Accounting is a Closed System: R&D Example

The End of Accounting by Baruch Lev and Feng Gu takes a rather negative approach to exploring the logic supporting accounting, but in the process also offers some great explanations. As it relates to building financial models, understanding how financial statements relate to one another is paramount, and in this way the book is very helpful:

By the structure of accounting procedures, what affects the income statement also affects the balance sheet, and vice versa. The immediate expensing of R&D, for example, depresses earnings (income statement) as well as assets and equity values (balance sheet). For better or worse, accounting is a closed system.

Source: Baruch Lev and Feng Gu | The End of Accounting | P. 35 | 06/02/2016 | Visit