subject: Accounting Basics Everyone Should Learn [print this page] After taking a semester of accounting as a freshman at West Chester University, I now realize the importance of taking accounting because it applies to so many aspects of our lives. As a result I think that all college students should be required to take an accounting class to gain a better understanding of their finances and better prepare themselves for the real world where Mom and Dad won't be there to pay for everything forever. Some of the basic concepts that I will discuss are debits and credits, accounts receivable, and accounts payable because I think that they are necessary concepts that all responsible members of society should have at least a basic understanding.
I will first explain the concept of debits and credits. Whenever you receive cash you debit it and whenever you spend cash you credit it. For instance, if you buy a pair of jeans for $50 you would make a journal entry debiting merchandise inventory because you just added a pair of jeans to your closet, and you would credit cash for $50 because you just spent $50 that you no longer have to spend on other items. However, the clothing company that you bought the $50 pair of jeans from would debit cash for $50 to account for the sale and credit merchandise inventory and cost of goods sold in order to effectively journalize the transaction. Since the company received the payment it is debited and merchandise inventory and cost of goods sold is credited because they company no longer has possession of that pair of jeans. The company has to credit merchandise inventory and cost of goods sold because those two numbers equal the cash received for the jeans. Cost of goods sold refers to the amount of money that the company paid to obtain the jeans, which is not the same amount of money that you paid to buy the jeans. However, merchandise inventory refers to the difference between the cost of goods sold and the amount of money that the store sold the jeans to you the consumer for.
In addition to debits and credits it is necessary to understand the different between accounts receivable and accounts payable. Accounts receivable refer to a service that has already been preformed, however the payment has not yet been collected. For example, if an electrician wires your house he has provided a service for which he deserves to be paid for. Therefore in his journal entry he would debit accounts receivable and credit services revenue because he already performed the service for which he needs to collect payment for. If the electrician had received a cash payment as soon as he provided his services there wouldn't be an account receivable to record, he would simply debit cash and credit services revenue. However, in the real world people don't always pay their electricians or other people on time, which is why they have to create accounts receivable accounts in order to keep track of payments that need to be made for services that have already been provided for them.
Contrary to accounts receivable, accounts payable refers to accounts which need to be paid for. For instance, when you go to the store and purchase a $1000 stereo using a credit card, if you were to journalize the transaction you would debit the stereo for $1000 and credit accounts payable for $1000 because you purchased the stereo on credit, therefore you are eventually going to have to pay cash for it, just not at the same time you purchased it at the store. When you eventually pay cash for the stereo to pay off your credit card bill, the journal entry would be to debit accounts payable for $1000 in order to get rid of the account and credit cash for $1000 because you will no longer have that money to spend on other items.
These are just basic accounting concepts that all college students should be required to learn so that they can more effectively manage their money and become responsible members of society, rather than trying to bum off of their parents for as long as they can. By understanding these basic concepts students will be able to understand where there money is going and grasp the concept that when you pay with a credit card, eventually the money will come out of your pocket because plastic doesn't actually buy you things. Ultimately taking an accounting class while in college may help people become more responsible with their money, rather than throw it away on useless items.
