While we look for harmonious balance, we are also creatures of change and achievement. We yearn also to count. Any youngster who approaches a pond with pebbles will toss them in and count the skips or try to hit the lily pad ten times. Or a crew rows by us on the river and we count the strokes. Well, maybe I just do because I was raised on Sesame Street. Remember The Count? Vun…doo…tree bats… ah.ah.ahh…
The river of time flows by, but we are compelled to stop and take reckoning every so and often, after a month, the year. What comes in, what goes out? Are we draining our resources or building a surplus?
That’s the purpose of an Income Statement.
Back to Square T
As I mentioned yesterday, accountants use left and right to balance everything. Assets (what you own) are on the left/debit and Liabilities (what you owe) are on the right/credit. Using the same idea, Expenses (what you spend) are on the left/debit, while Revenue (what you bring in) are on the right/credit.
This is the elegance of accounting. Numbers are like puzzle pieces that all fit together in a logical well. Suppose you start with nothing. You have a simple balance sheet:
But you are industrious. You find work and toil away, filling out time sheets, paying taxes, stocking shelves, writing status reports, sitting on Zoom calls, lamenting that someone ate your lunch in the refrigerator (who does that? apparently many people)… you do all the work things. You bring in $10,000. But you have to buy a laptop, special clothes, gas, lunch out because people eat the lunch you bring from home. Not to mention your mortgage, home internet–all that Netflix and Disney plus ain’t free, after all.
When you take stock at the end of your year, you can summarize all this with two reflective statements. One shows where you are NOW, that financial selfie. The other is what happened over TIME, the measurement of what you achieved.
That’s accounting in a nutshell. You acquire stuff. The net amount of what you acquire less what you owe is Equity. It’s increased each period by the amount you bring in over what you bring out. That’s Earnings. The Balance Sheet has to balance, left and right. The Income Statement flows, top to bottom. They connect to each other.
It can get more complicated, but it’s all based on balance and T-accounts. If you were led to believe you didn’t “get” accounting, what you didn’t get was all the specialized jargon and terminology.
There was once a boss (not mine, but it’s a true story) who didn’t like the fact that Net Earnings and the change to Net Equity were the same number. He thought it was an error. In fact, it’s the point. Life changes, over time, and if the change is positive, it reflects how much more your assets have increased over liabilities.
Financial Statements are Just Metaphors
There are a lot of ways you can take stock. The Balance Sheet is what you ended up with after time has passed. If you have been prudent, the Net Stuff is a positive number.
It’s probably not an accident that it’s called Self-Worth.