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Background - Accounting

Background  — Fri 4 Mar 2022

This is a background article. It explains a concept mostly, and not per se how to use Daxto specifically.

What is accounting?

You would almost forget. Usually we dive deep into the details straight away. There are plenty of those, right? But let's take a moment to start at the beginning: accounting, what is it really?

Accounting is writing down anything that has to do with value. So what value are we talking about then?

  • All things that belong to you.
  • All things that you have borrowed.
  • All money coming in.
  • All money going out.

In more formal words; assets, debts, income and expenses. It is not a coincidence that your balance is a report about just these things. When you keep track of these four things, you are accounting. You can keep track of these for your household too. The same four things matter in that case. But this article is about accounting for business owners. So let's get to it.

Why account?

It seems obvious that accounting is done by entrepeneurs just to satisfy the 'Belastingdienst' (the Dutch tax revenue office). Any entrepeneur should be able to show the books for that matter. And those books need to make sense. That is the obligation of any entrepeneur.

Yet, that is not the top reason to perfect accounting for any enterpeneur. In fact, accounting is something you do mostly for yourself. And even though it can sound boring or like your least favorite thing perhaps, it is also the most important thing for any entrepeneur to take care of. The more you learn about it, the easier it becomes and also the more useful it becomes.

Becoming an entrepeneur is simply about earning a living. So any entrepeneur needs to have a positive income flow. And only by keeping track of all of your figures you can respond in time to avoid having a negative one. So keeping track of all the details is a must. Only this can show you what is going well, and what could be doing better. And thus which decisions need to be made now, and which decisions can wait.

Without having up to date books you are not an entrepeneur, but just a sales person. Always busy securing more profit, but never looking at the bigger picture.

How accounting started

Accounting started roughly 10.000 years ago in an area we now call the Middle East. No much later people were doing math on abacuses. Egyptians also recognized the potential straight away, and even took it one step further. And this is how accounting started to evolve. It got rooted deeply and over time kept reinventing itself over and over.

The system of accounting that we use today is based on the work of Luca Pacioli (1446-1517, Toscany, Italy). He was a commerce and business scholar, with a personal interest in math. Between 1472 and 1475 he also became a monk. But this never kept him from thinking about, and teaching about, commerce. Luca invented the concept of double bookkeeping. Do not confuse this with cooking the books:

  • Double bookkeeping: double-entry accounting, so you can check each change twice to make sure it was done right.
  • Cooking the books: keeping two different books. One having the real figures, for yourself, and one using fake figures to fool any inspector checking your books.

Double bookkeeping has simplified accounting and made discovering errors much easier. This was a major step forward for accounting. It has saved many entrepeneurs serious headaches. Since then, the next major breakthrough for accounting has been computers.

How accounting continues

By having computers and software, we have arrived in a new era. Everything is faster, more is being kept track of and more is checked automatically. And this is unavoidable. Being an entrepeneur, just like anything today, has become more complicated. We used to compete with other entrepeneurs within the same town. Yet, today we compete with every entrepeneur on this globe.

Staying ahead of the competition means embracing whatever we can. Noticing small changes, and noticing them faster, has become essential. This is only possible because of computers. Mankinds most advance 'abacus' until today. Daxto is pushing that narritive even further, by demanding the absolute most from those computers. And therefor striving for the best in the history of accounting so far.

The core: value

The core of any accounting is keeping track of changes in value, the moment it happens and the reason why it is happening. Changes meaning: the exact moment the value of your business increases, decreases or moves around. Value can be about cash, but also about things. And all of those changes you record by:

  • Invoices. Those form a legally binding contract between a supplier and a customer, and thus an obligation to deliver and an obligation to pay for it.
  • Transactions. That includes all amounts that are received and paid from financial accounts. Often a direct result of invoices, but that is not always the case, for instance banking costs.
  • Bookings. Those include any other change in value (cash and things) that come into your business, leave your business, or are moved around within your business.

You keep track of all these changes of value by using overviews of invoices, transactions and bookings. Apart from invoices and transactions, you write down bookings in the memorandum. Keeping oversight is easy by using the profit & loss report and balance report. Now, how that all works, you'll read about in the coming chapters of this series called 'The core of accounting'.

The core of accounting

This background article is part of a series called 'The core of accounting'. Nowhere does it state its illegal to read the rest of it.

  1. Accounting (you are here)
  2. Accounting lingo
  3. Balance
  4. Profit & loss
  5. Memorandum