This article was first published on Linkedin on 4 July 2018.
Last week I was in a meeting to plan a Jazz Mass at St Matthew’s Westminster next Autumn. During the conversation Ewan, the lead musician, assured us that the congregation would be able to sing along with the hymns and by way of explanation said, “We’ll play traditional hymns but, for example, we’ll modulate between C major and Ab major”. I clearly looked a little blank, so he explained “…the dominant of C major is G, and G is the major 7 of Ab.” I nodded, confident that what he was saying would work, not because I understood, but because I trusted that he knew what he was talking about.
Conversations with your accountant can be a bit like this, but really, they shouldn’t be. It’s your business and they’re your numbers and the source of confusion can be cleared up with a minuscule piece of knowledge.
Accountants use language in ways that are clear to them but can utterly befuddle others, if not appear deliberately to mislead. The word “credit” has particular meaning to an accountant, and it’s not the one that most people understand. When I’m told my children are a credit to me, I say “Surely you mean a debit?”. Actually, I don’t anymore. It’s not proved to be a fruitful line of conversation.
The language issue is not entirely the fault of accountants. Double-entry bookkeeping has worked faultlessly for centuries for every size of business in every sector throughout the world, and in the face of all technological advancements. If the age of the robots becomes a reality, I have no doubt they’ll adopt double-entry as their method of accounting. But as elegant as it is, it can be confusing for the uninitiated. All the valuable things we own, our cash, land, our assets, are debits. Everything that reduces the value of our business, debt, tax payable and amounts due to suppliers are credits. All well and good, and why I hope my children continue to be a debit to me. It can then come as a surprise that income generated is a credit and expenses incurred are debits. I believe it is understanding this minuscule piece of knowledge that would clear up most of the confusion that business owners have about their accounts.
So with this insight in mind, on my introductory module to accounting, I decided not to assume anything of the students, went right back to the beginning and described an entity with nothing in it. I carefully and slowly demonstrated how financial statements are created through a series of basic transactions. It was simple and easy to understand, or so I thought, until a rather confused student asked at the end of the lecture “What’s an entity?”. Don’t draw the wrong conclusion here. This was a bright student who went on to perform extremely well in all his classes. His success, in part, came from having the courage to ask the stupid question.
For my part, I’m revising my teaching material again in an attempt to make the beauty and elegance of double-entry apparent to students and clients alike. For your part, next time you’re talking to your accountant, remember that they’re your numbers and it’s your business. Make it your business to know your numbers.