Thursday, September 9, 2010

Things I Like: Accounting

I am in the second semester of my junior year as an accounting major, and I after some recent reflection, I'd like to reaffirm my happiness with my selection. Textbooks often refer to accounting as "the language of business", and I think that as a well-established scientific system, it also functions as the rules of business. Knowing the rules enables one to effectively play the game.

When my enlistment in the Marine Corps ended several years ago, I knew that I wanted to do something in business. I had come to this realization when it occurred to me that every job out there belongs to some kind of business. Further, almost everything in life functions like a business, at least on some level or in certain ways. I was pretty ignorant when I started college, and without a lot of direction; "business" is, like I've said, broad and far-reaching. So those first few classes definitely informed my choice, one of which happened to be Financial Accounting 1.

I'll admit, at first I didn't get it. I was perplexed by the double-entry system, wherein every transaction is recorded twice, effecting two different accounts. This is the system of debits and I losing you already? Further complicating the matter, transactions are recorded in a journal, a chronological list, and then later posted to a ledger, a collection of all the different accounts and their balances. Still not getting it, eh? Okay, so here is the thing - some accounts (usually assets, like cash or a house, and expenses, like your electricity bill) have a debit balance, while others (liabilities, like your mortgage loan; equity, your net worth as an individual or the book value of owners' stakes in a business; and revenues, like your paycheck or sales) have a credit balance. sure look confused - I did too!

This is where it all fits together: the entire system is based on the accounting equation, which states that:

Assets = Liabilities + Equity

So...those double entries each effect, in some way, both sides of the equations. Therefore, the equation stays balanced. Okay, so I know that no one except people familiar with accounting have any idea what I'm talking about. But that's okay, I don't think anyone is reading this blog anyway (*wink*). Still, when all of this finally clicked in my head, I knew that I had found my education path and my place in the world of business. Why? Because the equation has to balance. Everything is assigned values, and though these change, the equation stays balanced. You can be relatively sure that everything is at least mostly right if your accounts all balance out.

This is all very basic stuff; I think I have just poorly explained the first two days of class. It gets so much better. These accounts and their balances are used to prepare financial statements, which tell you all sorts of things about how a business (or, say, your personal finances) are operating. You can then do all manner of analysis with the data, giving you even more valuable information. Management and the marketing department can talk all day about pricing strategies and their big new global initiative (and I don't mean to downplay those people and disciplines; they are extremely important), but the financial statements lay it out plainly to see for those who know how to read them. The "Rich Dad, Poor Dad" book series by Robert Kiyosaki, though mostly a giant fluff piece by a hustling snake oil salesman, did contain one great piece of advice: "Learn to think in financial statements". If more businesses stopped to think about exactly how that decision they're making is going to impact not just the bottom line, but the intermediary steps on the financial statements, and how that is going to impact all the various means of analyzing and comparing and projecting...well, I think we'd get far less stupid decisions.

So there you go, world. I like accounting. It works.

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