is possession of
> the house (and he has $1000
> > debt). He now sells them back the house for
> $1000, so they are in possession
> > of the house, and he is possession of the $1000
> (and the $1000 debt). He then
> > takes his money to mars, which is equivalent to
> paying back the debt with his
> > $1000. Now the workers depreciate the house in
> the cost of the shoes without
> > adding any equivalent purchasing power to cover
> that depreciation expense. I
> > will not comment on the other comments you made
> about this example because it
> > appears you missed the loan.
> >
> > I certainly did not miss the loan, and I cannot
> see a) how you think I did,
> > and b) why it matters one jot as the loan no
> longer exists even before the
> > first stitch is sewn.
> >
> > Just to confirm:
> >
> > The loan appears when the man wants to buy the
> house.
> >
> > Man $1000
> > Bank of Mars ($1000)
> >
> >
> > Man builds house, spending the $1000 on builders
> wages.
> >
> > Man $0 + House
> > Bank of Mars ($1000)
> > Builders $1000
> >
> >
> > Builders buy House
> >
> > Man $1000
> > Bank of Mars ($1000)
> > Builders $0 + House
> >
> >
> > Man pays off loan
> >
> > Man $0
> > Bank of Mars $0
> > Builders $0 + House.
> >
> > What we have now is a house with no loan or debt
> against it on earth OR mars.
>
=== message truncated ===
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