I get so little joy out of my Accounting class that I thought I should write this one up. I hate my Accounting class. That's not Accounting's fault. I like the precepts of accrual accounting-they make sense to me in the same way that IT or Compliance make sense to me because they are logical and they have rules. I like rules. It's just that taking Accounting requires that I do math. I'm really bad at math. That's what Excel is for. Even with a calculator I am still bad at math. I do things like move a number from one side of the equation to the other and forget to switch the sign. To be fair, I haven't had to do any math since 1994 until Summer term (not counting the GMAT), so this is not entirely my fault.
So here's my happy Accounting story. My boss sent me an e-mail saying that he had about $10,000 of computer equipment on his balance sheet. He explained that he usually expenses computer equipment in the year it was purchased so could I help him figure out what this $10,000 of computer equipment was? I had a happy moment where I said to myself "Oooh! I know what he means. He means his non-cash assets are too high by $10,000!"
For those of you who are as I was until 2 months ago unfamiliar with the principals of accounting, things are usually expensed when they are "used up". For example-you buy a bunch of books you're going to sell. You sell them. Once you have sold them they are "used up" and you expense the cost you paid for them. Rent and electricity bills are expensed-you have "used up" a month's occupancy or a month's worth of electricity. The toner that you buy for your printers is expensed as is the cab fare that you paid. By telling me that the company usually expenses computers in the year that they were bought he was telling me that this $10,000 non-cash asset on his balance sheet was probably equipment that I had bought it the last year.
Normally, computers are not expensed. The company guesses what the useful life of the machine is, marks it as non-cash asset at its purchase price and then depreciates it over the course of its expected useful life. For example, If I buy a server for $15,000 and I expect that it will last 5 years it goes on the company's balance sheet as a non-cash asset worth $15,000 at day one and after a year it is written down by 1/5 of the purchase price-that is we estimate that 1/5 of it is used up so we say it is now worth $12,000 and we have an expense of $3,000 for depreciation. At the end of 5 years, it is worth whatever we thought its salvage value was when we purchased it (whatever we thought we could sell it on Craig's List for.)
I know this is not how things operate where I work because my boss has yet to ask me what the expected useful life of anything I buy is. We are a small non-public company so we don't have to follow GAAP (Generally Accepted Accounting Principles.) I asked my boss when he showed up what exactly he was looking for with his query. After all, whenever I buy something I send the receipt to the bookkeeper.
Luckily, he didn't need me to do the bookkeper's job and match all my receipts up to make sure they totalled the asset value he had on the balance sheet-he just wanted to make sure that the number made sense to me. I told him it did and we both walked away happy. A rare and pleasant thing.