Accounting Solver

WEALTH & INCOME

by ren on November 6th, 2007

Having spent posts 1 through 31 in understanding accounting talk, of what use is all this accounting talk?

At the end of the day, what accounting does is: it measures wealth and talks about how income creates wealth.

There is a world of difference between wealth and income. It is easy to confuse the two. And many think wealth and income are synonymous. Wealth is what is owned. Income is what is earned.

Wealth consists in assets. Income consists in cash inflows.

Consider a person who owns a huge mansion, an expensive car and designer clothes, but has no job. He has wealth, but no income. He has assets which do not earn and are expensive to maintain. (The case with many an actor past his heyday). Of course, these assets can always be sold and generate temporary cash inflows. However, when they have all been sold and there is still no job . . .

Consider a person who earns an annual salary in 5 or 6 figures, but who spends all of it in consumables. He will end up not owning any asset. When he loses his job and has no assets . . .

The best case is a person who has wealth (assets) and income (cash inflows) and uses his income to generate assets that earn income which generates more assets which earn more income which generates more assets which generate more income . . .

A truly rich person is one who does not have to earn income, but has assets which earn income for him.

Behind all the jargon, what accounting really does is track the process or cycle of assets generating income which generates assets which generate income which generates assets . . .

Share This

Related Stories

• EARNING ASSETS 1
• ACCOUNTING NOISE 2
• EARNING ASSETS 3
• UNDERSTANDING ACCOUNTING TALK 1: Common Sense Accounting
• NFL STARS & PERSONAL FINANCE

POSTED IN: Accounting Concepts, Accounting for NonAccountants, Assets, Best Business Practices, Cash Inflows, Revenues