Week 2: Accounting for Entrepreneurs

They say accounting is the language of business, and perhaps like any language there are accents and dialects – quirks that bring variation and the chance to improvise.

We have a preconception of accounting as a cut-and-dry mirror image of one’s financial reality. Not so! There is ample room for – shall we say – interpretations that can help put one’s best foot forward.

Imagine you have a company truck that is in the shop for repairs. Do you classify the work being done as an ordinary repair or an extraordinary repair? If the former, that is an expense you record that takes money out of the office coffers. If the truck is undergoing an extraordinary repair, you are extending the life of a company asset…and the amount of company assets increases as a result.

Which would you prefer to have on your financial sheets: a bigger asset balance or a bigger liability balance via accounts payable? And yet, which is more representative of that auto repair?

This is just one example of the many daily decisions an accountant must make. Obvious are the roles that ethics and sound judgment play in this profession. These decisions don’t operate in a vacuum either: more than a few problems have been created from tensions between controller and CFO, bookkeeper and CEO.

When done well, the accountant provides information that sustains the business. Without that information, the CEO cannot make sound decisions. The business has no idea how many assets it owns and how much it owes. Since it has no idea how much it owns, it has no way to protect those assets against theft and loss.

Some Thoughts About Learning Accounting

In my experience, accounting is one of those skills that you can’t only read about and expect to learn. You can read about carpentry for years and yet learn more about the trade operating a bandsaw for an afternoon. Just so with accounting.

You need to do bookkeeping entries; you need to transfer those to T-accounts and to the general ledger. You make adjusting entries and go through the closing process. These things are not necessarily hard to do – you begin doing them in your first week of accounting class – but you have to do them to begin to understand them.

I’m familiar with the approach Rogers takes in this semester’s text. For many years I tried to read highly-condensed descriptions of assets, liabilities, and the various financial statements. But those lessons never seemed to stick. It was only after I took a couple of basic accounting classes at the local community college that I began to see the interrelationships between the financial statements.

These classes did not have a radical approach. They simply dwelled longer on each topic and broke down the larger topics into smaller digestible subtopics. For me this turned out to the missing part that had kept me from progressing like I had wanted to in accounting. Sometimes you only become aware of such a thing after the fact.

In any case, the more I learn about accounting, the more practical value it reveals. I’m glad I decided to take these courses before I started a business, and I think that knowledge will only help in the future.

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9 thoughts on “Week 2: Accounting for Entrepreneurs

  1. Hi Nick,
    I appreciate your comments that doing accounting is the best way to learn. I can read about it and see the formulas, but retaining all the information is challenging for me. I had basic accounting years ago but it is a distant memory. Would you suggest to someone in our program to take basic accounting or is it too late and because of time and money? Will we just learn on the job with some good guidance?.

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    1. Hey Cece –

      I don’t think its ever to late to learn accounting. I’ve taken basic accounting courses in parallel with some of the courses in this program through my local community college. I think the money for the class is worth it (the credit hour is cheaper than a university’s) in particular because it demonstrates the importance of controls. I was planning to post about the topic of controls next time. But for now suffice it to say that without proper accounting controls, every dollar a business owner makes is at risk. So I think a couple-three accounting classes are a necessity for survival.

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  2. Hello Nick,
    Accounting is something I always wanted to learn but when it goes from step to step I think I rely on the computer programs and hope the numbers look right. It makes me go cross eyes after a while and I wish it didn’t. I like numbers but not sure they like me. I keep trying and it clicks some times. I hope with guidance it will all make more sense to me some day.
    Mary

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  3. Totally agree. Depreciation was always confusing until I needed to actually put in the numbers for a real piece of equipment in the accounting software. And then see how that affected other items. The software is so good at producing nicely formatted tables. It’s easy to say “I’m done!” and not really understand how those numbers came to be.

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  4. Nick,
    Great topic. Accounting is one of those things that you have to constantly learn and practice. Not only should a person understand the basic and immediate accounting principles but also accounting tax documentation. I use to assist an Accountant with small business taxes, and one of the worst things clients would do is wait until the last minute to provide pertinent information concerning their business. Which would lead us to research, ask questions the owner was either clueless about, or it would take an extended amount of time to try to calculate for them. Maintaining proper bookkeeping and accounting records can be essential to saving money and time. If nothing else, I would say that understanding the difference between the two is a great place to begin.

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  5. Great Post! When it comes to accounting and all of these things we are learning (assumptions, cash flow, etc.) I’m a little over whelmed. I’ve never had experience with these type things, but am trying to learn and understand and put into practice for my business. Accounting has never been something I wanted to do, but I need to do now for my business. Any good sites or books you would recommend for beginners for small business? And, you are right, the more you do the better you become!

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  6. Nick,

    That was such a good idea to take basic classes in accounting. I took one accounting class in my undergrad, but like you said it really didn’t stick. I think if I took an accounting class now it would really help me because I am able to apply it to life and business now. I do feel like I have learned a lot about accounting just through work and hands on experience. But a class would be so helpful in expanding my knowledge, I might try to take one after I am done with this master’s degree.

    Thanks,
    Mackensie

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  7. I loved the woodworking analogy. There’s nothing more valuable than experience and/or the passion to learn through practice. I am a woodworker in my spare time and I’ve watched countless videos to learn how to make display cases. When it comes time to start making the case, I inevitably mess something up. I’m still learning, but the more cases I make…the less mistakes happen. This is the same when learning entrepreneurial accounting. There will be mistakes, but when you catch them (especially if they’re big ones), then I bet that mistake doesn’t happen again.

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  8. Hi Nick,
    I love the examples you used to clearly explain your points. I am a visual person; so it really helped. I definitely agree that it takes practice, willingness to learn about accounting. I am still learning as I go along. But as you mentioned this information will help in the future – especially as business owners.

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