Thanks for the explanation - very helpful! I'm working through Perry Mehrling's MOOC lectures, where he's talking about Copeland's flow of funds (sources and uses) analysis. What you've said confirms my interpretation. Unfortunately, I really don't like this sources and uses of funds terminology, as I'll explain - I'd be interested in your thoughts. I think the problem comes down to the assumption that everything is part of a transaction, and the A/L/E changes are categorised by the _assumed_ _other_ _side_ of the transaction. For example, if liabilities increase, it's categorised as borrowing - a source of cash. But liabilities can increase in other ways, such as issuing a credit to a customer as a good will gesture, which does not have another side to the transaction. Categorising it as borrowing and a source of cash is, I think, why this approach seems so confusing - it simply doesn't reflect reality. The terminology of sources and uses of cash also ignores the reality of how business works in practice where the vast majority of transactions don't involve cash, and for business-to-business don't even involve an immediate transfer of bank deposits. What I think we're really talking about when we say a "source of funds" is how much that side of the transaction _decreases_ net worth, and therefore what increase in net worth _would be required_ to maintain balance. And a "use of funds" is how much that side of the transaction _increases_ net worth, and therefore what decrease in net worth would maintain balance. For a few years now, I've been thinking that the unit of economic activity is _not_ the transaction, but the action - any event which changes any entity's balance sheet (and typically another entity's at the same time). I'm not an accountant, so apologies if the terminology isn't right, but each action can be thought of as being a debit to one account and a matching credit to the P&L account, or a credit to one account and a matching debit to the P&L account. Many transactions cause the two entries in the P&L account to cancel each other out, allowing them to be ignored under normal accounting rules. (In fact, for my economic modelling, I ignore the idea of accumulating P&L entries over an accounting period, which is there for traditionally practical rather than theoretically necessary reasons, and apply them straight to the balance sheet). I've found that thinking in terms of economic actions makes reasoning about economics far more intuitive. It's also led me to what I think is a novel macroeconomic model which works from small to large scale in any sort of economic system with no fallacy of composition. (See my channel for details).
Fantastic! I wonder if the company sells accounts receivable would that mean they would have to sell the specific product inventory that is tied to that account?
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Took you 11 minutes to explain what took my professor 50 minutes. Thanks man appreciate that
This is the best explanation: Easy to understand and simple and concrete examples) love it
couldn't ask for more...it was holistic . Thanks !!
i could never understand this until i saw your video, thank you so much'
Thank you so much!! The best explanation ever
Some more sessions on accounting would be great. Love the videos so far.
A much thanks to the explanation, it helps me well !
now i got it! thank you so much!
you're welcome :)
great explanation !! keep up the good work
Thank you, thank you!!!!!
Thanks for the explanation - very helpful! I'm working through Perry Mehrling's MOOC lectures, where he's talking about Copeland's flow of funds (sources and uses) analysis. What you've said confirms my interpretation.
Unfortunately, I really don't like this sources and uses of funds terminology, as I'll explain - I'd be interested in your thoughts.
I think the problem comes down to the assumption that everything is part of a transaction, and the A/L/E changes are categorised by the _assumed_ _other_ _side_ of the transaction. For example, if liabilities increase, it's categorised as borrowing - a source of cash. But liabilities can increase in other ways, such as issuing a credit to a customer as a good will gesture, which does not have another side to the transaction. Categorising it as borrowing and a source of cash is, I think, why this approach seems so confusing - it simply doesn't reflect reality. The terminology of sources and uses of cash also ignores the reality of how business works in practice where the vast majority of transactions don't involve cash, and for business-to-business don't even involve an immediate transfer of bank deposits.
What I think we're really talking about when we say a "source of funds" is how much that side of the transaction _decreases_ net worth, and therefore what increase in net worth _would be required_ to maintain balance. And a "use of funds" is how much that side of the transaction _increases_ net worth, and therefore what decrease in net worth would maintain balance.
For a few years now, I've been thinking that the unit of economic activity is _not_ the transaction, but the action - any event which changes any entity's balance sheet (and typically another entity's at the same time). I'm not an accountant, so apologies if the terminology isn't right, but each action can be thought of as being a debit to one account and a matching credit to the P&L account, or a credit to one account and a matching debit to the P&L account. Many transactions cause the two entries in the P&L account to cancel each other out, allowing them to be ignored under normal accounting rules. (In fact, for my economic modelling, I ignore the idea of accumulating P&L entries over an accounting period, which is there for traditionally practical rather than theoretically necessary reasons, and apply them straight to the balance sheet).
I've found that thinking in terms of economic actions makes reasoning about economics far more intuitive. It's also led me to what I think is a novel macroeconomic model which works from small to large scale in any sort of economic system with no fallacy of composition. (See my channel for details).
Great explanation is an understatement... thanks man, rly needed this
Great explanation, thank you so much!!!
you're welcome :)
2020. And just got here. Of all the explanations yours is more understandbale
Thank you very much!
You're welcome!
Explained everything in a clear and understandable manner thank you so much
This was perfect!! exactly what i was looking for. Thank you!!
Good explanation..Really helped me understanding the basic concept.
Fantastic sir
Really helpful, and easy to understand. Thank you!
Great! Clearly explained!
Love you sir
super clear. Thank you.
Your explanation was good carry-on
Thanku so much
you're welcome :)
Than you, the explanation is excellent
Fantastic! I wonder if the company sells accounts receivable would that mean they would have to sell the specific product inventory that is tied to that account?
Thank you for your explanation! In regards of cash, if there was an increase, is it still an use (because it is an asset). Thank you!
thanks, big help
thank you !!
amazing man
I commend you !!!
good job
Thanks :)
NICE
I buy a machine and i pay by bank. whats npw?