John A. Tracy - Accounting For Dummies

Administrators and managers of government and not-for-profit entities: Making profit is not the goal of these entities, but they have to stay within their revenue limits and keep on a sound financial footing.

Politicians at local, state, and federal levels: These folks pass many laws having huge financial consequences, and the better they understand accounting, the better informed their votes should be (we hope).

Investment bankers, institutional lenders, and loan officers: These folks should already know, but you would be amazed at how many times we’ve come across these types of professionals that still don’t have a complete understanding of accounting.

Business and finance professionals: This includes lawyers and financial advisors, of course, but even clergy counsel members of their flock on financial matters occasionally.

The following icons can help you find information quickly and easily.

This icon points out accounting ideas that are particularly deserving of your attention. These concepts are the undergirding and building blocks of accounting — concepts that you should be very clear about and that clarify your understanding of accounting principles in general.

This icon calls your attention to useful advice on practical financial topics. It saves you the cost of buying a highlighter.

Taking special note of Warning material can steer you around a financial road hazard and keep you from blowing a fiscal tire. In short — watch out!

We use this icon sparingly. It refers to specialized accounting stuff that’s heavy going, which only a CPA could get really excited about. However, you may find these topics interesting enough to return to them when you have the time. Feel free to skip these points and stay with the main discussion.

This book is packed with useful information, but if you’re looking for a compact overview of the most important points, check out the online Cheat Sheet. Go to www.dummies.com and search for “Accounting For Dummies Cheat Sheet” in the Search box. You’ll find FAQs on financial statements, accounting tips for business managers, and definitions of key accounting terms. We also want to note that all of the figures 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 tagetracy@cox.net .

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 15and 17, which explain analyzing profit behavior and budgeting cash flows.

Part 1

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

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.