Chapter 1: A Way to View Business

Chapter one drills home that accounting is not just moving numbers around ledger accounts; it is a methodical and organised way of summarising a business reality into a tangible form, being financial reports……getting those numbers onto paper for us readers to view.  But it is essentially just that, a summary.  I feel that Martin summed this up in a nutshell when he stated:

“It is a model, or simplification, of each firm’s economic

 and business realities”.

The underlying notion of equity and the purpose of accounting as a whole is that there are two sides to a business - the first of course the business itself and the other being that of its equity owners, regardless of what form the business takes (partnership, company, sole trader).  Double entry accounting was developed to keep these to realities separate from one another whilst still being intricately entwined.

I have always known there are two sides to each transaction, that two ledger accounts are affected.   For example if you purchase a car for a business you now own an asset; on the flip side the cash available to the business has decreased.  But I haven’t given it much more consideration other than looking at the accounts themselves and the dollar value contained within.  Really each transaction changes those numbers in ledger accounts but also either increased or decreased the value that an equity owner has in the said business.

Value in a business is another concept which it seems I never fully grasped further than, for example (a very crude illustration), ok this business has $10,000,000 of assets therefore it is has a lot of money and/or plant and equipment etc.  Thinking along these lines doesn’t look further than the black and white numbers sitting on the piece of paper in front of me.

What about the potential significant increase in revenue due to a breakthrough of a new product being developed which is very close on the horizon?  Once actualised, this would be a massive value add to a firm but cannot yet be reflected in the accounts - how much dollar value would you place on it and is this an appropriate amount!!!

Another thought I have pushed to the back of my mind is the use of accounting programmes and the need to only making one entry.

Computers are a blessing and take away the need to manually complete laborious journals and ledgers but it is easy to forget the fundamental accounting principles and underlying reason for double entry accounting, however it is still there – just behind the scenes.

Megan