To accomplish any goal you have to have the Right Intention, the Right View and the Right Data. If your goal is to make the business easier to run, then…
The Right Intention is to help everyone to see the business better. This means both to see the business as it is more clearly, and to see it get better. Problems are a lot easier to solve when you accept reality as it is.
The moment we face a situation frankly, a solution appears. This is true about the whole history of civilization.[7]
The Right View is not just the income statement and the balance sheet. Most small businesses are still looking at their business through a view developed in 1494. That’s when the dual entry system of accounting was developed and that’s when the balance sheet was first documented. Since then, it’s just been more documentation and regulations. Ok, that might be a little harsh. Let’s look at…
Three things accountants get right: Row Sets, The Matching Principle & Flow and Balance. These insights continue to be the foundation of financial reporting today and they are critical concepts for the rest of what we are going to cover. Let’s look at each of them.
- The Rowset of Income Statements and Balance Sheets. These are worth knowing by heart. An income statement is Revenue, COGS, Expenses & Income. A balance sheet is Assets, Liabilities & Equity. Each of the items on an income statement and balance sheet is a rowset. The well-known rowsets are pure accounting genius.
- The Matching Principle. GAAP requires accrual accounting not cash based. Accrual accounting relies on the Matching Principle which states that expenses should be recorded in the same (matching) period as the revenue they are related to. This is brilliantly logical. [8]
- Flow and Balance. Accounting has a Zen quality to it in the way it recognizes flow and balance. Revenue and expenses flow through the income statement and are balanced on the balance sheet. This is a genius only a mathematician from 1494 could have come up with. We have no words, just !
Please don’t study accounting, that’s all you need to know. Well, that and the rest of this book obviously. Remember, a CPA is only necessary to file someone’s taxes.
Here’s our question.
How is it possible that no one in the last 500 years has thought to add more data to the rowset? The good news is once you understand rowsets they are easy and all the things you studied in accounting will be useful. Well, not all the things, but definitely adding and subtracting.
— more to come —
Chapter 1: Introduction – There is a better way
Chapter 2: All Hail the CPA
Chapter 3: Making a business easier to run
