Wise Accounts Blog

Counting your dough is not a pastime for Uncle Scrooge - it is a necessity for all of us in a world where money, not love is the prevailing currency.

Accounting for what goes in and out of your purse has reached new levels of sophistication in this computer age and some have fallen behind for not keeping up the pace.

The profit and loss statement is one of several documents together with the balance sheet which describe your financial position.

We have to start first with the concept of an account. In accounting it is simply a fictitious bucket or container where money is identified. Yes you can think of your bank account - the amount held in custody for you by a financial institution. You could also have the petty cash account, the "under the mattress" account and the toll coins accounts for the change you keep in your car.

The art of accounting is to track the movement of money from one account to another. You go to an ATM machine and withdraw $100. Your bank account decreases by $100, while your petty cash account (your wallet) increases by $100. That is called a transaction and you log it into a bookkeeping program with today's date. What you do with these fresh one hundred dollars will lead to more transactions. You may spend $30 on petrol, $20 on food, and $50 on paying your phone bill. So now we have a travel account, a groceries account and a telephone account.

Accounts are listed in groups such as income, expenses, assets, liabilities and equity. Assets are things you own like your clothes, appliances, house, car and things that can readily convert to cash like bank accounts or investments. Liabilities are things that you owe like credit cards, mortgage and car loans. Equity is your net worth when everything is said and done.

Now are you ready for the punch line? The profit and loss statement is simply a listing for the current financial year of all your income accounts (your wages, the rent you collect from your tenants, the copyrights paid to you for the songs you wrote 10 years ago, etc...), followed by a listing of all your expenses (petrol, food, water and electricity bills, etc...). Finally the difference between the totals of those two groups is - wait for it - your profit or loss for that period!

But why stop there? The next thing after the profit and loss is the balance sheet. Again quite simply we group all your assets (the things you own) and all your liabilities (the things you owe) and the difference is your equity or net worth.

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