In this podcast I use a weaving analogy to explain how bookkeeping transactions impact today’s financial statements. Bookkeeping is like working on a loom, weaving with yarn. Each strand of yarn is like the running balance in each account in the chart of accounts. Misplaced strands mar the beauty of the final product. In the same way, incorrect running balances create incorrect financial statements. Bookkeeping entries add to the running balance of each account in the chart of accounts. It is sort of like adding to the length of each strand of yarn.
The Balance Sheet only shows an ending date, and this is like the part of the weaving process that is most recent, closest to the hands that are working (near the top in the photo above). The Balance Sheet does not show a beginning date because the beginning date of the Balance Sheet is the beginning date of the firm. Likewise, the beginning of the scarf is when the weaving process started. If we tried to create a Balance Sheet with a date that is more recent than the beginning of the firm, that would be like horizontally cutting the scarf above with scissors, say, for example, about half-way down. The whole thing would fall apart. All of the strands would unravel, making a mess. It is the same with the Balance Sheet. It needs all of the historical data to make sense to us today.
In both cases, problems today might be the result of wrong work in the past. The old work needs to be undone, and correct procedures need to be used going forward from that point to produce correct results.
This is just an analogy, and not a perfect one. But I think it works pretty well to help people understand the bigger picture of how bookkeeping entries from the past impact today’s financial statements.
Image credit: Jae (cropped)