The Language of Accounting

Article II – August, 2006

There are five important reasons to learn the basics of the language of accounting.

  1. Maintain control of your money: As we saw in last month’s article, Maureen the jeweler was lucky because the bookkeeper she found was trustworthy. Not everyone is as lucky. An equally common scenario looks like this: A small medical practice consisting of two psychiatrists hire an office manager responsible for their bookkeeping. She appears competent and handles all of the day to day business. Unfortunately, she is competent but dishonest. After embezzling thousands of dollars from the medical corporation and filing payroll tax returns in the wastebasket, she finally slips up and is caught and eventually prosecuted. The two doctors feel that they should have been able to spot her character flaws. But while they may have been excellent psychiatrists, they did not know the language of accounting and lost control of their money to someone they trusted. To know what a Balance Sheet is and to review it regularly is important for principals who run a business, even if they do not do the day to day bookkeeping. In fact it is particularly important if they do not do the day to day bookkeeping.
  2. Grow your business: To take your business to the next level, you will have to understand how to use the basic reports in accounting. To determine how to increase your income, it is essential to take advantage of the very basic accounting steps. If you do not understand a Balance Sheet or a Profit and Loss Statement, you will not be able to make successful decisions based on the reality of your financial situation.
  3. Borrow money: When you go to your local banker and ask them for a loan of $500,000 to expand your business, the banker will NOT smile and say, “I like you, here’s the money.” The banker will say “Please provide us with a current Profit and Loss and Balance Sheet for the past three years.” It will help if you know what these things are, and why they are important.
  4. Take a vacation: This is a very important reason to be familiar with the language of accounting. As a business owner you have been working 14 hour days, sometimes 6 or 7 days in a row, and you are really in need of some time off. You will want to know from a cash flow perspective when you can afford to book that cruise to Fiji for three weeks. Only accurate accounting reports are going to give you that information.
  5. Be able to sleep at night: This is the most compelling reason why business owners decide it is time to get a grip on their financial information. When you go to sleep at night you do not want to be haunted by the devilish visions of vendors showing up at your door demanding money. Midnight is not the time to be wondering about the status of your accounts receivable.
  6. Learning the language of accounting is just like learning any other foreign language- you only enough to get around in the new country! Let’s go over the very basic accounting lingo you need to learn.
    Chart of Accounts: This is a list of where you keep financial information. Imagine little buckets. When you buy some copier paper with your credit card, you get a receipt. You enter the receipt into an accounting program and it puts it in to two places for you. It puts it in the bucket marked “office supplies” and in the bucket marked “credit card”. The good news is you only have to put it in once and the accounting program does the rest. At any time you can look and see what you have in each bucket or account. We will go into more detail about how to set up the chart of accounts correctly in another article. If you can’t wait, contact the Queen now and she will help you.

    Balance Sheet: This is a handy report that tells you at any given time how much money you have in your accounts. The checking account is at the top of the list and as you write checks and make deposits this balance changes minute by minute. The balance sheet gives you a snapshot in time of all of the balances in the chart of accounts except the Income and Expense buckets. We need a separate report for that.

    Profit and Loss Statement: In the land of accounting, these are the Income and Expense accounts, and at the bank, this is called a P&L. This gives you a picture from a particular date range – like January to December, 2005 – of how much money you made, how much money you spent, and how much money is left over for you.

    Cash Flow: This tells you how much money you have right now, how much money your customers owe you (Accounts Receivable), how much you owe your vendors (Accounts Payable) and how much is left for you.

    And this is basically all you have to know. But it is critical that you do know it, and feel confident using the information.

    The Queen awaits your questions about what you have just learned and any way she can help you, so contact the Queen, today. She loves nothing better than answering questions and helping people take the royal tour through the land of accounting.