I want to share with you an AWESOME AI-generated explanation of traditional accounting.
Now, before you switch off, hear me out......
I know there is a lot of DOOM and GLOOM around AI. I am for the most part, a very concerned Doom-and-Gloomer, but my God, I am in the midst of a dizzying love affair with today's Big Bad Boy.
You see, yesterday, I got myself into Quite a Tis when I was trying to understand the difference between ‘traditional’ and ‘cash’ accounting.
Now, I know many of you can easily understand these two basic concepts, but my brain had switched off at the word ‘accounting’.
This is how I got from A to B in my understanding:
Called HMRC BIG mistake – after an hour on hold/being ping-ponged to different advisors, I was told: “We can’t offer financial advice blah blah blah, let us send you some links and you can go figure it out for yourself LIKE MOST PEOPLE DO. Ciao. Bye” (not exact words, but that was gist of conversation).
Read said links – still none-the-wiser.
Called up Financial Controller friend who very kindly tried to explain the two concepts – before hastily retracting himself from phone.
Had a good grumble to myself about why I wasn’t taught this at school. Mulled over possibility of a brain transplant.
Tapped into Google Bard (Google’s AI tool, now called Gemini), and asked it/he/she to explain the two concepts.
Read explanations. Still hadn't clicked.
Then (drum roll here please) I had a FREAKIN' BRAIN WAVE!!!
I went back to Bard, and asked:
“Please explain again, what you’ve just said, in very, as in 'VERY', simple terms."
And you know what he did? He took things right back to basics and asked me to imagine I was running a lemonade stand. Seriously! A lemonade stand!! Genius!!
So, here is The Bard, in his infinite wisdom:
“Imagine you're running a lemonade stand. With traditional accounting (aka "accrual accounting"), it's like recording everything that happens, even if you don't see the money right away.
Earnings:
You sold 10 cups of lemonade at $1 each, so you record earning $10, even if someone hasn't paid you yet.
Your grandma promised to give you $5 for helping her, so you record it as income, even if you haven't received it yet.
Expenses:
You bought lemons and sugar for $3, so you record that as an expense, even if you haven't paid for them yet.
You borrowed $2 from your friend to buy ice, so you record it as an expense, even if you haven't paid him back yet.
I’ll spare you the rest of his sparkling words of wisdom, but I especially love this last paragraph:
It's like keeping a detailed list of all your lemonade stand "promises" - who owes you money and who you owe money to. This helps you understand your overall financial health, even if the actual cash hasn't changed hands yet.
I am now currently setting up a lemonade stand outside front of house to put new accounting wizardry into practise. Not much business in all this 'drizzle'. Ha! Get it?
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