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Sunday, 16 August 2009

Fool proof accounting

Hi Motley Fool,

[Warning to Market Monkey: Do not read the following. If you do, you will turn into stone.]

As I was saying my dear Motley Fool,

I will teach you Constant Item Purchasing Power Accounting as defined by no other than our well known

The Motley Fool

Here we go: (this is what you call a liberal translation of the Motley Fool´s teachings about accounting. This translation is from The Motley Fool´s impeccible English to GobblyGook as sputtered by The Deluded Monkey.)

Accounting is double entry: For every debit there is a corresponding credit.

According to the Motley Fool

any particular entry

"should be worth more the next year due to the currency being worth less."

The Motley Fool´s exact words in inverted commas.

Since accounting is double entry the Motley Fool´s words hold true for BOTH sides of each set of debit and credit entries.

That´s it.

That, in broad principle, is the IASB´s Constant Item Purchasing Power Accounting.

"Due to the currency being worth less" all accounting items (entries) "should be worth more the next year" as per the Motley Fool.

There are three types of items in the economy:

1. Variable items. Cups etc. Their values are generally set in the market where inflation is taken into account in the price.

2. Monetary items: money, loans, etc. They cannot be inflation-adjusted. Thus you have a net monetary loss or gain.

3. Constant items: eg. salaries, capital, retained profits, etc.

As you know the real value of your salary is destroyed if it is not inflation-adjusted every year.

The same is true with capital and retained profits.

There you are: Constant Item Purchasing Power Accounting as per The Motley Fool.

Motley Fool, you are a genius!

Long live The Motley Fool!!

Kindest regards,

Deluded Monkey

PS: The Motley Fool´s famous statement:

"should be worth more the next year due to the currency being worth less."

signalled the end of the 5 century old Historical Cost paradigm.


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