Accounting For Dummies. John A. Tracy

presented in this book have been prepared in Excel and can be obtained free of charge by reaching out to us and requesting a copy of the workbook file at [email protected].

Where to Go from Here

      There’s no law against starting on page 1 and reading through to the last page. However, you may first want to scan the book’s Contents at a Glance and see which chapters pique your interest.

      Perhaps you’re an investor who’s interested in finding out more about financial statements and the key financial statement ratios for investors. In that case, you might start with Chapters 6, 7, and 8, which explain the three primary financial statements of businesses, and finish with Chapter 11, on reading a financial report. (And don’t overlook Chapter 20.)

      Or maybe you’re a small-business owner/manager with a basic understanding of your financial statements, but you need to improve how you use accounting information for making key profit decisions and for planning and controlling your cash flow. You might jump right into Chapters 15 and 17, which explain analyzing profit behavior and budgeting cash flows.

Part 1

      Opening the Books on Accounting

IN THIS PART …

      Discover how accountants are the financial information gatekeepers in the economy and why accounting is so important for for-profit businesses, nonprofit organizations, and government agencies.

      Find out how a business or other entity prepares its financial statements, its tax returns, and the reports to its managers. Know how to make sure these documents conform to established standards.

      Get the lowdown on bookkeeping — the record-keeping part of accounting — to ensure that the financial information of a business is timely, complete, accurate, and reliable, especially the numbers reported in financial statements and tax returns.

      Understand why safeguarding company assets is an integral part of an accountant’s job and how the digital age, the cloud, and technology are transforming the world of accounting.

      Look at the various types of business legal entities, see how accounting differs for each one, and get some helpful hints on when different legal structures are best used.

Chapter 1

      Accounting in Today’s New Economy

      IN THIS CHAPTER

      

Appreciating how accounting is relevant to you

      

Grasping how all economic activity requires accounting

      

Understanding the accounting function’s primary roles

      

Watching an accounting department in action

      

Shaking hands with business financial statements

      

Realizing accounting is both an art form and science

      There was a captive audience present when I (coauthor John) taught Accounting 101 because, then as well as now, all business school students have to take this course. In contrast, very few arts and science students elect the course, which is unfortunate. Accounting 101 teaches about business, including the nature of profit (which most people don’t fully understand) and the fundamentals of capitalism.

      The course is a very good training ground for becoming financially literate. Accounting is the language of business, finance, investing, and taxes. To be financially literate, you need to know basic accounting. These days, there’s a big push to improve financial literacy, and a basic accounting course offers a useful framework for understanding and thinking about financial issues. Financial literacy is important to help ensure financial security for you and your family as you go through life and eventually enter into retirement.

In one sense, this book is the accounting course you never took. For business grads, the book presents an opportune review of topics you’ve gotten rusty on. We dare say that even accounting majors can glean many insights from this book. You don’t need a college education to gain from this book, however. Like all the For Dummies books, this book delivers useful information in a plain-talking manner, with a light touch to keep it interesting.

      As you go through life, you come face to face with a flood of accounting-generated information — more than you would ever imagine. Regrettably, much of this information isn’t intuitive, and it doesn’t come with a user’s manual. In short, most of the accounting information you encounter isn’t readily clear.

      One main reason for learning some accounting is to understand its vocabulary and valuation methods so you can make more intelligent use of the information. Accountants are financial scorekeepers. In playing or watching any game, you need to know how the score is kept. The purpose of this book is to make you a knowledgeable spectator of and sometimes a participant in the accounting game.

      

Let us point out another reason you should know accounting basics — the defensive reason. Many people in the cold, cruel financial world are on the prowl to take advantage of your lack of savvy about accounting. These unscrupulous characters treat you as a lamb waiting to be fleeced. An important defense against such tactics is to know some accounting, which helps you ask the right questions and understand the crucial points on which con artists want to keep you in the dark.

Checking Your Preconceptions about Accounting

      You probably fall in with the majority of people who have preconceptions about accounting — which in fact may be way off the mark. For instance, most people think that you have to be good at math to understand accounting. Accounting deals with numbers, that’s for sure, but by no means does it require calculus or other math — just arithmetic. Accountants make calculations and compare numbers. That’s about it. We’ve never heard of an accountant taking the first derivative of an accounting equation or doing any other calculus computation.

The problem is that many people — perhaps even you — are number-phobic. They avoid anything to do with digits. They wouldn’t think of doing their annual income tax return. Accountants deal in numbers. But be aware that every accounting number has a name or label attached. There are no naked numbers in accounting. The basic unit of information in accounting is the account, which consists of both

       A name

       Its amount or value

      The vocabulary of accounting consists of accounts. Accountants communicate in terms of accounts.

      Another