I was a very good student back in the day when I was in school. Straight A’s, top of the class, the whole enchilada. In my entire life I only flunked one course—accounting.
I don’t understand accounting. I still say that they put debits and credits on the wrong side. To me a credit means you get money and debit means you spend money. It appears that’s not the way it works, and I think they switched it up just to confuse me.
This morning I was going through the end-of-the-year financials, and on the profit-and-loss statement we had a huge loss. However, at the end of the year we still had money in the bank. How can this possibly happen? The way I see it is that you start the year with a certain amount of money. All year long money goes into the bank and money comes out of the bank. At the end of the year, is there more money in the bank than when you started (a profit) or less (a loss)?
According to my accountant, we ended the year with money even though the financials say that we lost a ton of money. I think we’re back to “voodoo economics” here. If I start the year with two oranges and I get ten oranges throughout the year but I give fifteen oranges away, how can I end the year with any oranges? Never mind the problem of how can I give away three oranges I never had?
I remember back when I was a twenty something and my accountant brought my first business tax returns. I asked him if I’d made any money that year.
Accountant: Well, that depends on how you look at it.
Me: I don’t even know what that means. Either I made money, lost money, or broke even, right?
Accountant: Not necessarily. If you look at the bank account, you made money. If you look at your financials, you lost money. If you look at your tax return, you lost even more money.
Yup, that’s what he told me, and I guess he was right, even though I still don’t understand it. They tell me that accounting isn’t creative work, but let me tell you that some of those accounting guys are true Picassos. I don’t even ask anymore; I just do what they tell me and sign what they tell me to sign.
I have a call with my accountant this afternoon, and he’s going to try to explain what this all means so that even a simpleton like me can understand it. I’ll report back later and finish this blog after I speak with him—that is, assuming my head doesn’t explode.
Well, I finished the call and I still have most of my head, but my brains are starting to leak out of my ears. My accountant explained things to me like a teacher explaining takeaways to a six-year-old. According to him, the financial statements start at zero every year, but the bank account is one continuous account that just goes on and on. In theory, this means that if one year we have a profit of $100,000, the next year we could lose $50,000 but still have $50,000 in the bank.
I get it. The financials don’t have anything to do with the bank account. I understand money, but I still don’t understand accounting. None of it really makes any sense to me … which is probably why its a good thing I’m not your accountant.