Accounting is Life!

by Chad Thompson

I was drawn to the accounting profession when I heard the phrase "accounting is the language of business." I'm not sure who coined that phrase, but I'm taking credit for this one - "Accounting is Life."

What a bold statement. It's a statement that no doubt requires explanation. So here goes. We start our lives with basic everyday needs such as clothing, shelter and food. These items are provided by our parents or other custodians. These items do not come free and therefore require expenditures. Within the accounting world expenditures are characterized as "operating expenses," or "investments." In our early years, we are the beneficiaries of investments by our parents. That's right, our parents invested in us. They provided funds so that we could meet our basic needs, and perhaps a little beyond. One makes investments for the prospect of a future return. Our parents invested in us in return for the joys and experiences of raising us and the satisfaction of taking credit for helping us to achieve our goals in life. In accounting, the difference between an expense and an investment is generally that an investment will provide benefits in future periods, where the benefits of an expense pass quickly. For instance, a meal is an expense. What we eat for lunch will not likely provide much benefit after today.

As we progress in age, we stop receiving the benefits of investment. We begin working and paying for our own basic expenses. And in doing so, we engage in accounting transactions daily. Every hour we are on the job, we are accruing, or earning income. We spend those earnings on operating expenses or investments of our own. Thus, every single day, we are compiling transactions for our personal income statement, or balance sheet.

As we work and control our expenditures, we have savings, much like a corporation earns profits. We often invest those savings in a savings account, brokerage account or a house. A home is the ultimate accounting transaction for most of us. The price we pay for the home plants itself firmly on the asset side of our personal "balance sheet." It is not alone on the balance sheet, however. The mortgage is shown on the liabilities side of the statement. And the difference between the two represents our down payment through savings, which is our equity. And so it is: each time we invest, we change our balance sheets. The fact is that our balance sheets are continually changing. As we pay the principal on the house, the mortgage balance goes down and the equity goes up. We change our balance sheets more often than we change our bed sheets (don't quote me on that one).

Let's change the focus from investments to operating expenses. Our operating expenses include gas, home maintenance, supplies, food, entertainment and so on and so forth. These are all transactions for our "income statement." But it's even larger than that. Each time we purchase an item, somebody else receives a sale for the "income" section of his/her or a corporate income statement. The transactions in which we engage are included in the earnings reports published by large, publicly traded companies. These earning reports impact the companies' stock prices. The stock prices then have an impact on the entire capital market system, and affect the amount of capital available for lending or borrowing. The capital market system then has an impact on the economy. The economy then impacts everything from a company's expansion, to an individual's choice to invest in a child. This sounds like the circle of life. It's the circle of accounting.

One could also draw comparisons between life and other business disciplines. Take marketing, for instance. Marketing on a personal level could be how you present yourself in an interview or on a date. Likewise, business management theories may provide practical insights into running our family lives, or conducting our social network. But here's what separates these notions from accounting--accounting occurs naturally. A successful marketing campaign does not just happen. And the management of anything requires active attention. But accounting can occur while you sleep. That's right: the interest income in your investment account accrues while you sleep. In comparison, if you don't get out of bed for, say, three days, you will have accrued more interest expense on your mortgage payment than three days before. And at the end of three days, you are probably pretty hungry, so your need for food expenditures has not gone away.

Accounting occurs naturally. It is the natural result of running our lives. Accounting is all around us. It continues while we sleep. It engages us when we are awake. It can even occur without us knowing it. It's been here long before us, and it will survive us. Yes, accounting is life.

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