As we all know, accounting is the most boredom subject ever founded. However, the fact is that, accounting is the only subject that can drive you in to financially successful person in this world. The only reason for this is that accounting is the only subject that speaks about management of final outcome of most of other subjects. Which is Money!
What is accounting?
Accounting is the subject which discuss about identifying, classifying, recording, reporting and analyzing and finally presenting financial transaction that took place in a Company or with a person. Accounting is all about reconciliations between assets, liabilities and equities.
Fundamental concepts in Accounting with examples
The entire subject of accounting is based on 5 financial components and those will never change unless the entire world went blackout. They are,
Let me to explain one by one concept of each of these elements.
Assets are the tangible or intangible nature things that are within the controllability of a person which gives future economic benefits that can be measured in financial terms. Properties, house, cash at bank balances, financial investments etc are the ideal examples of assets. Accordingly, it could conclide that assets will generate future economic benefits such as intests and capital gains in future.
Liabilities are the opposite of assets which have arise to a person due to past event. Which had created an obligation for a future cash outflow or reduction of assets. Examples, credit card bills, loan balances, OD balances, agreements to pay money in future. As a result of a liability, there will always be a cash outflow or a reduction in existing asset value.
Equity is the residual value of assets and its financing sources which is liability. Hence, for a person, there wont be any equity component other than income retained within that person as retained earnings. However, retained income will never generate extra income, but can be reinvested in the form of assets.
Income is pretty easy, these are the ways of cash generating by assets. I.e. fixed assets and inventory are being used to run the business and generate sales, hence, asset will always a positive to a person. However, just having millions of assets wont work. Assets must me employed based on their nature and start generating money out of assets.
On the other hand, expenses are the cash outs arising from liabilities. I.e. electricity payment, rent payment, medical payments, credit card payments etc. It is always advised to maintain lower liability side in order to retain more income and reinvest the same.
How someone can become a millionaire out of these concepts?
In order to understand better, a summarized version of income statement and a financial position has been demonstrated below.
As per the above two tables, the first table shows a positive retained income of USD 5K. Thea only reason being is that the financial position has a positive assets which ultimately ended up with positive cash inflow.
As people starts earning money, they don’t think about reinvesting. Instead, they consume their money to purchase luxuries and try to maintain their status quo physically
However, the next table shows how liabilities could adversely affect your performance. More and more you gain liabilities, you will end up paying them and you will never ever save up money for you.
The Only reason why rich people gets richer everyday is no secret, its just because their assets have been employed effectively. As a result, assets works for them even at night.
My conclusion with this lesson is to convince my followers to start investing in high yielding assets rather than trapped between liabilities. Obtaining liabilities to purchase non yielding assets is the biggest mistake that 95% of the population do. So that why the rest of 5% chilling while you are working.