Keying In on Profit
Start with the big picture. The key purpose of an accounting system is to enable you to answer the burning question, “Am I making any money?”
Accounting is that simple. Really. At least conceptually. So, throughout the rest of this appendix, I just talk about how to calculate a business’s profits in a reasonably accurate but still practical manner.
Let me introduce you to the new you
You just moved to Montana for the laid-back living and fresh air. You live in a cute log cabin on Flathead Lake. To support yourself, you plan to purchase several rowboats and rent them to visiting fishermen. Of course, you’ll probably need to do quite a bit of fishing, too, but just consider it the price you pay for being your own boss.
The first day in business
It’s your first day in business. About 5 a.m., ol’ Peter Gruntpaw shows up to deliver your three rowboats. He made them for you in his barn, but even so, they aren’t cheap. He charges $1,500 apiece, so you write him a check for $4,500.
Peter’s timing, as usual, is impeccable. About 5:15 a.m., your first customers arrive. Mr. and Mrs. Hamster (pronounced “ohm-stair”) are visiting from Phoenix. They want to catch the big fish. You’re a bit unsure of your pricing, but you suggest $25 per hour for the boat. They agree and pay $200 in cash for eight hours.
A few minutes later, another couple arrives. The Gerbils (pronounced “go-bells”) are very agitated. They were supposed to meet the Hamsters and fish together, but the Hamsters ...