In the Trenches: Accounting

I know nothing about accounting. I have never personally filed so much as a tax return. That’s why when I committed to research and learn bookkeeping for my friend Kavon I was a little daunted. What if I can’t count that high? What does “signed in triplicate” mean? How will I stay awake? These questions raced through my mind the entire way home from the library with my fat stack of literature on the subject in tow. 

Before you teach people how to do something its a good idea to be sure you’re doing it right so I had a lot of research ahead of me. At this point, step 1 of my game plan for a DIY accounting degree is to just read as many books on the subject as possible. Like this THIS one, and THIS one. Web stuff too.

          

So far I’m about halfway through Bookkeeping for Dummies. Overall, I’m finding it surprisingly interesting. It’s like a biologist looking through a microscope for the first time. Now when I pass the small cornerstones and halal carts in town, I’m like “So that’sss how that works.” 

There’s this STIGMA that artists loathe any and all entanglements in numbers/ the real world. This process is helping me debunk that myth because frankly I find this stuff super interesting. Its something I don’t do everyday. ALL throughout art school any class outside your major is ostracized, rejected and occasionally ridiculed by the intense cynicism that only exists in liberal arts majors. Learning the tools that empower you to make money is criminally ignored for this very reason. Business majors feel their acumen is lost on a bunch of jaded hippies and the teachers preach “do the work and the money will follow.” This may be true but its not sound financially advice. 

Anyway, so far let me pull back the curtain and break down what I’ve learned. First up, the difference between accrual accounting and cash accounting. Basically, accountants can keep notes in two different ways. Accrual accounting is when you record transactions as they are agreed upon. Think of a credit card where you buy something before you actually have to pay for it. Cash accounting is when you record the transaction when the money actually changes hands. There’s pros and cons to each but accrual accounting is the one probably being used at any company with more than 10 employees. It lets you accurately track revenue and expenses in the big picture. So for accrual accounting think of the metaphor of a credit card, while cash accounting works like a debit card.

The real arch nemesis of accounting is double-entry bookkeeping. If accounting were an episode of Power Rangers, he’d be the jumbo-villain near the 20 minute mark that is the plot twist of literally every episode. (It’s not a plot twist if the same ending happens every episode guys) Specifically your enemy’s names are CREDITS and DEBITS. This duo is a pair of shape-shifters who continually redefine themselves seemingly to make an accountants life as frustrating as possible. I’m sure many an accounting major has received a failing grade confusing a credit for a debit.

Let me explain. So in the logical, sensible world in which we generally live in, a credit is more money in your account and a debit means there’s less money in your account. Not SO in accounting. In accounting, it varies depending on the account we’re talking about. An account is a category for the transactions you’ll be recording as an accountant. Similar expenses go in the same account.The accounts (categories) you’ll be recording in all the time get their own journal. Art students know journals as the diary in which they doodle uncontrollably and sometimes write lyrics for songs that will never be recorded. In old-school pen and paper accounting (which you’ll never probably do) a journal is a separate book for one category of items to keep organized the large number of entries for that one category. (example journal categories would be Sales, Purchases or Cash Receipts) These journals make up the tributaries to the great river that is the general ledger. They are the various Walls whose posts make up your Facebook News Feed. It’s where the whole accounting situation of your company exists all in one place.

Kay. So back up. How do I post these entries into wherever the fuck they belong? Back to our nemesis, double entry bookkeeping. When you’re doing double-entry bookkeeping, you’re always going to post at least two transactions. See where the name comes from? This is because you need to make sure both sides of this equation stay balanced.

(WARNING: SUPER IMPORTANT)

Assets = liabilities - equity 

So you need at least one account on either side of the equation to make an entry in double-entry bookkeeping. If you have one account on each side they both need to have the same value. If there’s more than one account on each side that’s fine too as long as the sum on the left (assets) and the right (liabilities-equity) end up totaling the same. 

So if you have bought $500 in Furniture you add $500 to the Furniture account in the Assets column. Then you Add 500$ to Purchases in the Liability column because you just purchased $500 worth of stuff. Now both sides have $500 so they’re equal. Our first double-entry bookkeeping! So I’ll be delving into this sort of thing more in the future as its really the backbone of modern accounting. 

But for you out there with glazed-over eyes already, no need to panic. Any software you use today (and by god, use the software!) will ensure you really don’t need to know more than the basics. When you input your costs it will do the debits and credits in their proper place and you get books that won’t land you in hot water with the IRS! But knowing what’s going on before you rely on the software will make your business run a lot easier and let you communicate in a world that doesn’t have any sympathy that you didn’t go to school for this stuff.