Foundations of Finance and Accounting

Now, let’s talk a little bit about finance. Finance is a little bit more involved. The financial equation is, it’s really, it’s one equation but we are going to break it down into three because the, the one equation has some components to it that, that we want to be very familiar with. Now the accounting, I’m sorry, the finance equation, basically, the bottom line of the finance equation is income equals revenue minus cost. Income equals revenue minus cost.

So what I make, my income, is my revenue, everything that comes in,

minus what I had to pay, the costs incurred in getting that revenue. That’s my income.

Now because of that, we’ve actually got a couple of other equations, right? Because what is what is my revenue?

Well, we got that equation. Revenue equals price times volume. The price of my, of my item or my service times the volume of my item or service, a lot of times in English, we say widgets, right? You either sell time or you sell widgets, you sell things. So how much do I charge for my time or for my widgets, and how much of my time or my widgets do I sell? That’s revenue, price times volume.

Then we have to calculate costs and that’s actually, we’re gonna be looking at that in detail in the next section. But cost is fixed plus variable, two kinds of costs. And the next section, when we talk about costing, you’ll see why it’s important that we classify them as fixed and variable. So, revenue is price times volume.

Costs is fixed plus variable.

Now, we can now calculate our revenue, we can now calculate our costs, which means all we have to do is subtract our costs from our revenue, get our income, and this is the financial equation. So, what’s the difference between accounting and finance? Think about it. The accounting equation, assets equal liability plus equity. The finance, the financial equation, income equals revenue minus cost.

Accounting is not concerned with performance.

Accounting is not concerned with income, revenue. They don’t care, ideally, if you make a profit or you make a loss, not the job of accounting. Accounting is the murder mystery. Accounting is who-done-it, right? Where was the money spent? Where did it go? Why did it go there? How did it go there? Accounting tracks what’s happening, financially, in the institution, and should be unbiased as to whether performance has been high, performance has been low. Ideally, accounting is not concerned with these things. Accounting is simply tracking it. Finance, what’s, what’s the financial equation? Income equals, what are we after? Money, money, money. We want to be profitable. If we’re not profitable, we wanna know why and accounting can often help us there. The major difference between accounting and finance is, accounting is tracking things. And finance is, is using what we’re tracking to determine how we can get those costs reduced, how we can get that revenue increased, and how we can increase that bottom line of income, which equals revenue minus cost.

Okay. So, in the next section we’re gonna look at costing, costing methodologies, how we do this. How do we get that c that we can subtract from the r as we move forward? Thank you.