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Comparability

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Transcript

Okay, welcome back. And in this lecture, I'm going to be talking about the concept of compatibility. accountants, as you probably could tell, love to compare things from period to period, and from one element to the next. However, there can be a lot of problems if you don't actually classify things in the right way. I'll illustrate this with an example. So say for example, in a particular period of time, you've got three apples, one, two, and three.

In that period, you've counted all right, we have three apples. In the next period, you count one apple, one orange, and one apple. When you first look at that count, without going into the detail of it, you see these three items. However, you notice that one of the items is actually an orange therefore That isn't actually classified as account. And therefore there's only two apples, not three. So this concept is very important.

Those what's the situation when I was in an organization, and we had an initiative to actually reduce travel costs. And when we first looked at the different periods of time, we will compare in one period to the next travel was actually down 25%. Initially, we were quite excited. And we were actually reporting that we've actually made a 25% improvement in travel. However, upon further investigation, we actually saw that a lot of the users who actually coding their travel expenses started counting them to an account called meals and food, and the meals and food account was actually up 50%. So therefore, when you actually look at those travel costs that were mis coded into the meal and food account, and add them back to the travel account, the travel expense actually had gone up for the entire year, year on year.

So the whole concept of compatibility is about putting things into the correct bucket where below This can be done on the balance sheet. And everything needs to be classified into its correct account, whether it's an asset liability or owner's equity, and the various subcategories, and likewise on the profit and loss, you need to classify the costs in the correct cost categories, and the revenues in the revenue categories. Because if you don't, you can't actually make a reliable comparison from period to period. So one thing you'll probably notice as we start to get into the more transactional side of accounting is that it'll be very specific about where you should be classifying your transactions. And this is quite initially quite hard to actually grasp, because you have to very specifically classify things according to its definition. However, you'll see in the long run, when you try to actually make a comparison.

If things are incorrectly classified, it's very difficult to make a comparison. However, when you do classify things according to the correct definition. It just makes the analysis so much easier. In the next lecture, we're going to be talking about the cash flows. accrual system of accounting

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