The Journey to Business Mastery: Entry 10

I found out that an asset is a debit entry in accounting and my mind has been spinning ever since. I found out other things but I’m going to focus on this one for now.

To the average man, or at least to me, a non-accounting individual, assets imply gain. But interestingly enough, it’s not that exactly the same in accounting. And I really wish it was, but beggars don’t fly so here we are. First of all, the assets of a business are made up of liabilities i.e debt and owner’s equity. I’ve explained these terms in a different post, but I’ll explain in case you’re not a returning reader or an accountant. So, liabilities in a business would be debts incurred in the running of the business, such as a loan. Owner’s equity on the other hand is the business owners own money which they have put into the business. I had learnt these things earlier in class and didn’t think much of it. Until we got to the practical aspect of things. We were required to document the financial dealings of a business and enter the transactions into the account as either a debit or a credit. That’s when things got really confusing. Picture this: your company gets paid for a service and you need to document it. First of all, you open two accounts titled Cash and revenue. You go ahead to input the figure but this cash that has come in, goes under the debit side. Confusing, yes? Frankly if you’re a regular joe like me and not wondering why this is so, I’ll be very confused. Cause there is no way this is common knowledge. I really hope it wasn’t common knowledge, for my own sake and belief in my intelligence. Now let me explain why the documentation of the cash goes under as a debit entry. According to and in the world of accounting, anything that increases your cash balance, is to be considered a debit. There is a deeper explanation, but I currently do not recall it.

I also found out that there is the principle of “double entry”. What this means is that for every debit entry there must be a corresponding credit entry and vice versa. For example, I mentioned payment for a service in the previous paragraph and I also stated that it goes into the cash account and also the revenue account. This is in line with the principle mentioned earlier. Because it is “cash’” that was received not the account, it will be recorded as a debit. But under the revenue account, it’ll be imputed as a credit entry. You should also know that you cannot have two debit entries or two credit entries. A credit entry must have a corresponding debit entry. If it doesn’t have this then the account won’t be balanced, which is required to be.

Yes, I might complain occasionally about accounting but it’s quite cool, once you understand what is going on. Which might take a while, but you eventually will.

Till my next entry, I bid you farewell.