Accounting Made Easy with the REAL Framework.

In the world of Accounting and Finance, where every business decision holds weight and every transaction tells a story, accountants, financial modelers, and finance professionals, are tasked with tracking,  understanding, and storytelling financial data, to help businesses make informed decisions that drive the success of organizations.

The REAL framework is an acronym derived from the elements of a financial statement. It is a framework coined by dbrownconsulting to help you understand the elements of a financial statement. 

This framework is a compass, guiding you through the process of financial mastery. REAL stands for Revenue, Expenses, Assets, and Liabilities – These are the key component that shapes the financial landscape of any enterprise or business. 

The REAL Framework Explained. 

• Revenue

Revenue is the starting point of our exploration. This is the income a business generates. It's not just about sales; it includes all income streams, from product sales to service fees.

Revenue accounts have a credit balance. When a sale is made or a service is provided, revenue increases, and is recorded as a credit to the revenue account. This follows the fundamental accounting equation: Assets = Liabilities + Equity, where revenue increases equity. 

• Expenses

Expenses encompass the various costs incurred by a business during its day-to-day operations to generate revenue. We have operating expenses which cover the day-to-day activities, and non-operating expenses, such as interest and taxes.  

Expense accounts have a debit balance. When expenses are incurred in the course of business operations, they are recorded as debits to the respective expense accounts. This reflects the reduction in equity as expenses are considered costs that decrease the owner's or shareholders' equity. 

• Assets

Assets are economic resources controlled by a company as a result of past transactions and have the potential to generate economic benefits in the future. Assets are the use of funds and where the money is going. 

Asset accounts have a debit balance. When assets increase, such as through a purchase or an investment, the corresponding entry is a debit to the asset account. This aligns with the accounting equation, ensuring that the left side (assets) equals the right side (liabilities + equity). 

• Liabilities: 

Liabilities are present obligations, as a result of past events, the settlement of which will result in the outflow of economic resources in the future. Liabilities are the sources of funds and where the money is coming from. The owner's equity, long-term loans, and trade payables are liabilities, but we use them to fund the business.  

Liability accounts have a credit balance. When a business incurs a liability, such as taking out a loan or owing money to a supplier, the liability account is credited. This reflects the obligation to repay or settle the liability and maintains the balance in the accounting equation. 

Conclusion

Understanding the fundamental building blocks for creating a Financial Statement for reporting and financial data story-telling sets the foundation for decision-making success in organizations.

Here's a short video briefly explaining the REAL Framework when working on Financial Statements.

As a training and consulting firm, we have trained individuals and built organizational financial models using the REAL Framework. In our course, Finance for Non-Finance Managers the REAL Framework helps individuals who are key stakeholders but not in the Finance department in an organization grasp the fundamentals of Finance to be able to create simple financial reports and statements.

Learn more about to Think Like a Financial Modeler and the 6 principles of Financial Modeling for only $99 here >>> Think like a Financial Modeler