Accounting involves counting, but it is not just counting. When you look deeply enough, accounting is a set of agreed-upon rules to produce the evolving financial story of an organization. 

The definitions of accounting are typically very dry and, in my opinion, often don’t provide a rich illustration of the purpose of accounting.

Accounting produces a lot of numbers that put a financial value on something. For instance, if steel is an input for your product, it tracks what you buy and how much it cost. It also tracks the value of the product from the factory floor until it is sold to the final consumer.

Why do we need accounting?

We should keep in mind why we do accounting in the first place. Anytime someone wants to be informed about something that involves quantitative or monetary things, they’re probably going to look at some type of an account or financial report. 

Shareholders use them, executive compensation decisions are based on them, internal resources allocation use them. If we could measure value, we could answer the following questions exactly:

What is producing value in this organization?

What kinds of activities produce value?

How do we distinguish activities that produce value from things that are consuming more than they’re producing?

Writing the accounting story involves “judgment calls” that can be made fairly and ethically, or unfairly and unethically. 

There are famous examples of organizations that have just blown up because their accounting processes lost integrity. Jeff Skilling joked about “hypothetical future value” accounting, where basically you just make up whatever numbers you want and put them in. And it was too close to what Enron actually did.

In our opinion, it is insane to damage the perceived integrity of the process.

So What should you do?

In our opinion, every business owner and manager needs to understand accounting basics. These concepts including assets, liabilities, equities, revenues, expenses, gains and losses. Furthermore, they need to understand how those concepts go into producing financial statements and bottom-line statistics.

Consequently, if you want to fundamentally change your organization’s way of doing things, you need to understand why things are the way they are.

It’s like any infrastructure: when things are going well, people don’t necessarily have to appreciate or understand all the foundations of it. But, when you need to adapt to a big shock, you need to understand how things work at a pretty fundamental level. 

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