The Key to Success is Accounting
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Knowing “”What is Accounting?”" is the key to success.
The business is run by the management. Accounting keeps track of the business transactions. So simply, accounting is keeping track of the business elements.
The elements of business - What are they?
Think of this, there are two elements of water, one is Hydrogen and the other one is Oxygen. If any of these is absent, there’s no water.
In business there are only three elements. Customer. Product, Cash. There’s no business if any of these are absent.
Suppose if opening a shop with no customers. How long do you reckon it will endure? It’s not going to be very long.
What a customer wants is a product.
For example, if I come up to you and say ‘excuse me what are you selling? you say, Oh, I don’t know what I’m selling just give me your money. Are you going to last for long? There’s no product. There is no business.
Customer wants a product. Every business person desires to have the customers money.
Why does anybody setup a business? We initiate business to make money.A business person wants money, the customer wants product. If the product fulfills the customers’ needs, he gives money.
This is a very interesting relationship. To keep the customer happy. This is a long term business strategy.
Out of the three elements in business, only two moves. How do they move?
These elements move within the customer and you.
When you buy and sell, a product goes out to the customer and money comes in.
When you buy, product comes in from the supplier and money goes out.
Looking at the three elements, 2 elements only move.
If product enters, we call it buy.
If a product goes out, we call it sell.
When you purchase, product comes in, cash goes out. This is Pay. You purchase and you pay.
Sell is when a product leaves and cash enters. You sell and then collect.
You see product and cash, move in opposite directions.
Product moves to the right and cash moves to the left. Always product and cash should head in opposite directions.
You’re in serious trouble if your money and product move in the same direction.
When you sell a product, it leaves. You do not collect cash.
Sales including no collection is committing a suicide.
All the sale must be attended with cash.
So, let us look at this. When you are buying and selling.
When you buy, accountant calls this expenses, when you sell accountant calls this income.
The movement of product goes straight into the profit and loss account.
Profit and loss account measures the movement of product, it measures the performance of the business.
Income and expenses equals profit or loss. There is a profit if the income is more than the expenses. If an income is less than expenses, then there’s a loss.
The cash flow statement is where the movement of cash is recorded. Inflow is what accountants call for cash that comes in.
Accountants call cash that goes out as outflow.
If inflow is more than outflow you get a positive balance, a net cash flow that is positive.
If outflow is more than inflow you get a negative net cash flow or a bank overdraft.
Very easy for starting your own business. Isn’t? Profit and loss account, determines the movement of product.
Cash flow is measured by the cash flow statement.
So, profit and loss account has nothing to do with cash.
The reason is the movement of products are expressed in dollars and cents but it has nothing to do with cash.
To help you memorizeall these. Here’s a song for you to sing, in the melody of Mary Had a Little Lamb
“Profit and loss is performance, performance, performance.
Profit and loss is performance has nothing to do with cash.”
Profit and Loss only determines the performance of the business.
So accounting is just simply keeping track of the elements of a business.
Now, to recap everything about these good business ideas, we say accounting is keeping track of the elements of the business. The elements of a business are:
- Customer
- Product
- Cash
How many elements move?
Two: Product and Cash.
How do they move?
IN and OUT in opposite direction.
Buy must be accompanied by pay.
Sell must be accompanied with collect.
Product goes straight to the profit and loss account.
The movement of cash goes straight into the cash flow.
Key to success is learning that Profit and loss account has nothing to do with cash.