Principles
Obviously, accounting principles and standards apply to Rent to Own as well as all other businesses. You may at first, think this discussion dry and unappealing... but then think of how much fun those execs at Enron, Global Crossings, and other companies are having right now. Do you want to see how they got in trouble? Read on.

Long ago, I was perplexed to discover that there was no “set” of accounting principles that was presented in one form, such as you might find in the Bill of Rights. This is not to say that the principles are incomplete or vague, it only means that the definitions of accounting principles can be presented in various formats, which may lead to confusion for some people, especially beginners.

Be that as it may, accounting principles are absolutely necessary when preparing financial statements, just as the rules of a particular card game make the card game possible in the first place. Accounting principles are like the glue that holds the accounting process together. For example, financial statements have an overall objective, which is to provide the user of the statements with a useful tool for making business decisions.

In order to be useful, accounting information must have certain characteristics, such as being dependable and practical. To be dependable, the accounting information must be unbiased, accurate, and verifiable. To be practical, accounting information must be predictable, prepared in a timely fashion, and be able to provide meaningful feedback. Additional characteristics are that the accounting information must be consistent, comparable, serve a utilitarian need (such as cost/benefit), and make a material difference.

Besides characteristics, certain operational rules are established as to when revenue and expenses are reported:

• How expenses are matched to revenue
• What to do when a choice can be made that might overstate or understate figures
• What information should be disclosed so that the reader will fully understand the circumstances under which the information is being presented.

There are also basic assumptions that the reader can count on, such as:

• The information is related to the business entity only and doesn’t have any unrelated information mixed in
• The business is a going concern and won’t cease operations soon
• The financial information presented is measured in specific time intervals such as a month, quarter, or year
• The financial information is using a certain unit of measure such as dollars, not board feet, etc.
• The information is presented at historical cost, i.e., when received, paid, or incurred
• The method of accounting being used is double-entry and not some other method.

Standards
The above are accounting principles as opposed to accounting standards. An accounting standard is an agreement as to how an accounting issue will be treated. For instance: a standard might state what type of inventory system is appropriate to use for a certain type of business; how capital leases should be recorded; how many years intangible assets should be amortized; what methods of depreciation should be used, and so on. There are literally thousands of accounting standards that have been issued over the years. These standards are constantly being revised or discarded as they become outdated.

Accounting principles are discussed in detail in Phase II of my Accounting for Non-Accountants online course at http://www.reallifeaccounting.com

Extreme Peril
If you want to play the accounting “game of cards”, you must become familiar with the “rules of the game”, which are accounting principles and standards. If you choose to not play by the rules, you do so at your own peril, as we have seen recently in the corporate accounting scandals.

Think for a minute about how those corporate executives ended up in a pack of trouble. You don’t have to know the sophisticated intricacies of their schemes, just think of the fundamental accounting equation:

ASSETS - LIABILITIES = EQUITY

Let’s set up an example equation that will be known as “The Truth”

If we decide to arbitrarily not disclose that some of our Accounts Receivable are not collectible then our assets become overstated, say $150 instead of $100. At the same time, we decide to not include some of our debts then our liabilities become understated, say $25 rather than $50. When we put together the new equation that will be now known as “The Lie”, notice how different the result in Equity is:

$150 - $25 = $125

If you were an investor, wouldn’t you be more impressed with a company that has $125 million in equity than a company with $50 million? If you were a banker, wouldn’t you be more willing to make a loan to a company with $125 million in equity than $50 million? Wouldn’t you, as a board of director’s member, be more impressed with a CEO who built $125 million in equity for the company than $50 million?

The only problem is, "the chickens always come home to roost". That is to say, the creditors will only wait so long before they file charges to get their money back. When that happens the whole deck of cards comes crumbling down. Cooking the books was so easy when it happened and usually the perpetrators were thinking the business would eventually work its way out of the hole. Falsifying financial statements to sell stock or obtain bank loans is fraud.

As an RTO business owner, you have the right and the obligation to put your best foot forward when presenting your financial statements to a prospective owner, banker, or board of directors. Remember, it is at the beginning of the slippery slope that someone decides to ignore accounting principles and standards. Woe be it to them, if they do.