The true story of every company is told in their financial statements.
To understand any story, you first need a good command of the language the story is written in.
Warren Buffet, one of the greatest investors of our time, once described it this way, “You have to understand accounting and you have to understand the nuances of accounting. It’s the language of business and it’s an imperfect language, but unless you are willing to put in the effort to learn accounting – how to read and interpret financial statements – you really shouldn’t select stocks yourself.”
Like in all languages, there are concepts and conventions that govern how accounting is written.
Before jumping into the numbers (that scare some people) or the explanations (that confuse others), it is important to reassure the first-timer that mastery of accounting principles is not reserved for geniuses. Like every other skill, you get better through commitment and care.
While it is true that understanding will be picked up by some faster than others, the speed of learning does not provide an edge in the application of learning. Be patient with yourself. The problem is never you nor the subject, it is usually just whether you care enough to put in the work and the time.
And when it gets really hard, remember the words of Jerzy Gregorek – “Hard choices, easy life. Easy choices, hard life.” Your life will be much easier if you never turn away because things get hard.
Every language can be learned. Accounting is no different.
To start in accounting, we first need to understand bookkeeping.
The Corporate Finance Institute defines bookkeeping as, “the recording, on a regular basis, of a company’s financial transactions. With proper bookkeeping, companies are able to track all information on its books to make key operating, investing, and financing decisions.”
Without records, even gods do not exist.
Fundamental to it all is keeping a trail on how capital flows through an entity.
No matter the size of an entity, proper bookkeeping is non-negotiable. In fact, a great predictor of the maturity of an entity is the quality of its bookkeeping.
To implement bookkeeping, an entity must first choose the basis of accounting – cash basis (recognize transactions only when cash is received and/or paid) or accrual basis (recognize transactions when it occurs, even when cash is not received and/or paid).
As an entity grows in sophistication, they usually move from cash basis to accrual basis.
We will continue on this journey next weekend.
#MEMBA11 #CFA #Zazparelli