Accounting is a zero-sum game

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Grant  GilmourQuestion:

What does it mean to “balance the books”?

 Facts:

The double entry bookkeeping system we have used for years for accounting requires that the books “balance”. What that means is that the value of a business is its assets minus its liabilities.

The two must be equal. If they are not, you have forgotten something.

Lifetime Profit = assets minus liabilities

Discussion:

The formula is written many different ways. But it is all the same formula just with the parts moved around. You can write it:

Assets = liabilities plus profit
Assets = liabilities plus retained earning

The parts of the formula can be broken out:

Retained earnings = profit
Profit = sales less expenses

The point is that the formula is always the same and in balance. The meaning of the formula is that no matter what you change it will affect something else in the formula. This is what we call a zero sum game. A change in one place will always result in an equal change somewhere else in the formula.

Recommendation:

If you want to discuss the real world “formula” of what accounting measures and what making changes means, please get in touch below. We are working to ensure every client gets a chance to learn and act on the formula that is best for them.

Grant Gilmour, BSc (Hons), MBA, CPA, CA, CICA – ITC
Partner, Gilmour Group CPA’s
Email: faqs@gilmour.ca
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