1. Funding Butterfly
The Balance Sheet is the primary financial report. Other reports, such as the Income Statement (Profit and Loss Report), the Cash Flow Statement and the Statement of Changes in Equity, are all subsets of the Balance Sheet. In other words, they provide further explanation of one or more summarized numbers in the Balance Sheet.
An Overview
The Balance Sheet is often described as a 'snapshot' of the financial position of an entity at a moment in time. The monetary value of the assets together with the obligations of the business to the creditors (lenders) and the owners. And all expressed in the 'voice' of the business.
The duality of accounting provides perfect symmetry in the Balance Sheet (and hence the name).
Accounting comes from the concept of accountability embodied in the duality.
In the video below, we link the Funding Butterfly to the Accounting Equation and the traditional Balance Sheet. [4.55 mins]
Video 1.1 - The Context of Accounting
Accounting comes from the concept of accountability embodied in the duality.
In the video below, we link the Funding Butterfly to the Accounting Equation and the traditional Balance Sheet. [4.55 mins]
Video 1.1 - The Context of Accounting
The following video can be used as 'pre-learning/homework' for a flipped classroom approach or as a post-class summary. It is an extract from an actual workshop where the complete funding butterfly activity is demonstrated live by Mark Robilliard. [22.28 mins]
Video 1.2 - The Funding Butterfly
1.1 Entity and perspective
Entity theory helps overcome one of the biggest linguistic confusions for accounting students: perspective or point of view. In accounting, the language changes with point of view. For example, a company making a loan to an organization treats their loan as an asset, but in the organization it is treated as a liability (against the asset received).
The following video gives a simple example using a customer/vendor transaction. [x.xx mins]
Video 1.3 - Pineapple (Point Of View / Perspective)
Filmed in a 2018 workshop in Malaysia, Color Accounting co-founder, Mark Robilliard, provides a demonstration of entity theory using the 'pineapple Point-Of-View' activity.
The following video gives a simple example using a customer/vendor transaction. [x.xx mins]
Video 1.3 - Pineapple (Point Of View / Perspective)
Filmed in a 2018 workshop in Malaysia, Color Accounting co-founder, Mark Robilliard, provides a demonstration of entity theory using the 'pineapple Point-Of-View' activity.
Perpective is just like buying a pineapple...
If a customer walks into a fruit shop with the intention of getting a pineapple: they are thinking
"I'd like to BUY a pineapple".
The fruit shop has the intention of providing a pineapple to whoever wants one: they are thinking
"I'd like to SELL a pineapple"
So, is it BUY or SELL?
The same transaction, uses two different words to describe the exact same event. The correct word to use depends on whose perspective we are looking from at the time.
In accounting, people are often talking from the wrong perspective, and end up using the wrong words. This can lead to great confusions, badly worded legal documents and even court battles!
If a customer walks into a fruit shop with the intention of getting a pineapple: they are thinking
"I'd like to BUY a pineapple".
The fruit shop has the intention of providing a pineapple to whoever wants one: they are thinking
"I'd like to SELL a pineapple"
So, is it BUY or SELL?
The same transaction, uses two different words to describe the exact same event. The correct word to use depends on whose perspective we are looking from at the time.
In accounting, people are often talking from the wrong perspective, and end up using the wrong words. This can lead to great confusions, badly worded legal documents and even court battles!
1.2 The accounting duality... a funding butterfly
Double-entry (modern) accounting is a component of 'double-sidedness' or 'the duality'. This is one of Pacioli's key concepts and is part of the automatic self-balancing structure of the general ledger.
1.2.1 Assets - it's all about the assets
We continue with the 'assets' theme and become clearer on what is, and what isn't, an asset. Anything of value is an asset, but not all assets are recognized as such (control, realization of embodied value, measurement).
An entity has assets, and those assets are ascribed a value expressed as a monetary amount. For each asset that the entity claims, it has an obligation to an external party: the owner/s (Equity) and or the creditors (Liabilities). The Funding Butterfly summarizes this relationship.
In the following video, 'Business Is All About Assets,' we explore the essential nature of an asset. Anything of value is an asset, but not all of these things are recognized in the balance sheet - why not?
Also, there is the essential duality of accounting: for every asset there is an equivalent value claim on that asset. But what does that look like?
In the following video, we explore the essential nature of assets (rights) and the obligation of the entity against those assets. The obligation comes in two parts: liabilities and equity. [8.51 mins]
Video 1.4 - Business is all about the assets
In the following video, 'Business Is All About Assets,' we explore the essential nature of an asset. Anything of value is an asset, but not all of these things are recognized in the balance sheet - why not?
Also, there is the essential duality of accounting: for every asset there is an equivalent value claim on that asset. But what does that look like?
In the following video, we explore the essential nature of assets (rights) and the obligation of the entity against those assets. The obligation comes in two parts: liabilities and equity. [8.51 mins]
Video 1.4 - Business is all about the assets
Using the BaSIS Framework, we provide an overview of 'What makes an asset, an asset?' For now you can ignore the other 4 elements of the BaSIS Framework shown: Liabilities, Equity, Expenses and Income. [2.20 mins]
Video 1.5 - What makes an asset, an asset?
Video 1.5 - What makes an asset, an asset?
1.2.1 Liabilities and Equity
Liabilities and Equity are the terms that describe the two different types of obligation of the entity. Both exist only as a legal concept and as such are intangible.
Using the BaSIS Framework, we provide an overview of Liabilities. Ignore the Income Statement for now.
Hint: they're not expenses.
Video 1.6 - Liabilities
Hint: they're not expenses.
Video 1.6 - Liabilities
Using the BaSIS Framework, we provide an overview of Equity. Ignore the Income Statement for now.
Hint: it's not an asset.
Video 1.7 - Equity
Hint: it's not an asset.
Video 1.7 - Equity
1.2.2 Accounting equation
In this brief video, we demonstrate how the BaSIS Framework connects to a traditional Balance Sheet. [0.30 mins]
Video 1.8 The BaSIS Framework and the Balance Sheet
Video 1.8 The BaSIS Framework and the Balance Sheet
Recap
In this video, we re-cap how the butterfly becomes the BaSIS Framework, and demonstrates how double-entry accounting appears by using some simple start-up style transactions. [4.47 mins]
Video 1.9 - The balance sheet & double-entry accounting
Video 1.9 - The balance sheet & double-entry accounting