I agree completely on your "thorough grounding" comment. I spend a lot of time explaining to finance people how tools like python, SQL, AWS stuff can be leveraged in simple ways for analytical purposes, and I spend a lot of time explaining to technology people what all the finance and accounting stuff is really about. In both cases my experience is it always comes back to explaining fundamental ideas or concepts over and over, but applying them to different situations and contexts (I do so much more confidently when explaining accounting and finance stuff since I have deeper education & experience there).
A lot of times these fundamental ideas and concepts can be explained very simply and intuitively using toy examples. the problem is it can take years and years to build up enough experience to really separate the signal from the noise and see clearly what is truly fundamental (yes that's where formal education is helpful but it can be hard to really grok absent experience imo... In the same way learning a programming language can be easier if you just try to build something).
A deep understanding of fundamental concepts is what allows you to pick apart very complex and novel problems into it's component parts. A deep understanding of fundamental concepts is one of the things that separates professionals from non-professionals in my opinion.
I'd encourage people doing their own accounts to think of it like this and don't do things that professional accountants do "just because".
The thing is accounting is all made up. We try to squeeze this idea of "value" into this abstraction called "money" and make it all work. But it's trivial to find cases where it's overly simplified and doesn't really work.
For example, how do you book depreciation of a motor vehicle? For the average person with a single utility vehicle the vehicle's value remains roughly the same from the moment of purchase until the moment is is written off. The value is its utility to you. In my accounts, I book this simply as "1 car" in my assets. But accountants don't like that. Everything has to be valued in money. So you end up with stupid stuff like averaging the depreciation over time that is pure fiction and only exists to make the books work and reduce the "shock" when a vehicle is finally written off.
- Yes money is in many ways best thought of as an abstraction. A socially agreed upon store of value that is easily exchangeable for other things of value. There is a tension (and a spectrum) between commodities that have use value and money commodities that have exchange value. In nascent market economies, commodities with use value can emerge as money commodities through consensus, that is, they emerge as socially agreed upon exchange value commodities. Think cigarettes in prison or precious metals like gold. Money commodities emerge naturally once there is enough stable volume of market activity which ensures liquidity. It's all contingent on constant market activity to keep it liquid as well as a sustained social consensus that is represents a store of exchange value. This is a lot of what Marx's Das Capital explores.
- Things like vehicle depreciation are not just so the books "work" nor is the intent for it to perfectly represent how an asset depreciates. Consider a milk delivery business. I buy a delivery vehicle year 1 for $40,000 and I expect it to last me 10 years approximately. Let's say I earn $10,000 a year for the delivery business and I pay a driver $7,000 a year to deliver milk using my delivery vehicle. If i don't include depreciation of the delivery vehicle my net income is $3,000 annually or 30%. Pretty darn good! However, we know the vehicle asset was used in service of earning all that revenue, so we should include something to ensure all revenues are netted against all known expenses whether they are wages or capital assets deployed in service of earning said revenues. Otherwise we have an incomplete picture of the business performance in our annual income statement. If I include $4,000 of annual depreciation on the vehicle suddenly I am no longer profitable to the tune of $1,000 a year. This is the matching principle. Profitability needs to ensure all revenues netted against all expenses associated with earning those revenues regardless of cash flow timing.
- But your point stands... The specific amount of depreciation annually is made up mostly, maybe the asset depreciates slower or faster. But there is enormous value in a rule consistently applied. Let's say you're an expert in delivery trucks and you know that the asset will last 20 years not 10... You could purchase the business at a cheap valuation because on paper it loses money annually, but you know the depreciation should only really be 2,000 and therefore the business is actually profitable all other things being equal. You leverage a widely recognized and understood standard applied very consistently as being imperfect, and you use that as a stepping stone to back into what you believe is the true value. This is where things like EBITDA come from that start with GAAP measures and back into what are believed to be better representations of business value, but it hinges on widely understood accounting standards being applied very consistently to create financial information that can be modified for other uses.