The reason we teach accounting is to help people understand business.
When you understand the elements of accounting, the essence of business becomes clear. It’s much more than cash in, cash out.
We convey that essence in a diagram called:
The Value Cycle.
This is how business works:
- The business raises funds from its shareholders
- It leverages those funds with debt
- With those funds it acquires assets for revenue generation
- It then sacrifices some of that asset value, in order to…
- Generate value
- The net value generated or consumed is attributed to shareholders as profit or loss.
The Balance Sheet and the Income Statement tell us the story of this cycle, and are expressed in the accounting language.