The Joy of Accounting: A Game-Changing Approach That Makes Accounting Easy

By Peter Frampton and Mark Robilliard

Discover a new, graphical way to conquer accounting.

HOW THIS BOOK IS DIFFERENT AND DELIVERS RESULTS

The Joy of Accounting uses a revolut

• Language: English
• Publisher: Accounting Comes Alive, Inc
• Release date: Oct 6, 2020
• ISBN: 9781735312934

Peter Frampton

Peter Frampton is a businessman, educator and advocate for accounting literacy. He is the Co-CEO of educational publishing company Wealthvox.When qualifying as a certified accountant at the world's largest accounting firm he started with a friend a twenty-year inquiry into why people found it hard to learn accounting. That began a quest to find a better, easier way to teach it, and give people access to greater financial and business literacy.The upshot of that successful journey is the groundbreaking book The Joy of Accounting. The better way they discovered involves the use of color, a concept-map, explanatory sequences, uncovered assumptions and a focus on plain words. The Joy of Accounting is a breakthrough text that makes accounting easy for all types of learner. Its simplicity, lucid explanations and relaxed style appeal to anyone, regardless of prior experience. Authored with Mark Robilliard and with input from dozens of educators, the book is a standout contribution to business education. It draws on techniques refined in thousands of workshops and classes in schools, universities and workplaces.Mr Frampton was born in South Africa and has lived in Sydney Australia and Washington DC. He started several businesses in healthcare, technology and education, and founded an award-winning business incubator. He has been on the adjunct faculty of American University in Washington DC and has been a guest lecturer at numerous other universities such as Georgetown, Wharton and Exeter, in the US, UK and Africa. He is based in Geneva, Switzerland where he loves being outdoors on his mountain bike.

Book preview

LEARN WITH YOUR HANDS

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Part 1

Principles of Accounting

1. What is Accounting?

I Want to Buy a Pineapple

I hear that you love pineapples. Couldn’t agree with you more. Delicious. Love ‘em. Prickly yes, but oh so juicy. An old symbol of hospitality too, going way back hundreds of years to a time when in Europe they were rare exotic imports. People would pass them around and display them on their mantles.

And here you are now, walking into our store, Lemonade & Laughter, for a fresh specimen.

Welcome! I’m so happy you’re here. You’ve come to the right place to get one of those amazing fruits.

So here we are: you to buy a pineapple, I to sell a pineapple.

Now, enter Annie the Accountant. She’s the business storyteller. She’s going to tell the financial story of what happens in our mutually beneficial transaction. You giving me cash, me giving you a pineapple, me gaining cash, and you gaining a pineapple. Fine, but whose story will she tell? Yours or mine?

Let’s hit pause for a minute on this playful and somewhat quirky start to what is, in truth, a wholly serious accounting book, because here comes the most important cornerstone of the linguistic construct that is accounting. An underappreciated point, a misunderstood distinction that almost everybody gets wrong. It’s the source of myriad confusions, mistakes, misconceptions, and incorrect definitions in the world of finance and accounting.

The issue centers around this question of whose story is being told: Yours or mine?

And the answer is… neither. Insert long silence. The story that we’ll tell about this pineapple exchange scenario is the story of Lemonade & Laughter itself.

Every accounting story is told about and from the point of view of a business entity. This business entity is undertaking the sale transaction, and it is always separate from its owner.

There’s always a business entity, and there’s always a separate owner of the entity. The business entity and the owner are never one and the same.

Sometimes it’s obvious that the business is a separate thing. For example, the business may be called Lemonade & Laughter, Inc. Inc. means incorporated. As such, it’s clear that there’s a corporation, which is registered and which has a life of its own. But even if this isn’t the case—if there isn’t a separate registered corporation—for accounting purposes, there must exist a separate entity whose story is told.

Let’s say I grow pineapples in my own backyard, and I sell them in my own name, as what’s called a Sole Trader. Accountants will still tell the story of a separate pineapple-selling business. The business is imagined, or as we say, the separate entity is imputed.

I, the one who grows pineapples in my backyard, become the owner of the imputed separate accounting entity.

So, even in our little backyard scenario where Lemonade & Laughter is me, there are three parties: you, the customer; me, the owner of the enterprise and the worker in it; and Lemonade & Laughter, the business entity undertaking the financial activities about which Annie will tell the story.

Figure 1. The separate business entity.

This separate entity concept is so important for you to understand that we’ve given it a symbol. A pineapple, of course! From now on in this book, the pineapple symbol stands for remember the separate entity and check your point of view. Whenever you see the pineapple map-pin image in this book, you are reminded to check whether you’re thinking about the situation from the correct point of view.

One of the many teachers around the world who use the Color Accounting Learning System technology in this book to teach schoolkids is Anne Brown. Anne taught for years in high schools and ultimately became a national high school examiner of accounting. Anne said to us one day: You know, after teaching accounting for forty years, I now reckon that getting the point of view right is the most important thing if you’re going to understand the subject.

Figure 2. Pineapple means make sure you’re thinking from the correct point of view.

Welcome to Accounting

Welcome to accounting. We’ve gone and thrown you right in the deep end, so to speak. So, let’s take a breath, step back, and ask ourselves a few questions about the context of what we’re about to learn. Like, what actually is accounting? We said that Annie Accountant was standing by to tell the story of the separate entity, which we called Lemonade & Laughter. What is her job?

Financial reports describe the state of a business and how it has been performing. The purpose of accounting is to provide useful information for decision-making to the readers of these reports.

Useful information is what’s key. If you simply list everything that a company has, then that’s just data. To turn data into decision-useful information, accounting sorts and groups it.

By sorting similar assets and similar debts into groups and measuring them, the reader gets a much clearer picture of what the business is about. Data becomes information as long as you can understand the language.

After sorting, we can see what types of assets are used to run the business, how long they’ll last, and what they’re worth. With this information in hand, we may notice a shortage of some assets and an excess of others. When assets are sorted and sized, we can start comparing different groups to see whether we’ve got the right amount, and whether we should order more or cut back. We can check that we have enough critical assets like cash, and work out when we can expect to get more cash from people who owe us.

The assets are sorted, and so are the debts of the business. The debts of the business are grouped by type of debt and by when it must be settled. That’ll give us even more useful information, such as our ability to settle the debts. Some must be settled soon, perhaps in days or weeks; for others, the business will have plenty of time to get the money together. We’ll refer to the debts of the business by other names too, such as liabilities and obligations.

Questions, Questions, Questions

Readers of financial reports typically want answers to questions such as…

Assets:

Howmuchinvestmentinassetsisthecompanyusing?Nowandpreviously?

What sort of assets are they? For example, are they buildings, equipment, goodwill, cash,orgoodsforsale?Aretheytangibleorintangible?

Are they liquid or not—can they be sold quickly or are they going to be around for a long time?

How were the assets funded? Has the company borrowed assets from lenders, and howmuchdiditgetfromtheownersofthebusiness?

Debts, Liabilities, & Obligations:

Byhowmuchandtowhomisthecompanyindebted?

How long does the company have to settle its debts? Are they short-term or longtermdebts?

Whatrateofinterestaretheliabilitiesincurring,andwhenispaymentdue?

In what order must the company pay back its funders? Who’s at the front of the repaymentlineandwhowouldgetpaidlast,especiallyifthebusinessfailed?

Performance:

To what extent has the company managed to grow its assets organically by serving itscustomers?

Howmuchoftheseassetsdidthecompanyhavetoconsumeinordertogrowtheassets?

Given the size of the company’s investment in assets, what level of return is being generated?Howdoesthiscomparewithotheroptions?

That’s quite a list of things we are interested in when reading financial statements. Yet it’s not exhaustive. There are other questions to be asked. These ones above address just some of the main issues that readers want to know about.

Two Things

Yet even though the list above has many points, it’s still really about just two things: assets and how they are funded (by obligations).

If you pull finance apart to its elemental parts, that’s all there is: assets and obligations. There’s how the business acquires assets from funding providers, and then how it arranges them, grows them, uses them, and disposes of them. There’s also how the associated obligations are arranged. That there are just these two things, assets and obligations, is good news. It’s why accounting can be really key ingredients: assets and obligations. These are the principle elements of what is often called the language of business. Accounting literacy is the fluency to work with and speak that language. This book is going to give you access to accounting literacy.

The Glue That Holds Civilization Together

Big things are built with simple concepts. Ultimately, accounting is about accountability for all of society. Accountability is what advances civilizations, economies, enterprises, environmental stewardship, and personal prosperity. There can be no financial accountability without accounting. It’s the glue that holds together the finances and lives of people, companies, communities, and nations.

Without accounting literacy, people make suboptimal decisions in their personal and business lives. They don’t engage as constructively as they could with their advisors, colleagues, or even their spouses. We’ve met so many people whose careers and lives have been hamstrung through lack of accounting literacy, and from fear of engaging in the numbers of a business, budget, or project. So let’s change that, starting with these first steps…

Separate Business Entity

We began by saying accounting always tells the story of a separate business entity. Let’s look in further detail at what separate and business mean.

We said the business always has an owner. It always has a master whom it is serving. There’s always, by definition, a separation between the business doing the serving and the master being served. By serving, we don’t in this instance mean serving the customer—we mean growing value for the owner. The business is trying to make itself more valuable for its owner’s benefit.

That said, the term owner may not be strictly correct—there’s an esoteric question about whether shareholders actually own a company, or just have some rights over it.¹ For some businesses, the master is not a shareholder but a stakeholder who benefits in a more general way from the company’s work.

Figure 3. Every business has a master.

Accounting always tells the story of the separate business entity—not the story of its owner.

Figure 3 shows the separation between business and master. The diagram depicts a human as owner, but that doesn’t have to be the case. The owner can be another business, as shown in Figure 4. The new owner of the original business will of course have its own owner.

Figure 4. the owner of an accounting entity can be a financial entity or a natural person.

The Business of You

This applies to you too. The story of your finances is not actually told from your point of view. It’s told from the point of view of—what we can think of as—The Business of You. To tell your financial story we impute a separate entity.

You can think of this business of you as You incorporated, or Financial Persona You, or your financial avatar. Accounting tells a story of this Imputed Business of You. You the human being are the imputed business’s owner. You own Financial You.

Figure 5. Your personal financial story is told from the point of view of a separate financial entity.

Being clear about whose story is being told is important. Confusing the point of view of the story is a source of a lot of confusion for accounting students, and it’s easy to do. A lot of the real-life situations that accounting describes involve multiple parties. As we learn to describe the situations in accounting terms, we need to always first get clear on which party we are tasked with describing. Our job is to tell the story of just one of the many parties involved in the scenario. For example, if we’re describing an investing scenario, there would be the investor and the company in which the investor is investing. If we’re describing a sale of goods scenario in a shop, are we telling the customer’s story as buyer, or the shop’s story as seller?

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Business Separate from Personal

It’s not just for accounting reasons that we should think of the business as separate from the owner—it’s also a good management practice. Think of the backyard grocery-selling business that we’ve imagined. Even if the assets and obligations of that business are legally part of your personal finances, you should regard them as belonging to a business that’s separate in its own right. Of course, it’s only a subset of your greater financial story.

Figure 6. Even a personal sole proprietorship business is accounted for separately from its owner.

You will make different management decisions if you regard the business as separate from your personal finances. Imagine you take some of the money you made selling pineapples and then spend it to buy your friend a meal on the way home from a day at the local community market. If you don’t separate the business-accounting from your personal-accounting, then you may get home and calculate that your grocery business made no money when it actually did. What happened was that you as the owner of the business drew money out of the business and then personally spent it on your friend. You’d come to a false conclusion about the business if you judged it by how much cash you had in your pocket when you got home.

Sorry, It’s Not My Money

Seeing the business as separate from your personal finances is important for even more reasons. When we were teaching in a small rural community, one of the micro-business owners in the workshop told us she earned a living doing clothing repairs with a sewing machine. When we distinguished the concept of her business as a separate entity, she was thrilled due to an issue we hadn’t thought of. She told us that in impoverished communities, it’s hard to build up funds to grow a business and invest in new equipment, in part because relatives come asking for financial support for funerals, education, and other compelling personal needs. The business owner exclaimed that now that she saw the business as separate from herself, she could politely decline the requests for support, saying she didn’t have any money to give. Sorry, the money you’re seeing me receive from the customers isn’t mine—it belongs to the business!

Legal Registration

That a business should always be seen as separate from its owner should now be clear. Sometimes this separation is obvious because the government allows for the incorporation of a nonhuman person to be the business. The word incorporate comes from the Latin word corpus, which means body. So, to incorporate means to give something form as a body. The authorities recognize the incorporated entity as a legal person. Accounting regards this incorporated entity as the financial entity whose story is told.

On the other hand, the law does not recognize a legal separation between the owner and a sole trader. The main relevance of this for the business owner is that the debts of the business are (for legal purposes) regarded as one and the same as the debts of the business owner. The owner of a sole trader is therefore responsible for settling the debts of the business if the business can’t do so itself.

If a creditor who is owed money by the business is chasing the business for settlement of a debt, they can sue the owner for the payment. This may result in the owner’s personal (non-business) assets, like their house or car, being seized under the authority of the law.

Limited Liability Companies

This risk to the owner of losing their assets because of the debts of their business leads to one of the most brilliant economic creations of modern civilization: the limited liability company. The fully paid-up (meaning they’ve fully paid for their shares in the company) owners of limited liability companies are not responsible for the debts of the company. If the company can’t pay its debts, the lenders can’t chase these owners for payment.

This form of company has unleashed the power of humans to collaborate economically on a scale that wouldn’t otherwise be possible. Limited liability companies allow for enormous groups of people to band together, each contributing some money (or capital) for a common purpose: to undertake massive and risky ventures to benefit humanity and generate wealth for owners, lenders, and stakeholders in the greater society.

How else would entrepreneurs marshal the funding and workers to create today’s massive projects, like building new types of electric cars, digging a tunnel under the English Channel, or building a massive network of warehouses, trucks, and planes to deliver parcels to your door, as Amazon does? All of these mega-projects are possible because of