Since its invention, the practice of accounting has been used by various States to keep track of concepts like taxation and State revenue. In fact, according to official history, records from Ancient Egypt show that economic activities were primarily performed by the State, requiring the invention of the Scribe to keep track of taxation on crops and other transactions (1). In China, the Tang Dynasty (618 – 907 CE) adopted many innovations in accounting from the Arabs. These innovations enabled the Tang to implement extensive taxation systems and centralized control of land, leading to the establishment of a massive bureaucracy that employed many accountants (2). The development of state-chartered joint-stock companies eventually necessitated chartered professional accountants (CPA’s) that could handle the increasingly complex commercial world and were up to date on the latest changes in legal codes that affected business. The State, in all its forms throughout history, has skewed the development of accounting in one way or another; up to and including modern times.
Today, corporate accounting -the State being the largest corporation- focuses on taxation primarily. Some accounts exist for the purpose of classifying transactions to be taxed, others have rules that are dependant on which chartered entity your business is classified as. The legal codes governing these accounts and entities are constantly changing. All of this makes for a complicated web of bureaucracy that must be trudged through to conduct business in the Public. This essay is not intended to weave some grand conspiracy, as accounting serves many other important functions besides taxation, and there is nothing inherently wrong with setting standards for the profession. I wish to show how much simpler and more beneficial accounting can be when it is not beholden to the whims of the State.
To use the legal commerce system for business, to work in the Public (Corporate) Realm, you must register an ENTITY with the government of the country you reside in. In Canada, there are three main categories your entity may be classified as. They are: Sole Proprietor, Partnership, and Corporation. Each category provides a ready-made structure of rules and standards that govern which accounts your entity can use, how it must compile reports, how your business is to be taxed, and more. The entity that is registered to you at the time of your birth – the “person” – is a Sole Proprietorship (3), so you can use it without having to register a new entity. Just conduct business under its identification number (SIN) and report all compensation as “income” to the authorities. A Partnership is formed when two or more persons agree to do business together. Each person is taxed individually, and unless the business is classified as a limited partnership, all involved are equally responsible for liabilities incurred while doing business. For accounting purposes, Sole Props and Partnerships must be considered a separate entity from the persons that run them. However, they are not considered legally separate. The third option is to form a corporate entity that is legally separate from your personal one. This way, the liabilities and tax burdens of the business are kept within the entity and are not the responsibility of those who own it/ invested in it (Shareholders). The usage of some accounts varies depending on your category. For example, there are some accounts that only exist within the Corporation’s framework; you wouldn’t be using an account for Stocks in a Sole Prop or Partnership.
Categories aside, there are other rules for taxation that must be taken into consideration. Let’s make an example of a Canadian farm. In Canada, farms are one of only three types of businesses that are allowed to use Cash accounting, instead of Accrual. Should a farm decide to use Cash accounting, there are then rules applied to certain accounts. For instance, if a farm prepays some expenses – like insurance, animal feed, etc. – and that expense relates to a period longer than one year from the end of the fiscal year, that cost is non-deductible until the period it is related to. If the farm incurs losses at year end, an adjustment may be made to the loss if there is inventory on hand (4). This adjustment varies whether the inventory was purchased – Grain, fertilizer, fuel, etc. – or if it represents livestock. The farm may elect to take some or all the value of the inventory into income consideration if it is to the farm’s advantage; there are, of course, rules on how the inventory can be valued. Any inventory taken into income in one year must be deducted from the next. Animals raised to sell as pets, as some farms do, must be reported on a separate form from the general farm income. If the farm would like to acquire government subsidies, then income must be further separated into different accounts; not all types of income are accepted by the programs (5) The same goes for expenses considered for the subsidy. As you can see, there are times when multiple income accounts are needed for one business because of the web of rules surrounding the taxation of income. Of course, changing your business’s category can influence all these rules, if not nullifying them completely.
Are you dizzy yet? This is only an infinitesimally small piece of the wild world of corporate accounting! When things are this complicated, it necessitates the creation of a “profession” wherein people are trained specifically to untangle the mess. All the while, the inner workings of this profession are occulted from the regular folk behind strange words and math equations known only to those men and women who practice the craft. Many of them, intentionally or not, take on the archetype of the Manipulator – to get Jungian about it – a shadow side of the Magician archetype (7). They give away little information, and charge heavily for what they do give, which is just enough to show their superiority. This is something that rings true in any profession, from doctors to architects to lawyers to politicians.
When you dissolve your corporation, when you stop working under your SIN and begin doing business as a man or woman with other members of mankind, you are working in the Private Realm. Here, there are no Corporations or Sole Props or Partnerships (in the legal sense). There are no taxes to be paid, no authorities to report to. Your accounting is done with the purpose of keeping track of the health of your business, so that you and your community can thrive. The accounts you use will be those that benefit your business the most. If you chose to track different types of compensation separately, it could be because you wish to know which types are the most profitable to you, but not because the Canada Revenue Agency (CRA) demands a cut of your labour. Due to this, many accounts used in the Public Realm are unnecessary in the Private. In fact, you may find that many businesses need only a handful of accounts in their operations. As you can imagine, this changes accounting from an occult profession into a task that anyone could do. It brings accounting back to its roots, which is tracking compensation and expenses, and compiling that information into reports that show you and others how business is going. Ok, maybe a little divination as well. Predicting trends in business is a useful skill!
All that being said, there are other reasons that accounting is regulated in the Public that need to be addressed in the private. One reason is that dishonesty and inaccuracy in accounting certainly happens, as there are those out there who “cook the books” to hide information from authorities. In my opinion, this will happen less and less as people realize that they no longer have to fear the boogeyman. It will then become apparent that cooking the books only hurts yourself. It paints an inaccurate picture of your finances, which leaves you unable to plan properly. You may also gain a reputation of being untrustworthy, and you may lose investment opportunities. Integrity and reputation are of the utmost importancein the Private Realm. Another reason is consistency in accounting practices, so that the information generated by accounting can be read and understood by everyone. If every business were to create its own version of accounting, it would be difficult for them to communicate financial information to each other. Having an agreed upon standard for the accounting practice is essential for effective communication. Organizations like CPA Canada came into being for this reason, as ineffective accounting methods were disposed of and a framework for effective methods was developed over centuries of trial and error.
The Future of Accounting in the Private Realm
As we move into the era of freedom and prosperity that many have envisioned, it will still be important to have a standard for accounting practices. I imagine that the CPA Canada’s of the world would still exist in some form; perhaps as something akin to guilds. Without the mechanisms in place today that allow businesses to artificially stay afloat, the organizations of tomorrow will have to rely on high ethical standards and good business practices to remain viable. There’s only so many ways to skin a cat, and while each organization will add their own flavour to the mix, the most successful ones will be those that make use of the most efficient accounting practices.
Rest assured Accountants, our services will still be needed in the Private Realm! Just because a task is simplified, does not mean that everyone will want to do it. Sometimes, it’s all a man can to do keep track of daily business dealings. Recording and interpreting finances is just too much extra work! So, there will always be a demand for people to do that work. There may be some specialized forms of accounting that disappear, Tax Accounting being an obvious one; but others, like Forensic Accounting, will still be as valuable as they are now. Honesty and integrity will be just as important for the men and women acting as accountants as it will be for the organizations that we may work with. Cooking the books, skimming funds off the top, or other such greed-driven practices will only destroy the prosperity of everyone around us, which will lead to our decline as well. If we’re not found out and shunned by our communities first, of course.
As the Great Awakening spreads about our realm, a new way of relating with people and conducting business is coming into view. This Golden Age of freedom and integrity in business can only be attained if people working in the private now can succeed and set an example for future generations. We, who act as accountants, have the opportunity to be on the forefront of this change; we can use our skills to help ensure these new business pioneers prosper! Accounting’s development may have been skewed by the need to cater to the State as well as business, but going into the future it can focus on making men and women wealthy instead of nations and States. I feel accounting will find plenty of reasons to exist in the new era, so long as it continues to be a valuable service to mankind.
References:
- A Global History of Accounting, Financial Reporting and Public Policy: Eurasia, the Middle East and Africa. Edited by Gary Previts, Peter Walton and Peter Wolnizer
- Audit Analytics: Data Science for the Accounting Profession. J. Christopher Westland
- https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/it526/archived-cash-method-inventory-adjustments.html
- https://en.wikipedia.org/wiki/Sole_proprietorship
- https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/rc4060/rc4060-03.html
- https://www150.statcan.gc.ca/n1/pub/96-325-x/2021001/article/00015-eng.htm
- King, Warrior, Magician, Lover. Robert Moore, Douglas Gillette
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