A few days ago we had a session on the Corporate Financial Accounting course. It is amazing how much I have come to know about the course. Before we began the course, I did not think I would do well but to my surprise, it has been quite easy following the course. I must at this point commend the course facilitator; he is a major contributor to my little successes in the course. His teaching style makes it easy to understand the concepts in the course.
Speaking of concepts, I would like to write on the topic that the course facilitator taught us in class. Have you ever heard the accounting term T-accounts? The word T-accounts is a way of recording and presenting information on a company’s business transactions.
You recall in my last write-up on corporate financial accounting, I wrote that every business transaction has 2 sides: you give something and you receive something. I also wrote that an accounting manager records the two sides of the transaction in his accounting worksheet or journal. The accounting manager, I learned, uses a system called the double-entry system. A double-entry system records the dual effects of an entity.
I have learned that every transaction must affect at least two accounts. For example, an amount of cash invested into a business will affect both the cash and stockholders’ equity accounts. We can use the T-account system to record the transactions.
The T-account system shows the two sides of a transaction. We use the vertical line of the letter T to divide the account into its two sides – left and right. The left side of the account is the debit system and the right side of the account is the credit. We write the name of the account at the top of the drawing.
Initially, I had difficulty understanding the T-account system but as always, I got clarity after the faculty provided more explanations. He told us to always remember that for every account, debit is on the left side and credit is on the right side. The debit side shows what I received and the credit side shows what I gave.
The faculty told us that we must always remember a key rule of debit and credit. The key rule is that the account type we are dealing with would determine how we record increases and decreases.
On the left side of the accounting equation, we have the assets. When there is an increase in assets, we record it on the left side (debit) of the T-account; when there is a decrease in assets, we record it on the right side (credit) of the T-account. On the right side of the accounting equation, we have the liabilities and stockholders’ (owners’) equity. When there is an increase in either liability or stockholder’s equity, we record it on the credit side; when there is a decrease on either account, we record it on the debit side.
Well, I found this strange, especially with the assets rule but as the faculty emphasized, this arrangement is by convention. The professionals must know better so it is in my best interest to understand it. It is a rule that has guided the recording of transactions.
Indeed, we cannot question some concepts right?