Debit, Credit and the fundamentals

#EMBA27accounting

Early days’ concerns

I guess engineers or science professionals like myself are wary of accounting or financial courses. I actually have done everything possible to evade the course or its practice even in my small enterprise. After all, why do we have accountants that can be paid? It became expedient to further my knowledge in business administration, hence an MBA (master’s in Business Administration), and here comes the dreaded accounting course: “Corporate Financial Accounting”.

In this course, I needed to interpret and make decisions using companies’ statements of financial position, statements of profit or loss, statements of owner’s equity, and statements of cash flow. To compound my fears, I was required to understand the use of journals, T-accounts, trial balance, and the list goes on. Soliloquizing, where do I debit or credit? When cash is increasing an asset why should I record it on the debit side, and not credit?

My fear vanished

On the first day of class, walks in our lecturer who is a professor and chartered accountant with an intimidating figure. But when he started the class, my face quickly lightened up because I could deduce that he wasn’t a lecturer but a teacher. The patience and dexterity with which he took each topic were amazing. Firstly, he enlightened the class on the different financial reporting standards; IFRS (International Financial Reporting Standards) and GAAP (Generally Accepted Accounting Principle), and that Nigeria is governed by IFRS. Then he quickly introduced us to the need or relevance of the 4 statements of account then added a fifth not listed though in the IFRS but equally important.

Furthermore, he dissected how each statement flowed into each other from the statement of cash flow to the statement of financial position. Using the Newton’s first law of motion, “a body will remain at rest or keep moving in a straight line at constant speed unless it is acted upon by a force” he explained that the statement of financial position will remain unchanged if there is any transaction under the period in review. I guess you will wonder why newton’s law? His background is also engineering. To appease those with engineering background, he introduced the first formula; the accounting equation which states that “Assets” must always be equal to “Liability” plus “Owners’ Equity” (A = L + OE). The initial challenge was in conceptualizing what made up “Assets”, “Liability” and “Owners’ Equity”. But it was gracefully dealt with.

Gradually, we drifted into some of the deeper things. Journals, Ledgers and trial balance were topics that required more time. At first, I was struggling to rationalize why an increase in Asset through cash account should be reported in the debit side and the reverse in the credit side. It didn’t make “English sense”. I was comforted when he said “some things are principles, take them the way they are”. I easily move on and can successfully enter transactions and their explanations into a journal, then into the ledgers and finally use a trial balance to list all accounts and their balances.