Hosting and GAAP Accounting: Like Toothpaste and Orange Juice

September 6, 2007

Hosting and GAAP accounting go together like toothpaste and orange juice.

If you're confused go brush your teeth and drink a big glass of orange juice. I've held out as long as I can, but I just cannot restrain myself from a post or two about the hosting business and accounting. So if this will make your eyes roll back in your head, please stop reading now and click here before you keel over.

In many ways, good ole GAAP just doesn't treat the hosting business fairly. Relative to accounting, hosting is a new phenomenon with roots dating back only into the 1990s. This is ancient in Internet time but double-entry accounting dates back to the 12th century, and the first accounting textbook describing the double-entry system was penned by Luca Pacioli in 1494. The double-entry system was used because mathematicians denied the reality of negative numbers until the 16th century and the double-entry system was used as a workaround for the lack of negative numbers.

So, why must we account for paradigm-changing Internet businesses with an archaic 800 year old math system? It's a classic example of the old "square peg – round hole" cliché. Toothpaste and orange juice.

Applying this 800 year old system to the hosting business often paints a flawed picture of the financial position of a hosting company. And there are a lot of folks in the financial world that either can't understand this or don't want to understand this by thinking outside the normal accounting paradigm.

I'll blog about two examples of this: 1) Net Income and 2) Current Ratio. My next post will cover Net Income and we'll discuss Current Ratio thereafter.

-Gary

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