If you are one of the people that thinks like the title of my article, please raise up your hand… okay, okay, okay, nothing to be ashamed about as I am also part of that thinking group before I started my recent sojourn in Lagos Business School (LBS) to undertake the Executive Master of Business Administration (EMBA) program.
As a beginner, it is important to note the fundamentals and principles guiding any way of life – yes, way of life because accounting is a way of life. In fact, principles of accounting have been in place for so many years although not as refined and defined as recently – everyone knows that when you give, you take and that is only way you can have balance account!
Then, what happened? The first class I attended as member of EMBA cohort 28 (EMBA28) on Friday 10th February 2023 was the Corporate Financial Accounting (CFA) with Professor Akintola Owolabi and within five minutes, I have a change of heart and decision regarding figures from company activities.
Please, do not get me wrong. I am still not fully ‘converted’ but I think I am getting out of the clique speedily, hopefully, with more classes, I will be fully ‘CFAite’.
Learning that CFA is a structure-based course with clear rules and regulations established to handle different accounts gives me sense of ease – of course, as a Physicist – I am structure, formular, principle-oriented. Let’s go through the journey of conversion from ‘wetin concern me’ to ‘converting CFAite’ in the past two weeks of attending CFA classes.
CFA is about Assets (A) always be equal to Liabilities (L) and Owners’ Equity (OE).
A = L + OE => always, always
Anything your business owns is an Asset while payment to be made by the business to other parties is called Liability and Owners’ Equity is the balance your business has after considering the Revenue (R) generated from providing services and goods to other parties as well as Expenses (E) incurred while providing the services and goods to other parties.
This description of Owners’ Equity is very important as it shows that there is ‘no gain without pain’ – no revenue without expense.
Wait a minute! How do you even know what a transaction is or where to identify assets, liabilities, revenues, expenses, etc.? You get these pieces of information from financial statement of companies. Financial statement contains accounts, and it is these accounts that will be used to determine any of the parameters mentioned above when computing financial position of a company.
Here is the rule – for transaction to be posted successfully, you must be able to determine:
- The account type – is it Assets, Liabilities, Revenues, Expenses
- The impact of the account – is it positive or negative
- Net change on the account
- Post the account as appropriate
For business owner with few transactions, basic Cash method accounting system can be used to manage the transactions. The Cash method only recognize Revenue and Expenses when money changes hands whereas for business owners with many transactions with some delayed payment for services and goods rendered to other parties as well as expenses incurred when rendering the services, Accrual method is recommended, and it is also in line with GAAP principle[1].
Wait a minute Lukman, what is that? GAAP principle!
Don’t worry and stay tune as I bring more juicy learner’s gist from Prof. Owolabi CFA class for your pleasure and learning as well. Till next time, make sure you are balance like balance sheet!
