Accounting Theory Models

There are 7 models that build sequentially, starting from the simple model of revenue and cash and adding additional accounting transactions and balances. The models cover the following topics:

  • Revenue and Cash
  • Receivables and Payables
  • Assets, Liabilities and Equity
  • Financial Statements
  • Debiting and Crediting
  • Direct vs Indirect Costs
  • Cashflow vs Profit
  • Working Capital
  • The Operating Cycle
  • Profit Margins
  • Fixed Assets
  • Business Funding

To launch each model, click on the relevant link link below. Each model has accompanying summary text and a video demonstration. To take a free online course built around the set of models see the Basic Accounting course page.

The first model introduces the analogy of water pipes and tanks to show how revenue, receivables and cashflow are all linked. Watch the video to see a walkthrough.

Launch The Model

This model adds costs, payables and payments to the previous model. It introduces the ideas of debit and credit balances and explores how receivables days and payables days affect cashflow. This model and further models feature financial statements as well as the diagrams of pipes and tanks to help demonstrate the connections between profit, balances and cashflow. Watch the video to see a walkthrough.

Launch The Model

This model introduces the profit and loss account as an equity balance. This model allows students to develop an intuitive understanding of crucial accounting concepts, such as:

  • Every accounting transaction debiting one balance and crediting another
  • Assets being matched by Equity and Liabilities
  • Profit generated by a business being attributable to shareholders

Watch the video to see a walkthrough.

Launch The Model

This model splits costs into direct costs and indirect costs using the example of a simple retail business. It introduces the inventory balance and provides a visualisation of the operating cycle. Students must manage both profitability and cashflow in order to be able to generate profit and distribute this profit to shareholders in the form of dividends. Watch the video to see a walkthrough.

Launch The Model

This model simplifies the previous model into 3 balances: the profit the business has generated, its non-cash assets and liabilities, and cash. Using the model students can develop an intuitive understanding of the idea that profit is equal to a company's cashflow plus the net change in the value of all its non-cash assets and liabilities. Watch the video to see a walkthrough.

Launch The Model

This model introduces the concept of fixed assets and how they are accounted through straight-line depreciation. Drag the slider to purchase fixed assets and adjust the write-off period to see how it affects the depreciation charge.

Launch The Model

This model introduces funding through share and loan capital, so students now simulate running a full retail business. The model can be used to visualise the concepts of gearing and funding through organic profit, payables, shares, loans and overdrafts. Corporation tax has now also been added.

Launch The Model