UNDERSTANDING ACCOUNTING CONCEPTS AS IT IS USED

A good evening to my dear readers, I hope we all have been having a good and insightful time with the tips I drop here on various topics as it applies to our daily lives. In the mood of the holidays, I would like to share with you a few accounting concepts that I learned from my faculty a few days ago, an amiable Prof. who has kept my interest in the accounting class stable and desiring despite my vague knowledge of the course. I hope I can break it down in the simplified way that he has taught.

First to know here is the conventional meaning of the terms as it is used in various professions. Different professions with their concepts and their use. I am made to understand that the English meaning of a word may apply differently in various professional fields; for instance, Accounting, Law; Architecture, Religious study; Science etc. In other words, it is best and safe to stay within the conventional meaning of the terms as it is used in the profession of knowledge without inferring the literary English meaning.

We shall be looking at the 5 under-listed terms in accounting as is it used in a double-entry account. A double-entry account is represented with a T-account just as shown as the letter “T” is written. The T-account is represented with Dr (Debit) on the left side and Cr (Credit) on the right side.

 The 5 terms are:

Asset, Liability, Owners Equity, Revenue and Expense. In a T-account when Asset go up, you debit; when it goes down, you credit (it sounds like it should be reverse right?) So, I thought as well, but hey do not make the mistake of giving it your own interpretation. Always stay within the conventional meaning as it is used, I cannot overemphasize this. When Owners equity goes up, you credit and when it goes down, you debit. When Revenue goes up, you credit and when it goes down, you debit. When Liability goes up, you credit and when it goes down, you debit. When Expenses go up, you debit and when it goes down; you credit. You will notice that Asset and Expenses have the same command while Liability, Owners Equity and Revenue has the same command. Let me interpret the explanation for you in another easier way to aid your quick recollection.

Asset and Expenses   (Dr)    (Cr)

Liability, Owners Equity and Revenue  (Dr)     (Cr)

Another question should be, how do we identify the 5 accounts in a transaction? Let us take a keen look at the examples below.

Assets are Land, Building, Cash, Equipment, Inventory, account receivable etc.

Liabilities are Account payable, and Accrued liabilities (expenses that are yet to be paid e.g. Salaries).

The owner’s equities are Retained earnings, common stock, Dividends etc.

Revenue speaks to sales and Expenses are the cost of goods sold, Rent expense, utility expense, salary expense and many more. In the next episode on this topic, we shall see various examples to apply the above-mentioned concepts.

See you next time. M.A.