Guide to Management Core Subjects- Accounting

Accounting is for accountants, right? So why are managers being taught this dull subject (I am voicing the opinion of a few million MBA students here). A subject can be dull or not, depending on who teaches it and how, but that is not the point of this discussion.

Even in personal life, we need to keep track of where the money is going to come from, and where it is likely to be spent. Credit card is not = money, by the way. Cash flows, in other words. Dad could be writing a cheque, or my inherited millions may be enough, but it has to come from somewhere. Likewise, businesses need their cash flows, which some say, is the only REAL part of accounting.

We also have balance sheets and profit and loss accounting. To some extent these are malleable, but over a period, like with Enron or Satyam, the truth is likely to step out of the tailored three piece suit. Baahar sherwani, andar pareshaani, to quote an old Hyderabadi saying. Anyway, the balance sheet depicts assets and liabilities, some of which are counter-intuitive, and hence confusing to a layman. But so is MBA jargon to an unsuspecting non-MBA. What an asset is, is things like buildings, machines, or cash. Liabilities are whatever the company owes to its creditors, or shareholders (this is dicey, as the company is a separate legal entity and owes things to its shareholders too), or to government in future taxes.

The profit and loss statement is straightforward, usually, but there are tax breaks for interest payment on loans taken (just like your housing loan interest in personal income tax), and for depreciation. One could write a book about depreciation alone, but suffice it to say that it is a method to reward a company that invests in assets which need modernising every few years. A machine bought may need scrapping after 5 years (some managements also need scrapping after a few years, but accounting does not provide for that-everything has limitations), so the company can set aside money for that purpose, and claim tax credits over its life of five (or whatever number of) years.

So that is accounting in a nutshell. How much loan should a company take? Well, ratios are the subject of finance, not accounting. But a simple answer is, not too much, unless you plan to take the money and scoot to an untraceable island.