The accounts as a lens on growth

Part Two of this book will review several applications of accounting information. We will start by examining how the accounts shed light on the evolution of a business over time, in particular what the factors are that enable the business to grow.

A first observation is that a business can achieve growth in its assets in either of two ways. First, it can use its existing assets to generate further assets. This is what happens when, for example, inventory is sold for an amount greater than cost: the loss of one asset (inventory) is exceeded by the gain in another asset (accounts receivable or cash). A business might also have invested in financial securities that generate a regular interest income, in which case assets grow as that income is received. Assets might also be used indirectly to generate further assets, for example where equipment is used in the development of a product or service, which leads ultimately to sales being made to customers and to cash being received.