§284 The beautiful art of AccountancyJanuary 22, 2009
Below is a translation to English of an article I wrote for teenagers, trying to push them to study accountancy and killing the myth that it’s a boring job. Here we go.
Bookkeeping and accountancy is one of the coolest thing you can do for a living. It’s so cool you’re not even worthy to have me write about it here. But I write it anyway so you’ll learn what it is to be cool for real.
First of all you’re an accountant. It has a name. It’s beautiful. It’s impressive. I’m an accountant.
Bookkeeping is the work in itself – to write down all the stupid stuff that the company you work for is doing. Accountancy is using the bookkeeping results to create nice reports in the end of the year showing how much you own, how much you owe, how big profit you made, etc. Accountancy is also the science of analysing the work and researching how effective it is.
The coolest thing with it is that you can work for anyone.
Airlines, goose liver manufacturers, shoe shops, the State, IT-companies, flag pole polishing service companies, travel agencies, churches, barbers, non profit organisations, weapon industry plant, candy taste quality check service companies, insurance companies, theatres… they all need accountants. Just go out on the street. Every shop you see uses the service of an accountant. It must be the coolest and most popular profession ever. Have you ever heard of unemployment in the accountancy business? That there’s no job because people are not interested in having money? Exactly.
If anyone had told me when I was 18 that I would become an accountant I would’ve laughed in his face. It took a long time before I understood exactly how awesome this profession is. Accountancy and bookkeeping has had a label of “boring” for too long. It’s time to snap out of it! Now go to the closest accountant you can find and give him a hug and apologize that you ever thought they were boring. Don’t let him fool you! Under the neat tie and the white collar is a crazy beast that juggles debits and credits in the air just like that, and that accounts so expertly good that every single auditor loose track. When he sits at his computer and write journal entry after journal entry, and fix them up in neat T-accounts in the general ledger where he analyses and summarizes and creates monthly trial balances, he kicks your ASS! Yes, yours, specifically your ass!
Here are the basics. The balance sheet is the basic report that shows in the end of the year exactly what the company looks like. It’s divided in three. The first one is assets. All the stuff that the company owns. From the value of computer and buildings, to the value of the the inventory to the money on the bank. The second part is liabilities. How much you owe others. Loans, unpaid invoices, etc. The last one is Capital and is the actual difference between assets and liabilities. The capital of a company is usually a good indication on how rich it is. A company can own millions of dollars but also have million dollar debts. Then they’re not really that rich. But even if the capital is disgustingly high, you also need to take a look at the type of assets. If a company has a capital of 3.5 million, but 3 million of its assets are buildingsand computers that they can’t do anything with except letting them stand where they stand, then they don’t have that much real money. But they own a lot of crap.
So the accountancy equation is that capital plus liabilities equals assets. In order to write this correctly, you use the “double entry system” (enter dramatic music here) bam-bam-bam. Every thing you do is written in two places. If a company buys a computer then it’s a plus on stuff (“fixed assets”) and a minus on money assets. Liabilities and capital didn’t change, a piece of assets only changed form and became another piece of asset. But if you pay salaries, that’s an expense. So that’s a minus on assets and a minus on capital. If you buy a bunch of furniture but haven’t paid yet, it’s a plus on furniture assets, and a plus on liabilities. When you’ve paid the dept, it’s a minus on liabilities and a minus on money assets. When you get an electricity bill but haven’t paid it, it’s a minus on capital and a plus on liabilities. When you pay the bill it’s a minus on liabilities and a minus on assets. Whatever you do, capital plus liabilities always equal assets.
Isn’t that totally super awesome? Just writing that gave me an orgasm.
Anything that is PLUS on assets or MINUS on liabilities or capital is called DEBIT.
Anything that is MINUS on assets or PLUS on liabilities or capital is called CREDIT.
So all above examples would be written:
Debit – computer 5000 USD
Credit – bank account 5000 USD
Debit – salary expenses 5milj USD
Credit – bank account 5milj USD
Debit – furniture assets 7USD
Credit – furniture debt 7USD
Debit – furniture debt 7USD
Credit – bank account 7USD
Debit – electricity expenses 6000 USD
Credit – unpaid bills 6000 USD
Debit – unpaid bills 6000 USD
Credit – bank account 6000 USD
What you see above is one of the most beautiful things humans have ever created. It’s called journal entries, and they are all written in the journal and later copied to the “General Ledger”. Every row you read above like “bank account” or “furniture assets” etc are an “account” an works pretty much like any bank account. These accounts are written in the General Ledger with all the debits and credits of the year and the final balance which can be a debit balance or a credit balance. Nowadays we usually have all these in computers instead, but the terms are still the same that were used by the cool Italian guys that invented this system back in the 16th century. (A “ledger” is a book that is “lying down”)
If you’re with me this far, there’s something you can shout “HEY” to. The bank account. When I pay money it says Credit! What kinda crap is that? Credit is when I receive money, isn’t it?
That’s when I answer WROOOOONG! Haha! And then I point my finger and laugh at your ignorance and incompetence. When you get credit, others agree to owe you money. When you write credit you are giving credit, that is you owe someone else money. The bank writes from its own point of view. When you receive money they write credit (they gave you credit) because then the bank owes you more money. But you write debit because you have increased the bank’s debt to you. If the bank takes money from you they write debit because they have lowered their debt to you. You write credit because the bank owes you less money. You gave the bank credit.
Too complicated? Then go become something else. We don’t want idiots like you amongst us accountants. We own you.
Except the above mentioned balance sheet, there’s also the need of an Income-Expense report that shows how much money you’ve gained/lost during one year. Companies on the stock market usually need to do this every quarter.
There are 5 different types of accounts. Assets, Liabilities, Capital, Income and Expenses. The report that shows all the income and expense during the year is a summary of all final balances in all expense and income accounts. The final sum is the net profit or net loss. Profit if it’s a credit amount and loss if it’s a debit amount. All these accounts are then nullified in the end of every year, and the net profit/gain are written as change in capital of the year. This means that if you compare the balance sheet of year one with year two, the difference between the capitals should be year two’s total profit/loss. This is not always true though. There are a few times when something is taken or added to the capital directly without going through the I&E report. Mostly noted is the payout to the owners or stock holders and investments received from owners or stock holders. But sometimes also reevaluation of fixed assets or changes in owned stock’s worth can cause this.
If you so far understand everything and if you’re not totally lost,then you’re not an idiot. Congratulations. You’ve understood the basics of the accounting language and could without problems learn to be an accountant if you want. If?? Of course you want! Go find an accounting school today!