Yes, at the time of the initial transaction the borrower would not have a liability on their balance sheet that included the interest due.

Over the course of the borrowing period the borrower would accrue interest expense commensurate with the passage of time that would increase the borrowers total liabilities. The author misunderstands the fundamental accounting definitions of liabilities (and also assets). Liabilities (under US GAAP but same core idea under IFRS) are present obligations. At the initial time of borrowing the borrower does not have a present obligation to pay interest on the liability. Similarly, an asset is a present right, and at the time of initial borrowing the lender is not owed the interest.

It's not the worst thing I've read, the author has clearly spent time learning things in good faith. That said, there are lots of indicators the author is not an expert in accounting / finance.

Most of the really stupid stuff written is written in good faith. It's not an excuse. There are many good books written about the financial system, accounting, etc. Rather than writing just another (incorrect) blog post, why not point to the good sources of information?

I didn't say it was an excuse. There is value in articles that correctly synthesize fundamental concepts in ways that bring in new learners who are curious and open to learning. There are things the author gets right, even if they are a bit facile.

You might be right. It's also possible you are wrong though. Some things have a lot of moving pieces and if one piece is off the entire thing is wrong - so you have to commit to getting a grounding that is quite thorough to have any understanding at all. I'd argue accounting is one such subject, finance is one, the legal system is one, software engineering is debatable, math isn't one.

I am a CPA by training originally, but have spent most of my time in operational finance roles for PE-backed technology companies. While my work is all finance and accounting related, I mostly work with SQL and Python day to day creating internal applications for things like ARR etc.

I agree completely on your "thorough grounding" comment. I spend a lot of time explaining to finance people how tools like python, SQL, AWS stuff can be leveraged in simple ways for analytical purposes, and I spend a lot of time explaining to technology people what all the finance and accounting stuff is really about. In both cases my experience is it always comes back to explaining fundamental ideas or concepts over and over, but applying them to different situations and contexts (I do so much more confidently when explaining accounting and finance stuff since I have deeper education & experience there).

A lot of times these fundamental ideas and concepts can be explained very simply and intuitively using toy examples. the problem is it can take years and years to build up enough experience to really separate the signal from the noise and see clearly what is truly fundamental (yes that's where formal education is helpful but it can be hard to really grok absent experience imo... In the same way learning a programming language can be easier if you just try to build something).

A deep understanding of fundamental concepts is what allows you to pick apart very complex and novel problems into it's component parts. A deep understanding of fundamental concepts is one of the things that separates professionals from non-professionals in my opinion.

That sounds like it would make one hell of a tech talk. I have a gut feeling many readers (especially lurkers) of this very thread would gladly watch the recording.

Common and/or various ways the two groups misunderstand each other, and how you help them to anchor to the underlying base concepts? Yes please. For example, we know that interest accrues over time, but we still use shorthand for the annual interest as a step function because it makes intuitively more sense.

There isn't a short cut. You just have to understand both topics.

Going in without understanding the underlying basic concepts is, just... well let's just say I completely agree with your comment!

Daddy chill

Rather than leaving some oblique references to "many good books", why not provide the actual references?

Because not everyone can read the source. Hence might be better to say let us have better summary or take, not just post to the source guy.

The $100 does become a liability on your balance sheet. You’re right that interest doesnt and is an expense.

In the context of this post, does it matter? He’s not teaching bookkeeping here. He’s explaining the time value of money.

It matters because it screams "I don't actually know what I'm talking about". And it's not just a bookkeeping error. It's a conceptual error. It's a complete misunderstanding of the time value of money.

As such, it's a self indulgent piece of writing.

Seems a little harsh and unkind over what's just a fun article. It's not a news publication or a textbook, it's Phrack, lol. I thought it was neat.

It's a blog post. And the criticism is on a message board... It's par for the course.

Classifying Phrack as a blog is about as accurate as classifying future interest payments as liabilities.

He's explaining the time value of money but uses an example that accrues interest before any time has passed?

He's explaining a bond, ie. it's a promise that you'll get back X+Y in Z years if you give up X now.

She

If you take that logic to its natural conclusion HN would shut down.

Why not? One of these days YC is gonna fund something worse than Flock and get itself on the Senate's radar.

the sooner the better

You mean like when YC-funded startup OpenAI CEO Sam Altman appeared before Congress, or when Garry Tan, YC president and CEO went before Congress and talked about YC startups? They're definitely aware of YC, in any event.

touche

the US treasury secretary was on calls about whether to bail hedge funds out of gamestop to prevent cascading financial system failures. arguably there is nothing that is too dumb to be written about finance. dont let anyone discourage you.

Various government agencies are on calls to bail out various players in the financial system all the time and will continue to be. That isn't dumb per se.

some things are about other things too. gamestop was peak dumb. nobody knows anything.

Any entity with a bunch of counterparties and large numbers who blows up will potentially be saved.

Alas, yes. One of the perils of giving the relevant authorities too much discretion.

in retrospect i should have said "any entity who has GS as a counterparty will be saved"...

Not at all. Goldman Sachs had and has plenty of regular folks as counterparties for their credit cards (branded as Apple Cards, I think). These regular folks don't get bailed out.

See also https://en.wikipedia.org/wiki/Archegos_Capital_Management which had Goldman Sachs as a counterparty and was not bailed out.

It was tongue in cheek. But, when someone says that, they generally mean a counterparty who owes money to GS, not the other way around. And I don't think goldies lost money on archegos.

> But, when someone says that, they generally mean a counterparty who owes money to GS, not the other way around.

All the examples I brought up are about counter-parties owing money to GS.

> And I don't think goldies lost money on archegos.

At most trivial amounts, yes. Goldman got out of the position really quickly. But your earlier claim was a bit more universal than that.

Goldman ain't stupid: if there were a treasury 'put' on Goldman's counterparties (and Goldman knew that), then Goldman would exploit that and monetise that 'put'. Instead of getting out early as they did in real life, they would demand and get ridiculous compensation for staying in the position, and then enjoy the bail-out.

(Disclosure: I used to work for Goldman for a few years, but not as a proper banker. I liked the place, but I also think they are much less important than people think they are. And I suspect Goldman is partially playing into the perception, because being a villain is cooler than being a middling also-ran bank.

You might like the book 'What happened to Goldman Sachs'. They have never been the same since the IPO in the late 1990s.)

You are fixating on one tiny point which isn't really that important within OP's ... errm "opus".

Why not critique the entire work?

Anyway:

I borrow 100 from someone. I am now in debt and they are in credit - to balance, both are 100.

However, they require a return on investment - usury: 10 for 100 (or a 10% margin - call it what you like).

When I take out my loan, I am in debt for 110 and they are in credit for 100 with a promise of 10 later. So we have some accounts - my one account is 110 in debit (I borrowed 100 and promised to pay 10 on top) and they have two accounts - one for the principal (100) and another for the 10 interest. To me, in this case, the principal and interest are part of the same account but to the lender they are separated out because the interest is probably taxable as income.

However, it might be the case that I can set off my debt or the interest on my debt against some tax. In that case I will maintain two accounts - the principal and the interest.

All those interests will also end up in additional accounts related to probably banking.

I've probably pissed off a few accountants with my choice of terms but in the end I do understand how fiat money works.

What gets on my tits is assertions such as "People who don't understand ..." with no working.

Yeah CPA here. On the day you take out the loan you're not in debt 110, you are in debt 100; you would accrue interest expense over the term of the loan. What if the lender called the loan day 2 for some reason? You wouldn't pay 110, probably just 100 plus one day of interest. Goes back to fundamental definitions of financial statement elements. Liabilities are present obligations.

Anyways, recognizing the interest over time would debit an expense account and credit some liability account... Could be the same account as the loan or could be an interest payable account, doesn't really matter in the context of the example.

Also you would not be "in debit"; the liability is on the credit side of your balance sheet.

You failed to check the terms of my loan and assumed it was on an interest basis. I literally told you I borrowed 100 and promised to pay 110. I also failed to note a term and you also assumed there was one. I do mention interest later on so that's a fair assumption, if misguided.

I might be guilty of abusing an industry term or two 8)

You said interest. It's right there. In practice all loans have interest. No matter what you call it, it's interest as the word is understood in finance.

What gets on my tits more is people who are pretty bright in one field (hacking) thinking that entitles them to just brute force their way through reasoning about some other field (finance) that in their arrogance they think is simpler.

It bothers me that finance people think they’re smarter than everyone when all their jargon bullshit boils down to SQL statements any senior DB person would understand.

Totally. Tech people don't have jargon that boils down to something simpler, nope. No "artificial intelligence" or "machine learning" or "back propagation" or "neural networks" or "big data" or "scaling up" or (one could continue for days....)

SQL seniors can understand anything in finance. Senior finance people would be baffled from chapter 1 of anything serious in CS. That’s the difference between general purpose programming and a math DSL.

My anecdotal experience is that both of those statements are untrue.

This is laughable.

Which part? You can’t find any mainstream finance concept that can’t be expressed in SQL, or it’s laughable that finance people don’t understand computing? Which part is laughable, would love to know.

... and yet somehow I have muddled along running an IT company for 25 years (I'm the MD) and I have a fair idea about finances, including surviving some rather unpleasant financial environments that have rocked up over those years.

One month in 25 years, my partners and I didn't pay ourselves. That's as close as we have got to having issues. We keep six months payroll, corp. tax and VAT in readies. The property mortgage is nearly paid off.

I'm no hacker and I treat finances as a means to an end - no more and no less.

This comment makes it very clear to me that we are not talking about the same things, lol.

You can't have taken a class on finance and/or accounting and passed it. This is 101 material, literally. Read the CPAs take.

And, in my initial comment i explicitly point out the error - the interest amount should not be there. People don't tend to show the working for zero * x = zero. This misunderstanding of a very fundamental piece makes any material on this topic by this author not worth reading. It might render everything they write not worth reading because they also don't know where their circle of competence stops.

Not OP and not an accountant.

I see the reasoning for accountants keeping future liabilities off of the balance sheet. I do this myself in multiple contexts.

Still, when making decisions about whether to take out or grant a loan (personal or business) I need to consider future "value" and cash flows. To someone running a business this is probably more important than the balance sheet. So I think the interest recording criticism is valid but relatively minor in the context of the whole article.

It's not keeping future liabilities off balance sheet. It's marking them at their current value. Same thing for assets. Nobody wants to see a balance sheet where 30 year government bonds are written down at the sum of all interest payments to be received plus the principal. If you did that, you'd have balance sheets jumping all around the place as companies just managed cash on a day to day basis.

The vast majority of the article is trash. It's wrong in many situations. The only reason the accounting issue was brought up is it's early, and so incredibly stupid that it renders the rest of the thing untrustworthy. The rest is bad. If you don't think so, you don't know the subject and are learning from bad sources.

Wouldn't the principle be a current liability, and the interest the future liability?

No.

For those hoping for more elaboration (including myself):

1. Only the portion of the principal that is due to be paid within the next 12 months is considered a "current liability".

2. Interest is a "future cash flow" that becomes a liability as it accrues over time.

But it says 'calling all hackers' so it must be the inside scoop.

Balance sheets and accounting are made up. You know in maths how you could do calculations on two different ways and arrive at the same result? That's what the author is doing. "Proper accounting" is how you do it, but you could actually just think of it this way. It makes no difference to the end result.

Epicycles in a geocentric model of the solar system is another way of looking at planetary motion. It breaks down due to the required addition of complexity to explain discrepancies between the model and truth, which is the same for this particular situation. In addition to what the CPA said, how does this model work with callable, putable, or floating rate bonds where the interest payment is not known up front?

I understand there's a reason why accountants do things the way they do. But hacking is about looking at things differently. To use your analogy, one can definitely gain insight into planetary motion from a geocentric model even if it's not the best model for all purposes.

Generally speaking, "hacking" is about thinking things in a different way that is generally better or at least more useful in a certain situation. The author's explanation is strictly worse.

It's just another confident fool spouting off about a topic they don't understand. The article is 90% trash.

You won't end up with the same result, that's the problem.

It was quite a good article if you don't care to nitpick over terminology. Too many technical people avoid the business side of things because they find it boring or are too cynical to engage with it, which limits their impact. Instead we get sleazebag money guys running the world.

The people who are in a position to influence the world are those who understand it, and if this article nudges people with a hacker mindset towards having more influence, then that's a good thing.

> The people who are in a position to influence the world are those who understand it

are those who can pay people who understand it*

>> Instead we get sleazebag money guys running the world.

Absolute nonsense. To the extent some small group of people have an outsized influence it's politicians and the rich of the rich (who at this point are overwhelmingly tech guys).

A very nit picky comment.

In avg, the normal way it creates the liability over time and i would argue that in a colloquial its absolutly fine and doesn't change the message at all.