A Story for Relating to Accounting Basics

 
I will present the basics of accounting through a story of a person starting a new business. The person is Mr Femi Omotayo–a savvy man who sees the need for a parcel delivery service in his community. Femi has researched his idea and has prepared a business plan that documents the viability of his new business.

 Femi has also met with an attorney to discuss the form of business he should use. Given his specific situation, they concluded that a corporation will be best. Femi decides that the name for his corporation will be Fast Delivery, Inc. The attorney also advises Femi on the various permits and government identification numbers that will be needed for the new corporation.

Femi is a hard worker and a smart man, but admits he is not comfortable with matters of accounting. He assumes he will use some accounting software, but wants to meet with a professional accountant before making his selection. 

He asks his banker to recommend a professional accountant who is also skilled in explaining accounting to someone without an accounting background. 

Femi wants to understand the financial statements and wants to keep on top of his new business. His banker recommends Miss Chima, an accountant who has helped many of the bank's small business customers.

At his first meeting with Chima, Femi asks her for an overview of accounting, financial statements, and the need for accounting software. Based on Femi's business plan, Chima sees that there will likely be thousands of transactions each year. She states that accounting software will allow for the electronic recording, storing, and retrieval of those many transactions. Accounting software will permit Femi to generate the financial statements and other reports that he will need for running his business.

 

Femi seems puzzled by the term transaction, so Chima gives him five examples of transactions that Fast Delivery, Inc. will need to record:

1. Femi will no doubt start his business by putting some of his own personal money into it. In effect, he is buying shares of Fast Delivery's common stock.
2. Fast Delivery will need to buy a sturdy, dependable delivery vehicle.
3. The business will begin earning fees and billing clients for delivering their parcels.
4. The business will be collecting the fees that were earned.
5. The business will incur expenses in operating the business, such as a salary for Femi, expenses associated with the delivery vehicle, advertising, etc.

With thousands of such transactions in a given year, Femi is smart to start using accounting software right from the beginning. Accounting software will generate sales invoices and accounting entries simultaneously, prepare statements for customers with no additional work, write checks, automatically update accounting records, etc.

By getting into the habit of entering all of the day's business transactions into his computer, Femi will be rewarded with fast and easy access to the specific information he will need to make sound business decisions. Chima tells Femi that accounting's "transaction approach" is useful, reliable, and informative. She has worked with other small business owners who think it is enough to simply "know" their company made N4.5million during the year (based only on the fact that it owns $30,000 more than it did on January 1). 

Those are the people who start off on the wrong foot and end up in Chima's office looking for financial advice.

If Femi enters all of Fast Delivery's transactions into his computer, good accounting software will allow Femi to print out his financial statements with a click of a button. In next note, Chima will explain the content and purpose of the three main financial statements:

1. Income Statement
2. Balance Sheet
3. Statement of Cash Flows

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