What really is accounting?
Accounting is simply a system we need to organize all our important information.
You do accounting whenever you are keeping score. Just like any game of sports will be boring without knowing how to keep or read scores , the game of business becomes daunting if you do not know how to read your score card.
Think of accounting as the score board used to keep track of the game of business. Business is a game between your debt (liabilities) and ownership (equity) used in building your assets. In this game Team 1 are the creditors, credit card companies, vendors, etc. and Team 2 is you using past income to build assets.
Whether or not you win this game all depends on you. If you let team1, your creditors build your assets, they rightfully own most of your business and can control what you can and cannot do as a business.
For instance if most of your debt are on a credit card you become a slave (financial slavery) to the credit card companies as you have to work relentlessly to pay them back. On the other hand, if you use your past income to build assets, then you find more freedom and exercise more control.
The more complex your business is, the more complex your score board will be but the basic components of any score board are the same. Just remember as a business owner you will like to build assets and you build these assets either with debt or past income or cash from other sources.
To learn more visit my accounting basics blog.
Your assignment:
How good are you in keeping score? Most people do not keep score because they believe they cannot, technology has made it more difficult, or they do not want the accountability that comes with keeping score. However, the lack of keeping score leads to bad management and the eventual death of the business. Keeping score is very important for a business.
If you have not started keeping score, open up an excel spreadsheets and write every asset your business owns and how you acquired that asset. Use the template above as an example. Write your liabilities on the left side and equity on the right side. Add up your liabilities and equity. If your liabilities are greater, then your creditors are the winners and own your business assets but if your equity is greater than you are on the winning side.