How would you explain complex accounting principles to non-finance executives in a board meeting?

1 Use Analogies

To make complex accounting principles more accessible, employ analogies that relate to everyday experiences or well-known concepts. For example, liken the balance sheet to a snapshot of financial health, similar to a medical check-up report. Just as a doctor assesses health by looking at various indicators, a balance sheet provides a quick overview of a company's financial status at a given point in time. Assets are what the company owns, liabilities are what it owes, and equity represents the owner's share—much like the equity in a home after accounting for the mortgage.

2 Simplify Terms

When discussing technical accounting terms, simplify them into plain language. For instance, instead of using the term "amortization," explain it as the process of gradually writing off the initial cost of an asset. Think of it like a car losing value over time; the value reduction is spread across the asset's useful life. This approach makes it easier for non-finance executives to grasp the concept without getting bogged down by unfamiliar terminology.

4 Focus on Impact

Center your explanation around how accounting principles impact the business. For instance, explain how the principle of conservatism might lead to understating assets and income to avoid overstating the company's financial position. This conservative approach affects how investors view the company's performance and risk profile. By linking accounting concepts directly to their consequences, you help executives understand why these principles matter in the context of business strategy and performance.

6 Real-World Examples

Use real-world examples to illustrate accounting principles in action. For example, explain how a change in inventory accounting methods from first-in, first-out (FIFO) to last-in, first-out (LIFO) can affect cost of goods sold and, subsequently, net income. By showing actual scenarios where accounting principles directly affect financial outcomes, you create relatable contexts that make abstract concepts more tangible and understandable for non-finance executives.