My Dad was a chemistry teacher and part of his teaching method included applying other areas of study to chemistry. He would explain that chemistry was not a subject unto itself. It also includes writing and solving math problems. He required his students to write scientific papers and also solve math problems as they related to chemistry. Most of the exams he gave were problem-solving, not guessing the answers to a series of multiple choice questions. My Dad applied these concepts to all aspects of his life. Working in the garden with him I learned much more than gardening. Some of the many topics we talked about included insects, soils, fertilizer formulae and the names of weeds. I am very thankful for my Dad and proud to be his little girl.
Many people have asked me over the years how I went from a degree in music to accounting. In addition to my Dad’s genetics, I have come to learn that math and music are actually processed and understood from the same part of the brain: Music is math, but it uses different symbols.
One of the first songs I learned to play on the piano was “Do, Re, Mi.” These symbols represent the first 3 notes of a musical scale. Scales are the foundation of music. Without a solid foundation, further study can be very difficult to master. Once the basics are learned the rest is simply variations of the same theme.
When we add and subtract we begin with 1, 2, 3.
When we ride horses we begin with W, T, C. (Walk, Trot, Canter).
Accounting begins with A, D, C (Account, Debits and Credits).
The combinations of A, D, C–much like Do, Re, Mi–are infinite. Not all note combinations are appropriate or sound good, however. The same is true of accounting. Accounts, Debits and Credits need to be recorded properly for everything to come together in perfect harmony.
An Account is the place where financial activity is summarized for various categories of records (e.g. horse purchases, lesson income, hay, grain). Accounts are an organized way of recording the ins and outs of your money. When you buy a horse you receive a receipt for the purchase. The amount you paid is recorded in an account called an asset. An asset is one of five major categories used in accounting. The other four are liabilities, equity, revenue and expense (More details on these in another blog).
Assets
An asset is something you own that is used in the operating or investing activities of your business. Assets are the “goodies” of your business that hold their value over an extended period of time. Physical, tangible types of assets include horses, barns, tractors and trailers.
Debits and credits
Debits and credits are a fancy way of describing additions and subtractions of the activity in accounts. A debit can be an addition or subtraction depending on what type of transaction you are recording. The same is true of a credit. The following example illustrates how to record the purchase of a horse, an asset.
Each account has a debit side and a credit side. Debits must equal credits in any transaction that is recorded. Additions to an asset are debits and subtractions from an asset are credits. In my example, the horse was paid for with cash, another asset. The balance in my horse (asset) account increases (debit) and cash decreases (credit).
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|
Debit |
Credit |
|
Asset: Horses |
$1,000 |
|
|
Cash |
|
$1,000 |
|
Totals (Debits = Credits) |
$1,000 |
$1,000 |
|
Description: Purchase of TB Barney’s Pride |
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If we look at each account separately the activity would look like this:
Cash
Beginning Balance $ 2,500.00
Purchase of Barney (Subtraction = Credit) $(1,000.00)
Ending Cash Balance $1,500.00
Horses
Beginning Balance $20,000.00
Addition of Barney (Debit) $ 1,000.00
Ending Horses Balance $21,000.00
In my opinion, accounting is much more than numbers. Its applications are numerous. Any time a financial exchange occurs the basic concepts of accounting are being used. My plan is to continue to discuss accounting basics and gradually increase the difficulty of the examples. My goal is to help you learn the basics of accounts and how debits and credits affect the different types of accounts. As I write about these concepts I will apply them to the horse industry.
You do not become a grand champion rider overnight. It takes years of practice. The same is true of other disciplines such as math, music and science. Each starts with basic concepts which are taught in a series of exercises of gradually increasing difficulty. With some patience, discipline and practice life gives us infinite possibilities.