The Danger of Shell Games
This appendix is longer than I initially intended. I’m sorry about that. I want to share one more thought with you, however. And I think that it’s an important thought, so please stay with me.
You could use the accounting knowledge that this appendix imparts to do the bookkeeping for a very large business. As crazy as it sounds, if you had 3,000 rowboats for rent — perhaps you have rental outlets at dozens of lakes scattered all over the Rockies — you might actually be able to keep the books for a $200 million–per-year business. You’d have to enter many more transactions, and the numbers would all be bigger, but you wouldn’t necessarily be doing anything more complicated than the transactions in this appendix.
Unfortunately, the temptation is great — especially on the part of financial advisors — to let the money stuff get more complicated as a business grows. People start talking about sophisticated leasing arrangements that make sense because of the tax laws. A customer or vendor suggests some complicated profit-sharing or cost-reimbursement agreement. Then your attorney talks you into setting up a couple of new subsidiaries for legal reasons.
All these schemes make accounting for your business terribly complicated. If you choose to ignore this complexity and go on your merry way, very soon you won’t know whether you’re making money. (I’ve seen plenty of people go this route — and it isn’t pretty.) On the other hand, if you truly want to do accurate ...