3. A whirlwind tour of accounting
accounts are made up of two parts
· a Balance Sheet, which shows what a company owns at any one time
· and a Profit & Loss Account, which shows how much profit (hopefully) a company has made in a period
Now, transactions affect these in different ways.
For example, if a company sells
something (for cash and for more than it costs) this will have two affects
1. It will make a profit, which is reflected in the Profit & Loss Account and
2. It will increase the amount of cash that it has, which will affect the Balance Sheet
So what we need is a method of doing both these things at the same time....I know, let's invent Double Entry Bookkeeping.
What we could also do, to make sure that we reflect both things in our accounts, is make things that we own a positive number and profit a negative number, so that when we add all the transactions together, they cancel each other out.
Logically then, things that we owe to other people will be negative numbers and costs will be positive numbers.
Next, we need snappy titles for positive and negative numbers.
Hmmm....I know, let's call positive numbers Debits and negative numbers Credits, not great, I know, but we can get the marketing guys to think up something better, before we start selling our great new invention.
So, all we need to do is remember that Debits are good on the Balance Sheet, because they represent things that we own, or amounts that people owe us and bad on the Profit & Loss Account, because they represent cost.
Likewise, Credits are bad on the Balance Sheet, because they represent amounts that we owe to other people, but good on the Profit & Loss Account, because they represent income.
There, what a fantastic new concept, we could become management gurus and earn huge amounts of money....except we were beaten to it by the Venetians, by about 500 years.
But now you understand everything there is to know about accounting (and although I'm breaking the accountants code by telling you, there isn't much more), we can move on to the example that I promised you.
"Making things as easy as"
Attwood Business Consultancy Ltd