One of my goals with this blog is to explain the fundamentals of accounting and bookkeeping. I truly believe that if you don’t understand basic accounting and bookkeeping and financial statements, then you probably shouldn’t be in business. I know, harsh, but the simple fact is, if you don’t know where your money is, then you don’t KNOW WHERE YOUR MONEY IS.
I can’t tell you how many times I’ve met a potential client and the first thing they tell me about is how they hired someone to do their accounting and that person ripped them off. It always comes down to one thing: they didn’t understand accounting. I don’t want that to happen to you!
Over the last three days, we’ve discussed what financial statements are, and the two main reports: the Balance Sheet and the Income Statement (aka Profit and Loss Statement).
The Balance Sheet is where all the fun starts. That is, the basic financial statement equation. Us accountants love a good equation. Our organized little souls like nothing better than a way to organize information, and that’s exactly what this equation does. As a matter of fact that’s the entire purpose of financial statements: To Organize Your Money!
Here it is:
Assets = Liabilities + Owners/Shareholder’s Equity.
Okay, now don’t run for the hills! I know you’re probably having freshman algebra flashbacks, but bear with me. Your brain is a lot smarter now than it was when you were a freshman and you can totally get this.
We’re going to break it down over the course of a number of blogs (and videos) and I promise you’ll understand when I’m done. By the way, did you notice that this equation is the basics of the the Balance Sheet? How COOL is that!!
Let’s start at the beginning: ASSETS.
What are they: Things you own that have some kind of value or usefulness.
What are they for: Ideally, to make you money!
See, you like them more already, don’t you! ☺
Assets are things like:
-The cash in your checking account.
-The computers you own (Fixed Assets).
-The money other people owe you (Accounts Receivable).
-Stuff you’ve bought to sell (Inventory).
Okay, that’s all for today. Asset = Things you own that have value or usefulness. That’s all you need to know about them for now! See? Easy-peasy. ☺
BTW, I hope I’m not talking down to anyone, as that’s certainly not my intention. It’s just that over the years I’ve talked to dozens of people (men and women) who don’t understand basic finance and that makes me very sad, and a little afraid for them. Because, as I said, if you don’t know where your money is, then YOU Don’t Know Where Your Money IS. And if you don’t know that, then it’s very hard to be a successful business person, and we want everyone here to be successful!!
So, I apologize to those who find this too basic, and I hope you’ll bear with me for awhile. And, if this is helpful, but you still have questions, feel free to email me. I love to get questions!
Related Posts:
