4. Summary of key learnings so far
Now that the Classic Transactions activity has been completed, it is time to take stock of what we have learned so far. This will both allow us to consolidate the learning and begin thinking on a different level.
4.1 The Value Cycle
The Value Cycle is a conceptual model that reflects the essence of how business works, and how it achieves its purpose.
4.2 Accounting is an asset-centric story
The other general ledger elements (Liabilities, Equity, Revenue and Expenses) are all defined in terms of their relationship to Assets.
4.3 Income statement - information flow
The layout and format of the Income Statement typically used internally (management accounting) by organizations differs markedly from those produced for external reporting which are much more summarized and piecemeal. Below is the typical information flow within an income statement produced for management use. It starts at the top and works down via 'cost of sales' and 'gross profit' to the net profit.
Note: management accounts produced for internal use would not typically show income tax expense. It is included here for completeness. Operating Profit is sometimes called Net Profit or Net Profit Before Tax (NPBT) and Profit After Tax is sometimes called Net Profit After Tax (NPAT).
T-accounts are widely used in accounting education to help explain accounting transactions. When used after learning the fundamentals with Color Accounting and in conjunction with the BaSIS Framework, they become a very powerful tool.
Mark Robilliard voices an animated summary video of how T-accounts work with Color Accounting. Note: Income is being used as a synonym for Revenue. [4:18 mins]
This is a fun little video about debits and credits, from a frog's perspective... [1:00 min]