Housecleaning for the financial reports

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Sudane Erato
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Housecleaning for the financial reports

Post by Sudane Erato »

Unless you know bookkeeping, this post may be a bit wonky. But its rather important, because for the next two years, what I'm explaining here will cause an apparent depression on our reported financial results of about US$80/month. It's not "real" money, but it's going to look like it is, so that's why this needs explaining.

Confused already? That's understandable. I'll try to make this a bit clearer. But if my explanation here leaves you still confused, don't hesitate to ask me about it directly. The world turns on money, and the money world turns on double-entry bookkeeping, and the medieval monk who invented it didn't create a very transparent system.

This whole matter came up because there's an interesting and wonderful proposal afoot to replace the Museum of Contemporary Art (MoCA) in NFS. It dawned on me then that the MoCA that's there now was commissioned many many years ago by the community, who hired an SL creator to make it. I don't remember exactly how much we spent then... perhaps $80,000. But when we spent that money, as is usual in RL, we did NOT record it as an expense. We recorded it as an "investment". Instead of appearing on our financial report that month as a BIG additional expense, it appeared as a new line on the Balance Sheet, the first page of the report, as a "Building ------- 80,000" (if that's what the amount was). And the bank account got less by 80,000, of course. But... no effect on the expenses.

Well, that's the way they do it in RL. The idea is that with expenses, once the month is over, the value you got for the paying of money is gotten and gone. But with investments, you still have the building, and its still worth 80,000! So the value lives on, even though you did spend that cash. In theory at least, you could sell that building and get your cash back (purely in theory).

So over the years, that line on the Balance Sheet grew (we bought other buildings), so on last month's financial report, it was $125,013. And, lo and behold, over the years other "investments" appeared as well. CDS Archive got value of $6033. Software $62,394. Equipment $40,532. And a category that I can't recall what we put in it is Other Non-Current Assets (which I think was website-related) was $345,000. In total, the sum was $578,972, or about US$2400 at the current L$ sell rate.

And then along comes the proposal to replace the MoCA. A really great proposal, which I surely support. But I realized that all these assets on our Balance Sheet, OTHER THAN CASH and LAND, really have no residual value. They really should be removed, as they display an unrealistic picture of what the money value is that our community owns.

Well, how do you "get rid of assets"? Double entry bookkeeping has strict rules... every time you ADD money one place you have to SUBTRACT money someplace else. That's why they call it a Balance Sheet... everything has to balance! So, removing assets from the balance sheet is done by expensing them. As I said above, this transaction is not "real" in the sense that we are not actually lowering our bank account (Rudeen's pocket) to do this. But we are recording a real expense. And it means that our report each month on income and expenses will show this additional amount as an expense.

Now, we could do this in one transaction. April might show this HUGE expense of L$578,972! That is TWO full months of TOTAL CDS expenses. It would be a horrible distortion of our financial affairs for that month, and for that term (which is how we organize our finances... by 6 month terms). So instead, we've decided to spread the distortion caused by this odd housecleaning transaction over 24 months, with a timeout for the month when our large web-hosting bill comes due.

So, I've moved all that money into the "Other Non-Current Assets" account, and for the next two years or so, there will be an extra expense appearing on the Income/Expense page of our financial reports, a line labeled Miscellaneous General and Administrative Expense of L$24,124. Sadly it will cause the financial reports to appear more negative than they really are. And it will slowly reduce the value in "Other Non-Current Assets" to zero. But you should at least know that we are not spending that extra 24,000 out of Rudeen's pocket... it's just a housecleaning item that I've put there to get our reports more "real".

As noted, ask me if you're still confused, and I'll try to improve my explanation!


Sudane.................
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Em Warden
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Re: Housecleaning for the financial reports

Post by Em Warden »

Sudane, that was the most pedagogic, well presented and easy to read explanation to book keeping jungle expeditions I have ever come across.

Financial administration always make me shudder, but this time it was very interesting and crystal clear, as well as crystal transparent to anyone with a suspicious mind :)

THANK YOU!
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Rosie Gray
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Re: Housecleaning for the financial reports

Post by Rosie Gray »

I've always had a hazy understanding of how this kind of thing works, so your explanation has cleared most of that haze away. I don't think I could do that bookkeeping myself, but now I get it much better how it all works! Thank you.
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