CHAPTER 1: TO UNDERSTAND REALITY

The difference between fiction and reality? Fiction has to make sense.

Tom Clancy
In this chapter, we will look at why and how aspects of the economic and business realities of
firms are captured and recorded into a firm’s accounts. Now a firm’s accounts are not the
economic and business realities of firms themselves. Each firm experiences its own economic
and business realities quite independently of what gets recorded in its accounts. But some
aspects of what is going on in a firm do get recorded in its accounts. We will look at why these
realities get captured and recorded in the way they do. This will help us better understand
where a firm’s accounts come from. This will help us, as we further study accounting, to be
better able to learn how to use a firm’s accounts to engage with and connect to a firm’s
economic and business realities.
Bookkeeping is to accounting, what anatomy is to medicine. Anatomy is the study of the
structure of the human body: how a human body is put together. By connecting our
understanding of this structure with an understanding of how all these bits function together
(that is, how they do things) in the human body, we can understand physiology (how things
work in our body when we are well) and pathology (how things work in our body when we are
not well). In the same way, bookkeeping is the study of the structure of a firm’s accounts: how
a firm’s accounts are put together. Bookkeeping can form the basis of our understanding of
how accounting works and functions (when firms are healthy; and also, when they are not so
healthy).
There are two main ways to learn anatomy. One is to memorise a whole lot of discrete,
unconnected facts about bits of the human body. The other is to understand how the various
parts in the body work together in regions of the body and systemically throughout the body.
In the same way, we can approach learning bookkeeping by memorising a whole lot of
discrete, unconnected facts about bits of the way data is entered into a firm’s accounts. The
other way is to search for an understanding of how and why the economic and business
realities of a firm are captured into a firm’s accounts and then adjusted and presented to
others.
We can memorise a whole lot of discrete, unconnected facts about the human body; such as
the skeleton of the foot, which consists of three parts, the tarsus, metatarsus and phalanges;
and there are seven tarsus bones: the calcaneus, talus, cuboid, navicular, and the first, second,
and third cuneiforms. This does nothing to help us use this information to diagnose and treat
illnesses in people (that is, to be a doctor). In the same way, memorising a whole lot of
discrete, unconnected facts about how a firm’s accounts are put together does nothing to help
us understand how to use a firm’s accounting information to connect to and gain insights into
a firm’s economic and business realities (that is, to be an accountant or a business person).

Reading
A book is a machine to think with

Anon

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When reading this study guide, there are five main ways we could approach our learning of
bookkeeping:
1. We could avoid or not actively engage in learning anything about bookkeeping at all.
As we are reading this study guide as part of a unit in Introductory Financial
Accounting, we could just hope we can pass the unit as best we can (or, in other
words, ‘just wing it’).
2. We could memorise isolated items of information that we do not really understand;
for example, ‘cramming’ before an exam some specific types of bookkeeping entries.
3. We could memorise (rote-learn) a ‘ready-made’ organised whole that we do not really
understand, for example a chart of the ‘Accounting Cycle’.
4. We could search for meaning by analysing isolated items of information without
organising them into an integrated whole. For example, we could ask ourselves, ‘Why
do we use double-entry bookkeeping?’; ‘Why do we use journals?’; and ‘Why do we
prepare a trial balance?’.
5. We could search for meaning by organising the content we are studying into an
integrated whole. For example, we could ask ourselves, ‘Why are the accounts put
together in the way they are?’; ‘What does a firm’s accounts look like as a whole?’;
and ‘What does all this mean for how useful a firm’s accounts may be to help me
better understand what is really going on in a firm?’.
This chapter seeks to support you to search for meaning as you organise the content we look
at about bookkeeping into a meaningful whole; that is, into a whole that is meaningful to you.
I am seeking to help you understand and seek personal meaning about bookkeeping, about
how accounts are put together. We will be looking at how accounting can provide us with a
powerful way of looking at the economic and business realities of firms. In this way, as you
further study and then perhaps practice accounting as a profession, or simply use firms’
accounts in future, you will at least know one thing: where the accounts of firms have come
from. We will first, in Sections 1.1 to 1.3, review some key concepts we studied in ACCT11059
Accounting, Learning and Online Communication.
You should experience a strong sense of déjà vu when reading Sections 1.1 to 1.3. They are a
repeat of elements from ACCT11059 Study Guide Chapter 1. As you read Sections 1.1 to 1.3,
reflect on what you can remember and understand from studying ACCT11059; and also
identify gaps or limits to your understanding, areas where you might need to strengthen or
deepen your understanding. This is an opportunity to ‘fill any gaps’ you may have in these
areas from your study of ACCT11059. For some, it may be a little like Ground Hog Day as we
review these key concepts. For others, it may be like a ‘light going on’ as some of the concepts
start to make sense to you personally; and for others, you may find yourself making new links
between the concepts as your understanding and connection to the concepts and ideas
deepens.
And for most of us, it might be a mixture of all three. Once we have done this, we will build on
these concepts in Section 1.4 as we look at Three Things to Memorise; that is right, memorise.
Memorising has a part in real, active learning; as long as our motivation in memorising is to
help us understand key concepts, rather than simply reproduce them (and 'pretend to have
learnt them'). The ‘smart money’ in our unit will take the time to memorise these three things.
This will lay the foundation for you to negotiate successfully the technical complexity,

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potential confusions and details of bookkeeping both in this unit and throughout your study
and experience of accounting, as we take further steps into the (possibly) exciting world of
accounting.

1.1 Keeping Records

But you have to know enough about it to understand its limitations; because
although accounting is the starting place, it's only a crude approximation.
And it's not very hard to understand its limitations. For example, everyone
can see that you have to more or less just guess at the useful life of a jet
airplane or anything like that. Just because you express the depreciation rate
in neat numbers doesn't make it anything you really know.

Charlie Munger
In this section, we will discuss the importance and necessity of first recording things a firm
does, and its transactions with various parties, before a firm’s accounts can be of any use to
anyone. Basically, unless things a firm does are first recorded and included in a firm’s
accounting system in some way, then a firm’s financial accounts can give us no guidance or
help in understanding the impact of those particular activities of a firm on its economic and
business realities. A range of different people have genuine interests in the operations of
firms. These might include managers of a firm, equity investors, debt investors, individual
employees, unions, customers, suppliers, the government and the general community. Also,
firms can be commercial enterprises, not-for-profit entities or public-sector entities. What we
will look at about bookkeeping can apply to any type of firm, although we will focus on
commercial enterprises. Regardless of the type of firm, or of who we are with a genuine
interest in understanding and gaining insights into the realities of a firm, a firm’s accounts may
help, or perhaps hinder, us in gaining these insights. Let us first consider why we would read
this study guide; and indeed, read a firm’s financial statements.

May the books be with you

Books have given me a magic portal to connect with people from the past and
the present. I know I will never feel lonely or powerless again.

Lisa Bu
How much do you read, in this media-rich world we live in? There are so many types of media
through which we can engage with others. And these are all great; and we will have many
opportunities to use a range of media online to connect with others and with a variety of
sources of ideas and concepts. And with all these opportunities to engage with a wide-range
of media, some people may be feeling a bit negative about reading this study guide. You may
be asking yourself: why am I reading this? You may be thinking, ‘I just don’t read’; and ‘I prefer
videos on YouTube or watching movies’. And you may be even dreading ‘having to read’ this
material; and feeling it is a lot to read. So why read this study guide? Here are a few thoughts
as to why you should read this study guide:
1. You can get some marks in ACCT11081 Introductory Financial Accounting by writing
your key concepts and questions from reading the study guide; and from writing,
answering and commenting on questions in PeerWise based on your reading. The
readings will also help you significantly with your preparation for the exam.
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 2. You can spend time with the author (me) as we discuss together some of the key
concepts about ‘where accounting comes from’. You can do this wherever you are;
and wherever I am. And you can do this whenever it suits you.
3. Also, reading can open your mind; it can open new worlds, ideas and pathways for
you. And the people you meet from reading can inspire you and help to put you in
touch with ‘where your dreams come from’.
4. And reading may make us more interesting people. The ability to think for yourself,
be curious and to discuss meaningfully a wide range of subjects can give you more
depth and make you a more interesting and attractive person to others.
So, reading this study guide can help you earn some marks in our unit; give you the
opportunity to spend some ‘quality time’ with me (the author) on some key concepts about
accounting and ‘where accounts come from’; can open your mind; and even, possibly, make
you a more attractive and interesting person (but be careful of the social contexts in which
you start excitedly discussing the finer points of double-entry accounting). And, of course,
sprinkled throughout this study guide are many links to material using various forms of visual
material. Now one person who died over 500 years ago (in 1517) wrote a book and, as a result,
he is remembered today; and what he wrote about, is influencing millions of people all these
centuries later. His name? Luca Pacioli.

Luca Pacioli
In the first instance, a firm’s accounts come from the transactions and other economic
events someone has recorded in a firm’s accounting system. A way of recording these
transactions has developed over a long period of time. It is called double-entry bookkeeping,
or double-entry accounting. Indeed, firms have been keeping accounts to record their
activities for a long time. Luca Pacioli (c.1445-1517) (pronounced pot-CHEE- oh-lee), an Italian
mathematician and Franciscan monk, published in 1494 the Summa de arithmetica,
geometrica, proportioni et proportionalita, which means (loosely) 'Everything you wanted to
know about arithmetic, geometry and proportion but were afraid to ask'. It is a summary of
the mathematical knowledge of the time (which we see today as quite elementary arithmetic,
geometry and algebra) and included bookkeeping as one of five topics covered.
Its section on bookkeeping contained 36 short chapters and is the first published book
describing double-entry accounting, a method of accounting that was being used by
merchants in Venice during the Italian Renaissance. His system included most of the aspects
of accounting as we know it today. Although Luca Pacioli is usually referred to as the “Father
of Accounting” he did not invent the system of double-entry bookkeeping. He was simply
the first to describe it in a published book. Indeed, double-entry bookkeeping had probably
been going on much earlier than Luca Pacioli’s time in the late 15th century. For example,
“the partners Francesco di Marco da Prata and Domenica di Cambio drew up a detailed
statement of assets and liabilities on August 30, 1389, quite in the modern manner.” 1
Why on earth did this system of accounting for a firm’s economic and business realities
develop in this way? Surely, it would have been far easier to simply enter in transactions once
rather than twice, as occurs in double-entry accounting. Why make it so hard on ourselves?
We will also see later how once a transaction is entered in twice these transactions are then
re-entered again and manipulated in various ways. At first sight, this seems like a lot of double
handling. At second and third look, it also seems like a lot of double handling.

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We build on the past
Whenever I think of the past, it brings back so many memories.

Steven Wright

In this bright future, you can't forget your past.

Bob Marley

Memories are the key not to the past, but to the future.

Corrie Ten Boom

To understand how this could be, we need to remember we are not born into a world with a
big blank page in front of us. Many, many people have lived before us. The first civilizations of
people sprung up in a few parts of the world about 5,500 years ago. Our societies, our cultures,
the ‘way-we-do-things’ have developed over many generations, with each generation starting
with what the previous generation had left it with. Our generation is no different.
Have you ever noticed that on shirts, buttons are generally on the left for women and on the
right for men? Yes, that is right; to the person wearing them, men’s shirts have their buttons
on the right and women’s shirts have them on the left. Why is this? In the 19th century,
buttons were very expensive and quality women’s clothing had plenty of them. Wealthy
women usually had staff (a maid) to dress them, and so the buttons had to be done up by
someone facing them. As most people are right-handed (including wealthy women’s maids),
women’s buttons were placed on the left, to make it easier for the maids to do them up.
Alternatively, most wealthy men dressed themselves, so the buttons were placed on the right
to make it easier for the man to do up the buttons themselves. Again, this was based on most
men being right-handed.
Today, buttons are much simpler and easier to do up. Also, women’s clothes are generally
not as elaborate in the buttons department today; and, of course, most women (whether
wealthy or not) generally now dress themselves. So why, in modern times, do we still have
men’s buttons on the right, and women’s buttons on the left? This applies not just to shirts
but also to modern jeans and trousers (which usually button on opposite sides for men and
women), school uniforms and other clothing. The reason is, we do not start life with a blank
piece of paper; indeed, the past always gently rolls up behind us as we step day-by-day into
the future. The practice of buttons on the right for men and on the left for women has
continued to the present, as that is what we are all used to; and why make the effort to change
this practice?
It is the same with double-entry bookkeeping. The process belongs to the world of the past.
Yet we are caught up in that past and it constrains and leads us forwards as we participate in
the digital age. So today computers do a lot of the steps of double-entry accounting or
bookkeeping for us. But we need to understand how these things work because our whole
accounting system is built on these ideas. If there is nothing else you remember from reading
this chapter, you should remember that ideas are powerful. If we had computers to keep the
records of businesses a thousand years ago we may well have gone about it very differently,
perhaps using quite different ideas. But we did not.

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As we will see later, the key thing to remember about double-entry accounting is that it is a
system of recording transactions of a firm to ensure the relationship between the different
elements of the business model that underpins accounting is kept intact. Bookkeeping is based
on a model, or way of looking at business. It is a powerful way of looking at a firm’s economic
and business realities. A deep understanding by us of this way of looking at business could
transform the way we view business reality from a view based on commonly-held
misconceptions about how business works to a view based on a deep understanding of the
good ideas and concepts of accounting. These ideas pervade the way bookkeeping is carried
out. These ideas were developed from a time way before computers, before the printing
press, indeed when quills and paper were ‘hi-tech’.

Bookkeeping without books

With the growing availability of computers since the 1960s, progressively firms’ accounts
have moved into a digital form. Various accounting software packages have been developed,
sometimes tailored to the specific needs of a firm; other times, firms use general packages
that they can adapt and use for their own purposes. Three commonly used general accounting
software packages that many small to medium size firms use in Australia (and, indeed, in many
countries) are MYOB (‘Mind Your Own Business’), Xero and ReckonOne. Other accounting
software packages have names such as Business Plan Pro, Express Invoice, Quickbooks Online,
Wave Accounting, Freshbooks, Net Suite, GoDaddy and Zoho Books. Spreadsheet packages
such as Excel are also widely used to record and manipulate and manage data.
In my own private equity business, I managed the bookkeeping of the management firm
myself for several years using MYOB. It was a straightforward process. I often recorded
transactions on the day they occurred or at the end of the week on a Friday or Saturday
afternoon. As the management firm had only a small number of transactions, it was easy to
manage the bookkeeping myself. I then used a firm of accountants to complete my firm’s
financial statements and tax returns based on the information captured in the accounting
package. Slightly larger businesses may often employ someone to complete the bookkeeping
each week or each month on a part-time basis. Larger firms will often employ full-time staff
to enter data and to ensure the bookkeeping processes are being correctly followed.

The first decade of the 21st century is often called the ‘digital decade’. Quite quickly, almost
everything was converted to digital formats. These are readily able to be communicated
between computers anywhere in the world through wireless and cable interconnections
stretching across the world in a growing web of interconnections. In almost all cases, except
perhaps for a few small businesses, everyone’s accounting record-keeping or bookkeeping is
being done digitally or electronically. So, the ‘books’ of the past have gone. Bookkeeping is
now almost always done without any ‘books’. Bookkeeping is now a redundant word; it would
be better called ‘record keeping’, or even better ‘capturing what is going on’. And with the
rapid digital disruption of accounting as a profession that has been occurring for more than a
decade, where is it all going?
In this section, we have seen a few reasons why we should read this study guide; and why
reading should be part of our lives. Indeed, studying accounting can change our lives. We have
also seen that the systematic and careful recording of transactions and economic events of a
firm (which we call bookkeeping, even though the paper books have largely disappeared and
been digitised) is essential to accounting. Without it, there would be no record of the
economic and business activities of a firm in a firm’s accounting system.

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We have also seen that the way these economic and business activities of firms are recorded
by way of double-entry accounting is an historical ‘accident’. It made sense in the days of
quills and paper. Yet it frames the way we record transactions today. And more importantly,
the whole way of looking at business, that is the business model, underpinning accounting
remains the same in our digital age. This way of looking at business has proved to be a
powerful way of looking at the economic and business realities of firms. You may find it is a
powerful way for you to look at business as well. In studying bookkeeping there are a few key
things we need to understand. We will look at some of these in the next section.

1.2 Two Sides to Everything

There is a great difference between knowing and understanding: you can
know a lot about something and not really understand it.

Charles F. Kettering
There are a few key ideas underlying bookkeeping and accounting that you need to
understand. You do not need to simply memorise them and be able to reproduce them
(perhaps in an exam at university, which we will have in this unit) and then forget about them.
You need to understand them. You need to personally engage and connect with these ideas.
You need to connect these key ideas about business that underpin bookkeeping and
accounting with your own (and others) prior knowledge and personal experience of business
and accounting. In other words, these are ideas and concepts you need to make sense of for
yourself. No-one else can do this for you; you must do it for yourself. And this is best done in
discussion with others, including through the use of PeerWise questions and answers and
other interactions. This section is designed to support you to do this, to help you make your
own sense of these concepts. Take the time to reflect on the ideas and concepts discussed in
this section. Think about them and search for what they mean to you. In fact, these ideas and
concepts could potentially transform the way you look at business. Let us first look at journals
and ledgers, the key ‘building-blocks’ of bookkeeping.

Journals and ledgers

As we discussed in ACCT11059 Accounting, Learning & Online Communication, accounting
uses two types of books: journals and ledgers. A journal contains the daily transactions of a
firm, such as its sales to customers, purchases from suppliers and many other types of
transactions and economic events of a firm that keep happening in a constant stream each
day. These are entered into a firm’s journals as they occur each day. The English word journal
comes from the French word ‘jour’ (or day) which was derived from the original Latin word
diurnalis, meaning daily. Also, the word ‘journalist’ has been used for those who write for
newspapers since the late 1600s, referring originally to those who wrote for newspapers
which were published daily.
So, the journal is a great long list of transactions recorded as they occur each day. The ledger
contains these same transactions but arranged not in the order in which they occur each day
but into individual accounts, such as various types of assets, liabilities, equity, revenue and
expenses. The word ledger means originally something that lies down or is laid down, having
been adapted from the Dutch word logger. It originally referred to a book that usually stayed
in one place because it was heavy and difficult to move and was also constantly being used.
So, a ledger basically means a book lying permanently in one place. The ledgers are at the

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heart of a firm’s accounting system. It is where a firm’s key accounting information lies. Thus,
in this sense, ledger now refers to the data that lies permanently in one place in our computer.
We can think of a bookkeeper (or accounting clerk) entering a firm’s transactions into the
journals, transferring them (or posting them) to the ledgers (which is, of course, usually done
automatically by our accounting software) and looking after a firm’s financial records or
‘books’ up to the trial balance stage. The trial balance is a worksheet where the balances of
each of the ledgers (one for each account) are listed in two columns (debits and credits). The
total of each column in the trial balance should be the same (or, in other words, should
balance). It is called a trial balance because it is a tool to help detect errors in the accounts; a
‘trial’ or ‘initial’ attempt to balance the accounts in the ledger. This gives us an opportunity to
fix up any errors that have caused the various ledger accounts to not balance. However, there
are many potential errors in the accounts that would not be picked up by a trial balance (for
example, simply transposing a debit and credit entry for a transaction or posting a journal
entry to the wrong ledger account).
In the days when bookkeeping involved physical paper books, transactions were first entered
into the journal and then carefully posted (or transferred) into the ledger. With the
widespread use of computers, transactions are now entered only once and they are
automatically (and digitally) posted in the various accounts in a firm’s ledger. Indeed, the
words ‘journal’ and ‘ledger’ are being used less and less as we no longer see bookkeeping as
involving keeping a daily journal or journals of various transactions and a separate series of
accounts for a range of different aspects of a firm’s business. We are now recording
transactions digitally into a series of accounts and we can look at this ‘raw data’ in all sorts of
different ways. Nevertheless, in these accounting software packages financial records are
entered into firms’ accounts based on a few key ideas and concepts that influence and affect
the way we view these transactions and the economic and business realities of the firms they
represent.

Proprietorship
In accounting, not only do we record the same transaction twice into two different types of
‘books’: first into the journal and then into the ledger. Also, and much more importantly, we
recognise that every transaction of a firm has a dual aspect, just as a coin has two sides (heads
and tails), or there are two sides to a piece of paper, or, usually, two sides to any argument.
The key idea underlying double-entry accounting is an awareness of there being a proprietor
or owner of a firm who is separate and distinct from the firm itself. This is the entity concept
in accounting where the activities of a firm are kept separate from those of the firm’s owners.
Subsequently, this idea has been reflected in our legal system as we have created the idea of
companies that have a separate legal identity and existence to that of their owners. The entity
concept in accounting applies to any type of firm, regardless of whether the firm has a
separate legal identity from its owners or not.
The realisation that a firm can be seen to be separate from the proprietors or owners of a firm
introduces a duality to all transactions of a firm. This is because all transactions involving a
firm will affect not only aspects of the firm itself but also the wealth or interests of the firm’s
proprietors or owners. This is true of every transaction or economic event affecting a firm.
Every single one. Double-entry accounting simply reflects this view or way of looking at
business reality. As we will see, for every transaction of a firm there will always be two
opposite and equal components: the heads and tails of every transaction, if you like. These
two sides or aspects to every transaction are called debits and credits.
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The word ‘debit’ comes from the Latin word ‘debere’, which means ‘to owe’. Indeed, the
Latin word ‘debitum’ means ‘debt’. The word ‘credit’ comes from the Latin word ‘credere’,
which means ‘to believe’ or ‘to entrust’. The practice has developed to put debits on the
left-hand side and credits on the right-hand side of a ledger account. For all their capacity
today, computers still have no idea about their left or right. For this reason, computers use
positive numbers for debits and negative numbers for credits. So, as we include items in our
various ledger accounts we do not refer to increasing or decreasing an account. Rather, we
refer to ‘debiting’ or ‘crediting’ an account which will each result in either increases or
decreases in accounts depending on the type of account being debited or credited.
The underlying duality of transactions due to the proprietorship or entity concept can be seen
when we debit an asset account to record an increase in an asset of a firm. We debit an asset
account because when a firm receives an asset it owes an obligation to its equity owners to
manage that asset well and provide a return on it for their benefit. This is a firm’s obligation
to its owners. It is what it ‘owes’ its equity owners. There is the sense that a firm is obligated
to its owners for its assets which it must have gained from them. Also, when we increase either
an equity or liability account we credit that account. We do this because equity investors (or
in the case of liabilities, debt investors) have entrusted a firm with something of value to them.
They have only done this because they believe in the firm.
Trust underpins all of business. We saw the importance of this in the global financial crisis in
2008. When banks stopped trusting each other because they could not assess the risks in each
other’s businesses, they stopped lending to each other. Thus, the whole financial and
economic system seriously faltered affecting billions of people world-wide (including you and
me). Double entry accounting is based on the mutual obligations that exist between a firm
and those who entrust resources to the firm (principally its equity owners). In this way, each
transaction has two-sides to it, a duality, a balance; indeed, a trust relationship that underpins
all of business. For trust to exist in business we need someone to trust, who will be obligated
to us in equal measure to our trust. An effect of this duality of all transactions will be that
there will always be an equilibrium or balance between these two aspects of debits and credits
of every transaction or economic event of a firm.

Accounting equation
The idea that the equity owners of firms are separate to the firm itself is expressed in the
fundamental accounting equation that underlies all bookkeeping and accounting:
Equity = Assets - Liabilities
What this relationship means is that if the assets of a firm are increased then the equity
interests of the owners of a firm are also increased; and if the liabilities of a firm are increased,
the equity interests of the owners of a firm are reduced. Or more precisely, if the difference
between a firm’s assets and liabilities are increased, the equity interests of the owners of a
firm are increased; and if they are decreased, the equity interests of the owners of a firm are
decreased. This is simply a model, or way of viewing, the world of business. There are other
possible ways of viewing business; but this is the model we use in accounting.
This fundamental accounting equation is often expressed as:
Assets = Equity + Liabilities
This whole idea of proprietorship and of a firm being a separate entity to its owners leads to

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all transactions of a firm having two aspects to them. In bookkeeping, and in accounting more
generally, we will see that transactions and other economic events of firms have by their very
nature two aspects to them, a duality that will have the effect of preserving the fundamental
accounting equation throughout a firm’s accounts. Another way of putting this is that our way
of looking at, or conceiving, or thinking about transactions or other economic events of firms
is consistent with, and indeed informed by, the business model (or way of viewing business
reality) embedded in the discipline of accounting. This business model is neatly summarised
and expressed as the fundamental accounting equation. In this way, as we record transactions
and other economic events in the accounts of a firm (that is, bookkeeping) each will fit neatly
into, and support, our overall business model or view of the firm.
Double-entry accounting is not a method simply designed as a check on the mechanical
accuracy of the entry of transactions into a firm’s accounts. That is a commonly-held
misconception about bookkeeping and accounting. Rather, the ability to use the fact that the
debits and credits of a firm’s transactions should always balance to check the accuracy of the
data entry into a firm’s accounts is a by-product of double-entry accounting, not the reason
for double-entry accounting. Instead, double-entry accounting is a way of looking at business.
As it has turned out, it is a very powerful way of looking at business reality. Indeed, the good
ideas and concepts of accounting have over time become so pervasive that they are central
to the way we understand business in the 21st century. Yet as we grow in our understanding
of the way of looking at business that underlies and informs accounting we should remember
it is not the only way we could view or think about business. In a society or community where
we can value our differences and uniqueness as people, we can reflect on other views of the
world, including other views of the world of business.
This is part of the process we can engage in at university as we develop the intellectual
foundations for our professional lives in accounting and in business. Our task in this section
has been to first understand the view of business informing accounting and bookkeeping; and
to feel and recognise just a little bit of its power and value in our society. We have seen there
are two key ‘books’ in bookkeeping, namely journals and ledgers, and that in our digital age
these two sets of books rarely exist. We have also seen the key ideas of proprietorship and
the fundamental accounting equation that underpin bookkeeping and accounting. These
central ideas reflect a way of viewing the economic and business realities of firms. In turn, this
view of the economic and business realities of firms underpins the way transactions are
recorded in a firm’s accounts, or in other words the way we do accounting.
Accounting involves recording the economic and business realities of a firm in such a way as
to reflect a way of viewing business. As you continue to study accounting, you will find it has
proven to be a powerful way of viewing the realities of firms (but not the only way). This is
possibly why so many people who get good at accounting seem to end up running many of
our businesses as chief executive officers, as other senior managers or as directors.
Understanding accounting can be a powerful way to transform our understanding of, and the
way we see and think about, the day-to-day realities of business. Understanding double- entry
bookkeeping, or more relevantly double-entry accounting, is the foundation to understanding
what accounting is about and, indeed, to starting to understand a most powerful way of
viewing business. In our unit, you will have an opportunity to continue to reflect on the model,
or way of viewing business reality, on which accounting is based; and to develop, over time,
your own understanding and personal meaning of these ideas.

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1.3 Five Elements of Accounting
The true sign of intelligence is not knowledge but imagination.

Albert Einstein
The key ideas underlying accounting of proprietorship and the entity concept leads us to view
a firm as having five key elements: Assets, Liabilities, Equity, Revenue and Expenses. As you
study accounting you will learn a great deal about each of these five elements of a firm. In
ACCT11059 Accounting, Learning & Online Communication, we looked at relatively simple
definitions of each element. In this section, we will look at more complete definitions of the
five elements of accounting. These will be based on the definitions in AASB CF Framework for
the Preparation and Presentation of Financial Statements.

Assets
We saw in ACCT11059, that assets are those aspects of a firm we expect will provide future
economic benefits to a firm, or in other words, we expect will add value to a firm in the future.
For example, Coffee Supreme, a firm based in Wellington in New Zealand, owns several small
silver delivery vans. These delivery vans are assets because they are expected to provide
future economic benefits to Coffee Supreme by transporting its products to customers (who
are mainly coffee shops) in the future.
We can extend this definition of assets to ‘a resource controlled by the entity as a result of
past events and from which future economic benefits are expected to flow to the entity’: AASB
CF Framework para 49 (a). As well as including the expectation of providing future economic
benefits, we have now added to our definition of assets the aspect of control (which means
the firm is able to benefit economically from the asset and to restrict others from those
benefits). This usually means the firm has formal legal ownership of the asset; but a firm may
still be able to control an asset it does not own (for example, with certain leases). The third
aspect in the definition is that the events giving rise to the firm controlling the asset have
already occurred. In the case of the delivery vans of Coffee Supreme, these are assets because
they are expected to provide future economic benefits to Coffee Supreme and they are
controlled by the company as a result of past events (ie Coffee Supreme owns the vans
because it bought them in the past).

Liabilities
We saw in ACCT11059, that liabilities are those aspects of a firm that we expect will use up
future economic benefits of a firm, or in other words, we expect will take away value from a
firm in the future. For example, Coffee Supreme may have promised to pay $50,000 in two
months to a firm in Brazil that has recently supplied it with raw coffee beans. This is a liability
because we expect this will involve using up future economic benefits of Coffee Supreme, that
is $50,000 moving out of Coffee Supreme’s bank account in two months.
In AASB CF Framework, this definition of liabilities is extended to ‘a present obligation of the
entity arising from past events, the settlement of which is expected to result in an outflow
from the entity of resources embodying economic benefits’: AASB CF Framework para 49 (b).
As well as including the expectation of the outflow from the firm in the future of economic
benefits, we have now added to our definition of liabilities that it is a present obligation. This
could be a legal obligation to pay a debt; but it need not be. The obligation could also be due
to normal business practices or due to notions of equity or fairness. The third aspect in the
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definition is that a liability must have resulted from a past transaction or event. In the case of
the promise by Coffee Supreme to pay $50,000 in two months to a firm in Brazil that has
recently supplied it with raw coffee beans, this is a liability because we expect it will involve
Coffee Supreme using up economic benefits in the future, is a present obligation (indeed, a
legal obligation) and has resulted from a past transaction of Coffee Supreme having been
supplied raw coffee beans by its Brazilian supplier.

Equity
We saw in ACCT11059, that equity is often referred to as a ‘left over’ concept: what is ‘left
over’ for the owners of a firm after liabilities are deducted from assets. This is how equity is
referred to in the AASB CF Framework: equity is ‘the residual interest in the assets of the entity
after deducting all its liabilities’: AASB CF Framework para 49 (c). I expressed the view in the
ACCT11059 Study Guide that this definition of equity does miss the point somewhat. Rather,
the concept of equity is grounded in the concept of proprietorship and of a firm being a
separate entity to its owners. It is the ‘other side of the coin’ to a firm’s assets and liabilities.
Assets and liabilities represent the current value of a firm. Equity represents the current value
of the interest of its owners in the firm.
Based on our view of business reality underlying accounting, equity will always equal assets
less liabilities as summarised and expressed in our fundamental accounting equation. This is
how the definition of equity is treated in AASB CF Framework. But equity is not in essence a
residual item. Equity has its own conceptual ‘reality’ in our view of the economic and business
realities of a firm that informs the discipline of accounting. Indeed, it is because equity does
have its own separate conceptual ‘reality’ in the way we view business in accounting, that all
transactions of a firm conceptually have a dual nature, affecting either a firm’s assets and
liabilities and, also, its equity.

Measure of value
Assets, liabilities and equity are the three elements that provide a measure of the current
value of a firm and of the interests of its equity owners, or in other words the financial position
of a firm (and of its equity owners) at a given point in time. Value is a central concept in all
our lives and we find we all have a wide range of opinions and views about what is important,
or valuable, or worthwhile in life. So, accounting enters right into this issue of what we value
in business. Indeed, accounting seeks to put a precise dollar figure on the current value of a
firm. This is useful (well, essential) because we all transact with other people in markets using
dollars to measure the value being exchanged. Firms transact in product markets with
customers, in input markets with suppliers and in capital markets with equity and debt
investors. All exchanges of value between the firm and other participants in these markets are
done in precise dollar terms. Quantifying value into hard, harsh monetary terms is
unavoidable in our market-based economy. Indeed, if nothing else, it focuses our minds
sharply on what is of value in our lives, and in particular in our business lives and experiences.
The view of the current value of a firm in a firm’s accounts is built up from every one of the
transactions recorded in a firm’s accounts. Value in a firm’s accounts is the product of
bookkeeping. The current value of a firm as expressed in its assets and liabilities (and the
current value of the interests of a firm’s equity investors as expressed in its equity) come from
bookkeeping. They do not come from anywhere else.

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Changes in value
A firm’s value is changing day-by-day and moment-by-moment because of its business
activities and of changes in its markets and in the world around it. As anyone who has been
involved in business knows, firms never stay still. Business is always ‘on the move’. The
realities of business are always shifting and changing and affecting the current value of a firm
(and the current value of the interests of its equity investors) at different points in time. It is
just the same as in life. Life is dynamic, ever-changing. Nothing ever stands still, just as we take
in each breath. Life is ‘on the move’. It does not stand still for us. We quickly, ‘get old’. We
just do not realise this when we are young. We almost think the world ‘stands still’ for us in
the moment of time in which we find ourselves. We think our lives, our world, will go on
forever just as it is. But it does not. Neither does business. The ‘current value’ of a firm, as
expressed and measured by a firm’s assets and liabilities, is not standing still. It is constantly
‘on the move’ and changing. In the dual nature of our view of business reality, the ‘current
value’ of the interests of equity investors in a firm is also constantly changing. Indeed, the two
are inextricably linked: the current value of a firm and the current value of the interests of
equity investors in a firm.

Revenue and expenses

Now we come to something important to the way we view business reality in accounting. We
usually do not keep adjusting our firm’s equity day-by-day or moment-by-moment for
changes in the value of a firm. Instead, what we do is have temporary accounts of revenue
and expenses to hold many of the various additions or reductions in our equity. Every so often,
perhaps monthly, six-monthly or yearly, we then empty out these temporary revenue and
expense accounts and calculate the net effect of our firm’s transactions for a period on the
value of the interests of our equity investors in a firm. We call this a firm’s ‘profit’ if there is
an increase in value and a ‘loss’ if there is a decrease in value. We then transfer this profit or
loss to a firm’s equity at the end of a period. We then start the next period with zero amounts
in our revenue and expenses accounts.
We saw in ACCT11059, that revenue are additions to equity as a result of increases to assets
or reductions in liabilities of a firm (other than those relating to transactions between a firm
and its equity owners). For example, this would include sales by Coffee Supreme of fresh
roasted coffee to Day Made, a café in Woolloongabba in Brisbane, near the Gabba stadium. If
Day Made paid for this coffee in cash, this would increase an asset (that is, cash) of Coffee
Supreme. Although there is not a definition of revenue in AASB CF Framework there is a
definition of income as ‘increases in economic benefits during the accounting period in the
form of inflows or enhancements of assets or decreases of liabilities that result in increases in
equity, other than those relating to contributions from equity participants': AASB CF
Framework para 70 (a).
This definition of income is also repeated in AASB 15 Revenue from Contracts with Customers
(Appendix A) and is largely the same as the definition of revenue we used in ACCT11059. In
AASB CF Framework, income (rather than revenue) is one of the five elements of accounting.
Rather than income, we are using the term revenue in this study guide, to ensure it is clearly
distinguished from some of the uses of the word income, which can refer to measures of
profit; and terms such as corporate income tax and taxable income can also refer to measures
of profitability, rather than revenue.
Although there is not a definition of revenue under AASB CF Framework, there is a definition

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of revenue in AASB 15 (Appendix A) which defines revenue as 'Income arising in the course of
an entity’s ordinary activities.' This defines revenue as occurring in ‘the course of the ordinary
activities’ of an entity. If we include the definition of income, then we see the definition of
revenue can be expressed as: 'increases in economic benefits during the accounting period in
the form of inflows or enhancements of assets or decreases of liabilities that result in an
increase in equity, other than those relating to contributions from equity participants arising
in the course of an entity's ordinary activities'. In 2017, Wesfarmers included as revenue in its
accounts, Sale of goods ($68.0 billion), Rendering of services ($12m) and Interest revenue
($84m). In the same year, Ryman Healthcare included as revenue Care fees ($227.4m),
Management fees ($61.0m) and Interest received ($0.5m).
We can see that revenue is limited to gains arising in ‘the course of the ordinary activities’ of
a firm. Now the definition of income includes revenue as well as gains that may not have
occurred in the ordinary activities of a firm, for example gains on the disposal of non-current
assets or on the revaluation of marketable securities. For example, Wesfarmers in 2017 had
as part of its income Other income from gains on disposal of property, plant and equipment
of $123m (from the sale of property, plant and equipment at greater than their book value in
Wesfarmer’s accounts); and Ryman Healthcare had Fair value movement of investment
properties of $325m (which result from revaluations of retirement village units owned by
Ryman Healthcare and which are effectively ‘leased’ to residents and for which residents
pay an occupancy advance which gives them the right to use the retirement village unit for
life). In the 2017 Consolidated income statement of Ryman Healthcare, you can see how
Ryman Healthcare has distinguished between Total revenue ($289m) and Total income
($614m), which includes revenue ($289m) as well gains not in the course of the ordinary
activities of the firm (Fair value movement of investment properties: $325m).
And we saw in ACCT11059, that expenses are reductions to equity as a result of decreases to
assets or increases in liabilities of a firm (other than those relating to transactions between a
firm and its equity owners). For example, this would include the cost of electricity used to
power the coffee grinders and roasters in Coffee Supreme’s manufacturing operations in
Hopper Street, Wellington. And transactions between a firm and its equity owners are entered
directly into equity and are not treated as revenue or expenses. They do not add value to our
equity investors; they simply represent a transfer of value between equity investors and the
firm. In AASB CF Framework para 70 (b), the definition of expenses is similar to what we used
in ACCT11059: ‘decreases in economic benefits during the accounting period in the form of
outflows or depletions of assets or incurrences of liabilities that result in decreases in equity,
other than those relating to distributions to equity participants’.
Revenue and expenses relate to a change in the value of the interests of our equity investors
in a firm during a period. Revenue increases the value of the interests of our equity investors
in a firm (that is, increases a firm’s equity) and expenses reduce the value of the interests of
our equity investors in a firm (that is, reduce a firm’s equity). If a firm’s revenues are greater
than its expenses during a period, then the firm has added (or, perhaps magically, ‘created’)
value for its equity investors. If a firm’s expenses are greater than its revenues during a
period, then the firm has reduced (or, perhaps less magically, ‘destroyed’) value for its equity
investors. Once an item meets the definition of one of the elements of accounting, it does not
necessarily mean it will be included in a firm’s general purpose financial reports. Each item
also needs to meet recognition criteria included in AASB CF Framework. We will discuss
recognition criteria for some items later in this Study Guide and also in ACCT19062
Intermediate Financial Accounting.

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Accrual accounting
Firms can last many years. For example, Wesfarmers has a market capitalisation of about $45
billion and is the largest company in Australia by revenue (about $68 billion) and the largest
private employer in Australia with over 200,000 employees. It can trace its history to 1914
(more than 100 years ago), when it started as a co-operative providing services and
merchandise to Western Australia farmers. It was listed on the Australian Securities Exchange
in 1984 and has grown into a major retail and industrial conglomerate. Since firms can last for
many years, they typically report periodically on their performance. This is because we do not
usually want to wait until a firm completes its lifespan before we find out how it is performing.
In the case of some firms, like Wesfarmers, that corporate lifespan might be very long; indeed,
it might be longer than we as individual equity investors could expect to live.
Various people with genuine interests in a firm want to know what is happening to a firm at
regular intervals during its life. To do this, financial statements are prepared using accrual
accounting rather than cash accounting. Accrual accounting requires the matching of expected
costs and benefits of economic activities in a period, regardless of whether there has been
actual receipt or payment of cash. Cash is a hard concept. You either have the cash in your
pocket from, or have handed over your cash to, another party; or you have not. There is not
too much you can argue about that. On the other hand, accrual accounting requires us to
assess the economic consequences of current business activity, which will be subjective and
will necessarily mean we need to make assumptions and judgements. Our assessment of the
economic consequences of our business activity may be wrong, either deliberately or
unknowingly. It is because we want to know about changes in value in our firm more
frequently than simply once at the end of the full life of a firm, that we need to allocate or
place our firm’s revenue and expenses into periods, which is necessarily based on making
some judgements.

Extended accounting equation

The relationship of the five elements of accounting can be viewed as:
Assets = Equity + (Revenue – Expenses) + Liabilities
or
Assets + Expenses = Equity + Revenue + Liabilities
This is often called the extended fundamental accounting equation, because it includes
revenue and expenses, or in other words, includes changes in value over a period (namely,
revenue and expenses) as well as simply measures of value at a point in time (assets, equity
and liabilities). Understanding the extended fundamental accounting equation is essential to
understanding what accounting is about. It is also a necessary first step in our journey to being
able to see aspects of the world of business as accounting experts see them and in the process
to become, over many years, an accounting expert ourselves.
In this section, we have looked at the five elements of accounting: assets, liabilities, equity,
revenue and expenses. These five elements, or ideas, underpin the view of business that
accounting can provide us. Bookkeeping is the capture of those aspects of a firm’s economic
and business realities that will support the view of business reality that accounting can
provide. A key part of this view of reality are dollar measures of current value at particular
points in time (assets, liabilities and equity) and dollar measures of changes in current value

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during particular periods of time (revenue and expenses). In the next section, we will look at
a few things we need to memorise (yes, memorise) to be able to negotiate the technical
complexities and details of bookkeeping.

1.4 Three Things to Memorise

Everyone has a photographic memory. Some don't have film.

Anonymous

To know the laws is not to memorise their letter but to grasp their full force
and meaning.

Marcus Tullius Cicero

In this section, we will look at the key things you need to memorise to be able to negotiate
successfully the technical complexity, potential confusions and details of bookkeeping. That is
right, memorise. Before we do this, however, we will see how the study of accounting at a
university level is not a process of adding ‘facts’ to our memory but actually an unsettling
process of transforming the way we view aspects of business reality.

Transformative process
The mind is not a vessel that needs filling, but wood that needs igniting.

Plutarch (46-120 AD)

The study of accounting at university does not involve us simply adding to our store of
‘knowledge’ meaningless (to us) technical ‘facts’ and ‘rules’ about how accounts are put
together. Indeed, learning at university is not an additive process at all. Learning at a tertiary
level actually has nothing to do with us simply adding new, clear-cut, black-and-white ‘facts’
from some authoritative source (such as from the lecturer or writer of a textbook or study
guide). This is not what a university education is about. Also, at university the progressive
accumulation of technical facts about accounting, disconnected from my life and from my
understanding about the reality of business, would quickly become a grinding, boring process.
Do not simply ‘learn’ accounting by memorising and reproducing ‘facts’ about accounting
you do not properly understand. Do not do this to yourself. At the end of the day, it is no fun
and will only take you down a ‘blind alley’ that will lead you nowhere. Indeed, you will not
even remember most of these disconnected ‘facts’ you superficially ‘learnt’ anyway.
Ironically perhaps, we remember far better, and more intensely and deeply, things we
understand for ourselves, and have engaged with, which mean something to us and which
have thus become part of us. And let me tell you, those recruiting graduates from our business
schools around the world know this. We are not fooled by a simple list of grades on a person’s
university transcript. We also want graduates with real substance and who have developed
(at least to some extent) genuine problem-solving abilities, lateral thinking, insight, integrity,
perspective, self-motivation, an ability to ‘self-learn’ and an ability to communicate and work
constructively with a wide range of other people. We want graduates from our business
schools who have gained the intellectual and academic foundations for a career in accounting
and business.
A university education is not an addictive process but a transformative process. It involves me
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changing in some way. Studying accounting at university involves us being engaged in the
challenging, disturbing and unsettling process of transforming the way we view aspects of
business reality in light of our understanding of the good ideas and concepts of the discipline
of accounting. To the extent we engage in this adventure, we will come out of our university
experience a different person in some way. We will be able to not only think for ourselves but
will have developed (to some extent) our own personal commitments, based on evidence,
about some of the key challenges and issues in the discipline of accounting and, indeed, in
business itself. This will change the way we view aspects of business reality in quite profound
and fundamental ways.
We will gradually, over time, start to see and think about aspects of business reality in the way
accounting experts do. We will be ready to engage in our accounting or business career with
a mind-set and approach of imaginatively acquiring the technical knowledge of accounting.
This means we will be able to relate the technical detail that inevitably is a focus of the early
years of any professional career with the central ideas and concepts of accounting. Also, as
we learn the technical details of our profession in our working life, this in turn will help us to
greatly deepen our understanding of the key ideas and concepts of accounting. This is the path
before us to become a true expert in accounting, should we wish to go down this path. It is
also the only path to being an accounting expert. If there is a short-cut to this, I have yet to
discover it.
One thing to remember about going through processes of personal transformation is that,
once started, there is no turning back. Once we find we start viewing the world differently
based on the good ideas and concepts of people who have gone before us in the discipline we
are studying, we cannot go back to the often commonly-held misconceptions about aspects
of reality we had before. The reason for this is that we have changed. If we engage in this
adventure we also find we remember much more, because what we have learned is now a
part of us, not something simply ‘tacked on’ and thus all too easily forgotten. We will
remember much more because the technical details and ‘facts’ make personal sense to us.
They will be, in a real sense, part of us.
In fact, the mind-numbing, relentless, tedious attempts to rote-memorise and reproduce
technical ‘facts’ (‘facts’ which we quickly forget anyway because we do not really understand
them) besides being boring does not even usually work. It may (or may not) work to get good
grades in assessments in a university unit; but it usually does not work very well in terms of us
learning anything of value to us, or to anyone else. If we engage in a process of ‘learning’ based
on accumulating ‘facts’ that we have little or no understanding of, we tend to find we can
actually remember very little of these ‘facts’ after a surprisingly short time (say a matter of
hours or days after an exam). The reason for this is that we never made any real personal
sense of, or connection to, these ‘facts’ which largely remained meaningless to us. We never
made them our own.

President of the United States

Education is not [simply] the learning of facts, but the training of the mind to
think.

Albert Einstein
Who is the President of the United States? What name occurs to you? Well, it is 2018 and the
US President is Donald Trump. Did you get that right? No pause, straight up with the right

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answer? Basically, pretty well everyone seems to know, to have memorised, the name of the
President of the United States. In twenty years’ time, I could ask you who was the US President
in 2018 and you will probably be able to tell me: ‘Donald Trump’. Why is that? Is it because
you have studied a university course on US Presidents, summarised in detail textbooks on US
Presidents or prepared for and sat exams on US Presidents? Or perhaps you have received a
High Distinction in POL333 Advanced Studies in US Presidents? Well, no it is not. In fact,
probably only a few of us coming on this journey of studying accounting have any real interest
in US politics, and even fewer (if any) would have studied US Presidents at university. Most
likely none of us is seeking a career in US politics. Yet you may be seeking a career in
accounting or business (or perhaps as a secondary teacher of accounting), as we study
accounting at university.
We all know who the US President is because we have heard his name repeated again and
again in the media. Indeed, the reason we all know and can easily say who is the US President
is because we have heard his name at least 40 times. If we just occasionally hear the name
Donald Trump over the coming years we will remember his name for life. Studies have shown
that if we repeat something 40 times and then simply occasionally repeat it over the years
typically we will never forget it. Never forget it. Indeed, we will not be able to forget the name
of Donald Trump, even if we wanted to. Earlier in this section, I emphasised the importance
of understanding, deeply understanding and thinking about, some key ideas and concepts in
accounting. So how does understanding some key ideas and concepts and simply memorising
some simple ‘facts’ fit in with each other?
Simply memorising, or being able to recall, the facts and principles we will look at in this
section is not enough. However, you do need to be able to recall these facts and principles if
you are going to be able to apply them to accounting and to start to solve the problems you
will face in coming to grips with accounting. To be able to negotiate and complete the
bookkeeping we will look at you will need to be able to recall the key facts and principles we
will look at in this section; and be able to understand them sufficiently to be able to use them.
And in using them you will have the opportunity to develop some real understanding of what
they mean for you. So, it is not ‘either-or’. It is ‘both-and’. It is both understand and memorise,
and as you do them both they will each interact with, and support you in doing, the other.

One minute a day

I challenge you. Invest about one minute a day writing down 5 times the three things to
memorise in this section. One minute. That’s right, one minute. Do this once a day for the next
8 days. It is not a huge workload. It does not involve you spending hours constructing largely
meaningless (to you) summaries of textbook materials you have not really thought about or
engaged with personally. It involves just one minute a day for 8 days (that is a total of 8
minutes, which you could do all in one day if you like) that will allow you to be able to recall
these key concepts for the rest of your life (if you have quite limited and occasional repetitions
in future years): for the rest of your life. Just as it works with ‘Donald Trump’, it can work with
‘Increase in an Asset is a debit’. Try it.

1st thing to memorise

Increase in an Asset is a debit
That is, an Increase in an Asset is a debit. You will notice I have snuck in three repetitions of
this already. Let’s do a fourth: Increase in an Asset is a debit. You are a tenth of the way to
doing 40 repetitions already. Why not write this down five times right now: Increase in an
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Asset is a debit. That’s right, right now.

2nd thing to memorise

Assets + Expenses = Equity + Revenue + Liabilities
This is the (extended) fundamental accounting equation.

3rd thing to memorise

In the (extended) fundamental accounting equation above, remember that:

LH side are debits 
RH side are credits
This could make a good rap, perhaps: Debits to the left; credits to the right.
That is, since an increase in an Asset is a debit, so an increase in expenses is also a debit. And
an increase in equity, revenue and liabilities are credits. Conversely, the opposite is also true:
a decrease in assets and expenses are credits; and a decrease in equity, revenue and
liabilities are debits.
This can be expressed as:

Debit Credit

Assets  Assets 

Expenses  Expenses 

Liabilities  Liabilities 

Equity  Equity 

Revenue  Revenue 

But you do not need to memorise this last table if you memorise the 1st, 2nd and 3rd ‘things
to memorise’ above. That is all you need to know. You can simply work out bits of the last
table from the 1st, 2nd and 3rd ‘things to memorise’. So, the above table is an optional
memory task. It is up to you whether you memorise this last table or not. So, this is all you
need to memorise to negotiate your way around bookkeeping. It really is a ‘piece of cake’; if
you take the few minutes you will need to memorise these three things. And the funny thing
is, most people reading this Study Guide will not do this simple task.

‘Maddie, this is Daniel’

Reading through the material in this chapter once is simply our first introduction to these
concepts, formulas and facts. It is sort of like meeting someone for the first time at a party.
We are introduced to someone, usually along the lines of “Maddie, this is Daniel; Daniel,
this is Maddie”. So, we now know each other’s name, but nothing else. When reading through
this chapter for the first time, we can do this quite quickly, looking to engage with the meaning
and ideas of the author. But to really get to know someone we need to do more than simply
be introduced at a party. Once we are introduced, we can ask each other questions and get to
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know each other a bit more. We need to engage with each other in meaningful conversation;
at first about more surface things in our lives, such as where we are from, what we do, what
music we are interested in, what movies we have seen recently; and then later, about deeper
and more personally meaningful things. It is the same with these key things to memorise. You
have been introduced to them by reading this section. The author (namely me, writing in
Chapter café in Yeppoon) has merely introduced you to some key ideas and concepts and to
these ‘three things to memorise’, which are a summary or highly condensed version of a lot
of good thinking and ideas by a lot of different people over many, many years.
When Daniel and Maddie are introduced to each other at a party, they are each much more
than simply their names; but for getting to know each other, it is a good place to start. Reading
this chapter can give you the names of some key ideas and concepts of accounting and
bookkeeping, which is a start. As part of getting to know these ideas, concepts and facts you
first need to remember some things. Just like remembering someone’s name at a party. If
Daniel and Maddie were introduced to each other at a party and then an hour later bumped
into each other again and neither could remember each other’s name, how far is their
relationship developing? Not very far. They really know nothing about each other, not even
each other’s names. You need to be able to recall these things in this section (as well as be
able to understand what they mean to you; that is, to be clear on how they are personally
connected to your understanding of the economic and business realities of firms). But you
cannot understand them, and use them, if you cannot even recall what they are. To this, even
Homer Simpson would say “Doh”.

Conclusion
You’ve got access to all of the sounds that you could possibly think of so
you’re only limited by your imagination.

Harry (Superorganism)
In this chapter, we have seen that a firm’s accounts are not themselves the economic and
business realities of firms. Each firm experiences its own realities quite independently of what
gets recorded in its accounts. Bookkeeping is the process of recording in a firm’s accounts
some aspects of what is going on in a firm. The way this is done has developed over many
years. Embedded in the approaches used is a view of business reality. Over time, this view of
reality has proven to be a powerful one. It has resulted in a profession of accounting
developing that for the past few decades has had an insatiable appetite for university
graduates from around the world, regardless of where we are in the economic cycle at any
point in time.
It has resulted in many of those with a deep understanding of accounting and its way of
viewing business reality ending up in senior management or board positions of many firms
throughout the world. These substantial career opportunities for those skilled in accounting
may well have encouraged, or even perhaps driven, you to study accounting at university in
the first place. These powerful ideas sit in behind, and are the reason for, the way we record
and include in a firm’s accounts aspects of its economic and business realities. This is what
we have looked at in this chapter; your first (or perhaps second) introduction to some
powerful ideas, and ways of viewing, business.
In the next chapter, we will start using the things we have been learning in the ‘real world’
of bookkeeping. Bookkeeping is not actually the ‘real world’, with so much changing in a world
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of profound digital disruption rolling forward each day. But what we will be looking at in the
next chapter is also in a very real sense the ‘real world’ of bookkeeping. We will be looking at
the increasingly ‘hidden world’ of bookkeeping, disappearing each day behind the mists of
digital disruption, cloud computing, automation and an exciting world of digital
connectedness that can easily obscure the mechanics and engine of bookkeeping still working
silently and powerfully behind our mobile devices and computers. The next chapter will help
us take some further steps to see how a firm’s accounts seek to capture and measure the
constant stream of business activity of firms, as it happens each day.

Footnote
1. Foulke, R.A., Practical Financial Statement Analysis, Mc-Graw-Hill New York, 6th ed,
1968: 4. As noted by Foulke, these accounts are reproduced in detail in Enrico Bensa,
Francesco de Marco da Prata Milan: Fratelli Treves 1928: 414-17.

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