Wise Accounts Blog

Why do some accounts start with zero and others don't? As you start a new accounting system you may indeed have not earned or spent a cent yet but it doesn't mean you are worth nothing.

Since you were not born overnight in a cabbage patch a new set of accounts has to reflect your personal worth. There are things that trail us from year to year and accounting is concerned with what we own and what we owe.

Sleeping on it does not make a debt disappear. If anything it costs you more in interest at best, at worst it can get the lender irate and claim all his money back all at once.

So we find there is a tight relationship between time and money. Knowing how much you spent or earned in of itself doesn't mean much. What's more interesting is how much you spent and earned within a given amount of time (a week, a month or a year) so that we can compare with the same period (last week, last month, last year) and see if things are improving or getting worse.

Accountants segregate those two types of accounts into two reports.

The profit & loss report shows earnings and expenses that get reset each time period.

The balance sheet shows what you own and what you owe. These things get passed on from period to period. You don't get off the hook with your borrowing if a new financial year starts. Likewise you'll be happy to know you don't loose your house or car just because a new financial year starts either!

So what is the best accounting period for you? If you are a wage earner then the period by which your income comes in is the obvious period to choose.

If you run a business and major regular outgoings fall due at regular intervals then that might be the time measure to use. You first have to clear off your expenses before you hit the profit zone. How soon in the period you can achieve that is a great motivator all by itself.

Is there a connection though between the two reports? Remember the first report was called profit & loss. (it should really be called profit OR loss - or just either PROFIT if you are gaining ahead or LOSS if you are falling behind).

If the first report is reset to zero at the start of each new period then the profit (or the loss) is passed on to your net worth (also called equity) into the second report (the balance sheet).

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