Key Concepts
This chapter was a nice and easy immersion into the idea of
accounting. It details the history of accounting, why we use accounting
We use accounting in
order to understand a business and its realities. Is it successful?
Everyone knows, even if they’re not an accountant, that money – value – is what makes the world go
round. You always see little kids at the shops grabbing at lollies and toys and
at the same time see their parents scolding them that you can’t just take them,
you have to pay for them. You very quickly understand at a young age that you
can’t get something for nothing and everything has a value. Accounting just
shows us how this value is calculated and created.
Another key concept is that of how businesses can be run
under different types such as a sole
trader (owned by one person), a partnership (owned by two or more
people), a company (separate legal
entity from owners and comply with the Corporations
Act) and a trust (where a
trustee carries on the business for the beneficiaries).
The concept of double-entry
accounting has been around for centuries and even though technology has
advanced, we still maintain that method because that’s the way it’s always been
done and if it ain’t broke, don’t fix it. It is the process of maintaining the
relationship between each aspect of a transaction. Basically, I see it as the
business version of Newton’s Third Law– every action has an equal and opposite
reaction.
In order to keep track of all these tricky and confusing
transactions in everyday business activities, bookkeepers use two books, journals and ledgers. The journal keeps a chronological list of all the
transactions that occur every day and the ledgers categorise these transactions
into their relevant accounts.
The balances of the ledgers are then brought to a trial balance where the balances of
debits are added and compared to the sum of the credits where they should be
equal. It is a trial balance because it helps pick up errors.
Debits and credits are the two sides of a
transaction. Debits are owed, and credits are entrusted.
The accounting
equation of Assets – Liabilities =
Equity. It illustrates the relationship of the interest of the owners. I
understand it as assets are like your salary, you have to pay all your bills
first and then whatever is left over is what you get to play with and enjoy (or
more sensibly, stash away just in case). This equation expands to Assets + Expenses = Equity + Revenue +
Liabilities.
Whew, there was a lot of material covered in this chapter,
but luckily it was relatively simple and easy to understand. For me, at least.
Things I Find Confusing/Difficult
to Understand
The whole concept of debits and credits has been a little
difficult for me to get a handle on. I just couldn’t for the life of me figure
out which one was which and where they went in a transaction. It was just a big
old mess and let me tell you, it really stressed me out. If I can’t understand
this basic, fundamental concept, how screwed am I for the rest of the term? It
wasn’t until the textbook question about explaining debits and credits to your
friend who doesn’t understand using a car driving on a street as an example. I
ended up writing:
“Debits are recorded on the left-hand side and credits are
recorded on the right. Debits increase assets, expenses and drawings from
owners. Credits increase revenue, liabilities and investment by owners. Driving
on the left-hand side, assuming you are driving away from your business, this
is the flow of money out of the firm. Driving on the right-hand side are the
cars heading into your business, this is the flow of money into your business.”
After this, it all of a sudden just clicked. It was like the sun had
broken through the clouds and the angels appeared with their trumpets. I had
figured it out! Hallelujah for that. I still get them a little messed up
sometimes when I think too hard about it, but when I stop trying to overthink
it all, I sort it out again.
Things I Find Boring
In reading this chapter, I found the inclusion of the incessant
focus on “businesses are everywhere” rather monotonous.
“I am writing this chapter in Yeppoon, a small coastal town in Central
Queensland near Rockhampton. I have just had a short walk around the area, and
businesses I saw include a dentist, Icon Dental Group, and right next door The
Coffee Club, a cafe with a great spot just near the beach. Nearby is Elders
Real Estate, Yeppoon Car Wash, and Sullivan Nicolaides Pathology (which
provides medical services). There is also David Eaddy & Co (solicitors),
Johnson & Tennent (chartered accountants), CEADS (Capricorn Engineering
& Drafting Services), Yeppoon Medical Centre, Betta Electrical Yeppoon
(electrical retailer), Marsden Tavern (retails alcohol and provides various
entertainment services), Young’s Coaches (the local bus company), Sandy’s Cafe,
Subway, Rip Curl (clothing & swimwear retailer), Sleepzone (beds and
bedding retailer), Woody’s Foodworks Yeppoon (supermarket), Paintplace Yeppoon
(paint retailer), Yeppoon Tattoo Studio (tattoo services), Tanby Roses Florist
(retails flowers and manufactures flower arrangements), Tai Ho Indian
Restaurant, James Street Medical Centre and Centrelink Yeppoon (a government
agency providing social welfare payments).
Other businesses I saw were Dollars and Sense (discount variety store),
Sail Inn Motel (sells accommodation services), Office National Express (retails
office supplies), Happy Sun Chinese Restaurant, S.M. Weston Optometrist (sells
eye services and retails spectacles), Yeppoon Health & Fitness Centre (gym
services), Pacific Hotel, Wavelengths (hairdresser), Megalomania (bar and
bistro), Jaques Coastal Meats (butcher), Video Ezy, St Ursula’s College (a
private school that sells education services), Wendy’s (ice cream/cafe), Coles
(supermarket), Ian Weigh Toyota (car dealer), Regals Dental (another dentist),
Blue Dolphin Caravan Park, Shell (petrol station), Seaside pools (builder of
pools), Yeppoon Self Storage, Flexihire (equipment hire and sales), Wot A Sign (sign
makers, printer & website designer), Central Queensland Sailmakers
(retails, installs and manufactures yacht sails, shade sales, marine
upholstery), Yeppoon Veterinary Surgery, Yeppoon Kitchens (manufactures and
installs kitchens), Firewood2Furniture (manufactures custom built timber
furniture) and Trevor’s Trim & Upholstery (retails, installs and
manufactures shade sales, blinds, marine & household upholstery). I took a
few photos of these businesses which are included in Figure 1-1 below.”
This whole great big chunk of text is just a waste of time
and space. Just look at it. It’s now taken up a whole page of my own text. Big waste of space, isn’t it?
Everyone has walked down thousands of streets in their lives
and make purchases from these types of businesses all the time. I know that there are a gazillion
different businesses around me and being on the other side of the nation, I don’t
particularly care about some businesses in a tiny town on the east coast. Then
going on to fill two whole pages with images of these business names is a
little on the heavy handed side, particularly when it’s not particularly
relevant.
Things I Find Exciting/Surprising
The concept of businesses being organised in different types
really intrigued me. I knew that there had to be some sort of difference
between your little corner store and your major international corporations. I
never really thought much about how little businesses around me could vary in
themselves.
When I did my tax return two weeks ago, I looked at the bottom
of my dad’s group certificate and saw that the business he works for is
organised as a trust. Ordinarily, I wouldn’t have any idea what that meant and
how it worked. I knew that the business was run by a husband and wife team, but
had absolutely no idea how that translated into a business structure. Now I
have a better understanding of how their hierarchy and business management
functions which now helps me understand when dad comes home and talks about
what’s happened during his day.
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