Accounting for non finance people

Accounting for non finance people

The purpose of this paper is not to convert smart business people or non finance managers into accountants but to help them in reading and understanding the financial statements.

If there is one element of the business discipline that most business people are afraid of or one they do not want to learn or get involved in then that discipline is accounting. The writer has met a plethora of smart business people but most of them capitulate when we start discussing about accounting.

The writer feels that most of this fear of accounting is psychological and in writing this paper the writer wants to kill the myth that accounting is difficult. The writer feels that the reason why people think accounting is difficult is because of what they are told by their colleagues and the inherent fear of numbers within most of us. Accounting is not difficult because it is difficult but it is difficult because of what is incocated in us.

Accounting

The word accounting comes from the word account which means to report and reporting is all what accounting is about. This is something most of the people do on a daily basis. In a nutshell accounting is about score keeping, that is keeping records of what income the business earns and where the business is spending its money. This information is captured in the following statements:

• Profit and loss account
• Balance sheet
• Cash-flow statement

Below the writer will discuss these financial statements in detail.

Profit and loss

The profit and loss (P&L) account tells us in numbers the business story during an accounting period. So in layman's terms the P&L is a numerical narration of the business affairs during an accounting period which is usually a year. So the P&L is a performance statement therefore the information we can glean from the P&L includes turnover, expenses, profit or loss. It is worth noting the further analysis including use of ratio analysis can be used to improve the quality of information gleaned from the P&L.

Balance sheet

The balance sheet is a snapshot of the business at a particular date. From it is clear that a balance sheet is a variable statement and it changes every time the business transact. The balance sheet shows the sources of finance of the firm and how the firm uses the resources. The balance sheet is summarised by the following equation:

Capital = Assets - Liabilities

A strong balance sheet indicates that a firm will be able to survive if it encounters a difficult situation.

Cash-flow statement

Unlike the balance sheet and P&L which are subjected to the vagaries of the accounting principles and standards a cash-flow statements tells us where the cash is coming from and how it is being used. The writer refers to the cash-flow as the quality statement as it helps to clarify whether the profit in the P&L is quality profit. It is possible that a firm can still make a profit even if it only physically collected only 10% cash from its sales. This is because the P&L recognises a sale when it occurs and not when cash is paid.

The writer hopes that this paper will contribute towards killing the myth that accounting is for accountants only. Accounting is for everyone involved in business because it improves the quality of decisions made.