Get a handle on the top-five misunderstood accounting terms
Accounting Made Easy demystifies obvious accounting terms often misunderstood by non-accountants.
Everyone in business, from the operations director, to the training manager, makes important financial decisions every day. And they need financial know-how. But according to Mark Samowitz, the CEO of Accounting Made Easy, obvious accounting terms like debit and credit are often misunderstood by non-accountants.
He says that finance professionals should help non-finance people to “speak accounting” and learn the correct terminology. Here are the top five misunderstood accounting terms and how they can be simply (and correctly) explained.
An asset is something you control, not something you’ve completely paid off. Many people think that only when something is fully paid off, is it considered an asset. When someone laments that they have no assets because they’re still paying off their house and car, you’ll brighten their day and add 20 years (the average bond period) to their life, when you tell them those assets are already theirs.
Income is not money in the bank account. Income is the value of a service rendered. A pastry chef for example bakes 100 croissants for a company function, and service is rendered when she delivers the goods to the venue for the guests to eat. She may only be paid a week later, but she already has income.
This is another term that tends to floor non-accountants. People think something is an expense when they’ve paid for it. But what they don’t realise is something only becomes an expense in a business when it is used. The cartons of butter used by the pastry chef to bake her croissants are not considered expenses when they were bought and paid for. They are only considered an expense when that carton is used in the production of the croissants.
An income statement is one of the most misunderstood terms by non-accountants. If we apply the definitions of what income is and what expenses are – we see an income statement is therefore what we rendered in service, less what we used up. This results in either profit or loss. An income statement has nothing to do with cash flow – this is the big misconception.
Debit and credit
Most people would have heard these terms. Credits mean “up” and debits mean “down”, right? But credits can go “down” and debits can go “up”. The misconception around debits and credits comes from looking at the bank account – where a debit is down and a credit is up. But for a company, a debit could cause an account to increase or decrease and is the same with a credit. For example, a debit to an asset account will increase the account while a debit to a liability will decrease the account.
The good news: There’s help for those who don’t have an A+ in financial literacy. Visit the CFO SA Training page to sign up for Accounting Made Easy’s accessible one-day course. You’ll qualify for a 10 percent discount if you sign up with the code CFO2018.
What course participants had to say about Accounting Made Easy’s courses:
“Accounting Made Easy explained the practical business environment extremely well and will help me to partake in financial discussions as I now understand the language of finance.” - Jano Visser Section Engineer – Anglo American
“It simplified accounting jargon and helped me to understand how one makes profits. Furthermore, it gave me insight into reading and understanding financial statements.” - Madelein du Plessis HR Business Partner – Transunion