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!


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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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Re: Housecleaning for the financial reports

Post by Almut Brunswick »

Dear Sudane,

accounting is not my strongest side (not even in my native language), and in distiction to my dear two friends before, I do not regard your presentation as "crystal clear" - I simply don't get what you want to convey as bottom line. As a non-native English speaker with a quite poor understanding of literary English, please do me (and maybe others) the favour to explain again here or in IM to me without literal artifice what you want to tell us in plain, simple words. I would highly appreciate it.

Thank you!

Almut
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Re: Housecleaning for the financial reports

Post by Sudane Erato »

Almut, I'm sorry, but there is nothing literary about my words here.

To make the point in a nutshell, I will be making changes on our Balance Sheet (the part of the financial report which shows what we OWN and what we OWE) to make it more accurate. Those changes will cause an additional expense every month, for the next 24 months, of about L$20,000.

That expense appears on the second page of the report, the Income/Expense report. It will make our monthly performance look worse, of course. L$20,000 more expense per month than we would have had if I hadn't done this housecleaning. But this L$20,000 is not actual cash in the bank. All the other dollar numbers on the Income/Expense report are "cash in the bank" numbers... but this is not.

I am sorry if that last statement is unclear; I attempted to explain it more thoroughly in the first post.

For the purpose of understand "how we are doing", please mentally improve the results on the Income/Expense report by L$20,000, starting with April 2021. Or even better, refer to the "Land Information Summary" and the chart named "Sim Revenues as a Percent of Tier", as I think these are far better expressions of the health of the CDS economy on a month by month basis than the Income/Expense report is.


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Re: Housecleaning for the financial reports

Post by Lilith Ivory »

Bookkeeping is not my strongest side either but I think I understood what Sudane tried to explain :)

So I will try to summarise what Sudane said. First in english so you can correct me if I got something wrong and also a translation in german

What Sudane tries to explain is that we in the past spent money for the purchase of buildings.
Those expenses were, like usual in RL, not accounted as expenses but as investment.
This means that we now have 20.000 L$ more at the plus side of our balance sheet than we actually own.
Sudane plans to do some Bookkeeper magic to remove those 20.000 L$ from our balance sheet. This means our financial report will for a while look worse than our financial situation actually is. The plan behind this is that in future your balance sheet will only show the money we actually own.

Was Sudane versucht zu erklären ist das wir in der Vergangenheit Geld für Gebäude ausgegeben haben. Diese Ausgaben wurden aber, wie in RL üblich, nicht als Ausgaben verbucht sondern als Investition.
Das bedeutet das wir 20.000 L$ mehr auf der Guthabenseite unserer Buchhaltung haben als wir tatsächlich besitzen.
Sudane hat vor diese 20.000 L$ irgendwie durch Buchhalter-Magie abzuschreiben, wodurch unserer Finanzreport in nächster Zeit etwas schlimmer aussehen wird als unsere Situation eigentlich ist.
Das Ziel dieser Aktion ist das in Zukunft nur noch das Geld in unserer Buchhaltung auftaucht das wir auch tatsächlich besitzen.

I hope this helps :)
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Re: Housecleaning for the financial reports

Post by Sudane Erato »

Agree with Lil, BUT... the amount is about L$20,000 per month for about 24 months... a lot more money. The total to get drawn down through this exercise is around L$480,000.


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Re: Housecleaning for the financial reports

Post by Almut Brunswick »

Thank you, Lilith, for your attempt to explain! And of course Sudane as well.

I try to put it in my own prosaic words now, so you can see if I really understood now what you are doing. Basically it seems to be a system change taking into account that all money spent in SL has no real equivalent value anymore. For the sake of realism, our predecessors had apparently the idea to account building projects etc. as investments and assets. The attempt now is to abandon that concept in order to count only incoming and outgoing money. However, the (actually already spent) money is still listed in the balance table and needs to vanish from there in an orderly way without a final cut.

This is how I understand the procedure:
  • The perceived asset is now treated as a (virtual) debt.
  • This debt needs to be amortised until its value is zero.
  • In order not to turn the balance into the abyss, the debt won't be (virtually) paid in one step, but by an extension of loan in 24 installments.
  • The money used for the installments, however, has not been spent yet and is actually still available.
  • Once all installments have been booked as described, the household will be eventually balanced on a realistic base.
Am I still wrong? 8)
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Re: Housecleaning for the financial reports

Post by Sudane Erato »

Almut Brunswick wrote: Mon May 17, 2021 12:21 pmBasically it seems to be a system change taking into account that all money spent in SL has no real equivalent value anymore. For the sake of realism, our predecessors had apparently the idea to account building projects etc. as investments and assets. The attempt now is to abandon that concept in order to count only incoming and outgoing money. However, the (actually already spent) money is still listed in the balance table and needs to vanish from there in an orderly way without a final cut.
  • The perceived asset is now treated as a (virtual) debt.
  • This debt needs to be amortised until its value is zero.
  • In order not to turn the balance into the abyss, the debt won't be (virtually) paid in one step, but by an extension of loan in 24 installments.
  • The money used for the installments, however, has not been spent yet and is actually still available.
  • Once all installments have been booked as described, the household will be eventually balanced on a realistic base.
This is a quite fascinating view of the matter. Not entirely correct, but, importantly, the last conclusion is exactly correct, and the only inaccuracies come in the details of how it is arrived.

First, "our predecessors" are me. I have always presumed to treat our economy as "real" (which it is...), but how exactly "real" translates into the economy of SL is something that is slowly learned over time. "Building projects, etc" are customarily recorded as assets in the way I described, so I did it that way too. But I now realize that functionally this is less useful.

Next, the List.
  • The perceived asset is not treated as a debt, but rather it remains an asset that we have realized has no value... it is not a debt.
  • This value-less asset needs to be "amortized" (interesting word there... not exactly right... but it will do...) until its value is zero, IN THE RECORDS. In reality, its value is already zero.
  • Exactly, not paid in one step, but rather in 24 steps... but not a LOAN being paid, simply an adjustment of the records.
  • Now... the "money used for the installments...", it has not been spent yet, because it actually WAS spent when the building, etc, was bought. It was spent a long time ago, and we are just now entering that record of expenditure into the books. Yes... years after the fact. THAT was the only time that "money was spent".
And thus, we have the completely true statement that "Once all installments have been booked as described, the household will be eventually balanced on a realistic base."

Thank you Almut!


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Re: Housecleaning for the financial reports

Post by Rosie Gray »

And this is why I consider bookkeeping to be amongst the greater mysteries of the universe, and its bookkeepers the masters of intrigue.
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Re: Housecleaning for the financial reports

Post by Em Warden »

Bookkeeping seems to be a challenge regardless of mother tongue...
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