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Write 2 page essay on the topic Accounting and the saudi stock crash in 2006.However, using principles of financial accounting of companies to evaluate the financial position of countries is not appro
Write 2 page essay on the topic Accounting and the saudi stock crash in 2006.
However, using principles of financial accounting of companies to evaluate the financial position of countries is not appropriate and the conclusions in the article are incorrect due to several reasons.
Firstly, the author says that the US has taken on too many liabilities and will not be able to cover them with the existing assets. Using the accounting equation, Assets = Liabilities + Equity, this means that from financial standpoint, the US is in a negative equity position. This is in contradiction to the fact that the US GDP has continued to grow positively since the last quarter of 2009 (Trading Economics, 2011). It is therefore evident that using financial accounting principles to evaluate countries is not correct. The underlying reason is that the asset and liability position of a country is quite dynamic. The liabilities increase when government raises money from the market by selling bonds. however, unlike most companies, the government is much more active in buying back these bonds from the same entities (banks) when it wants to reduce the money supply.
Secondly, the author’s key assumption is the increased long-term liability on one side has been balanced only by cash. However, the government has used the liability to increase its other assets too. It has increased the money supply in the market to spur growth in the economy. This increased growth will bring higher demand and therefore higher revenue to the government.
Next, the author assumes that the liability taken up now will not be able to be met through existing assets. However, the government has several ways to increase their revenue to meet the liabilities. It can increase taxes and/or reduce spending. In the case of a company, it compares to increasing product prices and reducing costs. For a government, it is much easier to take these steps than for companies which are bound by the competition and internal fixed
