If you run your own business but don’t have a background in finance, it still pays to have an understanding of basic accounting. Too often, even senior managers are tripped up by simple misconceptions, posing potential risk areas for a business.
UCT Graduate School of Business’s Associate Professor Mark Graham helps debunk four common basic accounting misconceptions:
This is not necessarily true – you can simply think of it in terms of certain accounts increasing and decreasing. While it is helpful to speak an accountant’s language, if you understand the principle, managing your accounts becomes simple stuff!
Debits are neither good nor bad – they’re simply one side of the coin. However, it does depend where that money is going! If you were to buy a company car, the resulting debit would be considered a good thing – you’ve acquired an asset. However, if that company car were to receive a fine – an avoidable expense – then the resulting debit would be a bad thing.
While there is movement towards a standard accounting language, jargon exists, and it pays to be aware of it. Most people don’t realise that some of these confusing words actually have the same meaning and can be used interchangeably.
The debt ratio is determined both by the business and its stage in the economic cycle. Simply put, a debt ratio is defined by the percentage of long-term and short-term debt in relation to the business’s total assets.
If a business forecasts high profits when interest rates are low, it could acquire more debt to take advantage of this. However, when interest rates start to rise and a drop in profits are expected, it would be wise to reduce debt to meet interest payments.
These four points only scratch the surface, and are explored more in-depth in UCT Graduate School of Business's Finance for Non-Financial Managers course. Over four days, the course covers the Big Five of basic accounting – assets, liabilities, equity, income and expenses.
"A lot of what is considered basic accounting is really straight-forward and common sense, but it is shrouded in complicated language. So, we help people to see what is important to them in terms of basic accounting and how it relates to their business interests," says Associate Professor Mark Graham.
For more information about the Finance for Non-Financial Managers programme contact Executive Education department at the UCT Graduate School of Business on 0860 UCT GSB or email firstname.lastname@example.org.
Executive Education courses are offered in Cape Town at the GSB's Waterfront Campus and in Johannesburg from a satellite campus in Sandton. For upcoming short courses visit http://www.gsb.uct.ac.za/course-menu