subject: Accounting Applied to the Average Joe [print this page] Accounting Applied to the Average Joe Accounting Applied to the Average Joe
Growing up, that is all I thought about during career days and in personal finance classes. I never thought accounting was a part of every aspect of society. Debits, credits and balance sheets, those words meant nothing to me before my Financial Accounting class I took freshmen year of college. I now know these words and meanings hold a significant place in everyone's life, not just accountants.
Debits and credits are terms used that show increases and decreases in cash, expenses, revenues etc. This directly relates to everyone because we all have cash and expenses and other things we have to keep track of or account for. If an asset (something you own such as money, property, supplies etc.) is debited, then it is representing an increase.
In the accounting world, assets are more in depth than just cash. Common assets are cash, accounts receivable, land, supplies and equipment. Supplies can be for the office or supplies for a store, business etc. Accounts receivable are accounts with customers; it is money they owe for products or services. All of these accounts are increased with a debit.
Although a debit to an asset shows an increase, a debit to liabilities (obligation or something you owe to someone else) or equity (the worth of something minus debts towards it) shows a decrease. These things do not seem to directly affect the average person but expenses fall under liabilities, which everyone has. We all have bills to pay and things we need money for, almost anything we spend money on is an expense.
To corporations, the most common equity is within stock holders. Liabilities are all accounts payable (credit that companies have to pay off), expenses such as rent, utilities, supplies expense, etc. As stated before, these accounts are typically credited to increase, except for expenses. Expenses must be debited to increase it, even though it is a liability and liabilities are credited to increase.
Once we know what a debit and credit do to these accounts, we can discuss journal entries. Journal entries are what show the activity in all of the accounts. When anything is purchased, sold or used, we have to acknowledge it with a journal entry. These entries will help us keep the accounting equation in balance.
After understanding the concept of debits and credits as well as journal entries and the different types of accounts, we can discuss the accounting equation. The equation states that assets = liabilities + owners' equity. This equation must always be equal therefore, what happens to one side must happen to the other. This is why the expense account has a debit increase. If money is spent to pay for rent, cash would be a credit (decreasing) and rent expense would be a debit (increase). This would be an example of a journal entry.
To ensure that the accounting equation is balanced, a balance sheet is produced at the end of every period. All of the accounts under assets, liabilities and equity are listed in the balance sheet under three parts. The first part is labeled "Assets" and all the asset accounts are listed in alphabetical order underneath with their balances. We get the ending balances by recording journal entries. After assets, is "Liabilities" with the same set up as the assets section. After listing the accounts and balances for liabilities, the same is done for owner's equity. Each section is totaled and the liabilities and owner's equity totals are added together, if the sum of those two equal the sum of all the assets, then the accounting equation balanced.
These things are all the basics of accounting. Every successfully run business has to keep track of all activity within the accounts and make sure they are recorded correctly so the accounting equation is balance. When businesses are audited, their journal entries and balance sheets are a few of the things that get investigated. If a company does a poor job recording journal entries or their balance sheets do not match up, they could get into trouble by the government. Shareholders of different companies also look in the balance sheets and other statements when they consider investing with that company, so it is very important to know how these things are done.
Knowing these simple concepts of accounting helped me to understand how companies keep track of not only their money, but other assets and liabilities. I believe that everyone in college should have to take an introduction to accounting class because it also helps teach the importance of keeping track of your own money and budget, which is a growing problem in today's society.
