Accounting is Easy, Right???

The First Installment in the  “Accounting Made Easy for [Business Owners/Attorneys]” Series

An Interview by YOU with M. Martin (Marty) Mercer, J.D., CPA, FCPA, CFE, CFF

 YOU: So Marty, you maintain that accounting is easy but it seems complicated & very detail oriented. Why do you say it is so easy?

MARTY: We all are familiar with the formula: “Assets = Liabilities + Equity”.  And we all know the rules that both sides of this equation need to be equal in dollar amount.

YOU: Sure, but you are not telling me anything we all don’t already know. We have all learned that “Assets = Liabilities + Equity”.  But after that things get really complicated with detailed Income Statements; I still don’t know what a Cash Flow Statement is supposed to be telling me; and, to this day, Debits & Credits still trip me up but I am embarrassed to admit it. Just when I think I understand Debits & Credits then they go and reverse on me again… #$^%#@!!! How can you say accounting is easy and then just drag out that old formula “Assets = Liabilities + Equity” and expect us to believe it???  (Easy for you because you’re a CPA…)

MARTY: What I was about to say before you interrupted & went into a rant was that most people (even folks with degrees in accounting) think they know what the formula “Assets = Liabilities + Equity” means, but they really don’t. As a result, most people move on to the very complex detail of accounting without understanding the nature & context of that detail in the overall accounting model; and they are forever destined to be confused by accounting transactions (particularly Debits & Credits).

When I was 30 years younger, 100 lbs. lighter & incredibly handsome; I took the time to truly understand what “Assets = Liabilities + Equity” means and passed the 3-Day, 4-Part ‘CPA Certification Exam’ 6 months after taking my 1st accounting course (This also involved a memorable experience with a Nurse from UCLA, 4 bottles of wine, & some ice cubes)… but I digress…

The point is that if you truly understand what the formula “Assets = Liabilities +Equity” means, then you will be able to put any transaction of a business into that formula and instantly understand the consequence & context that transaction has to the financial well-being of that company.

YOU:  Intriguing… I think I understand the formula, “Assets = Liabilities + Equity” but how do I know if I truly do understand it?

MARTY:  Easy… tell-tale answers to a few questions:

What does the formula really mean?
Why does there need to be two (2) sides to this formula (why not just one)?

If you cannot really answer these questions with specificity then this is an indication that you can recite the formula and know, in part, how it works; but you are not clear about what questions the formula is attempting to answer about a company.

YOU: When I don’t understand something, I don’t like to admit it and just get quiet… [long pause of silence…………]

YOU: So how would a person (let’s say a friend of mine) truly learn what the formula “Assets = Liabilities + Equity” means?

MARTY: Out of time right now (because of your interruptions)?  You will have to tune into the next installment, “Accounting is Easy, Right? #2”

YOU: Darn, you’re just teasing me (Now I understand the ice cubes)…

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