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Published:
January 19, 2022

Accounting For Dummies

Overview

Demystify your financial statements and figure out what your accountant is talking about with this straightforward roadmap to the world of accounting

Few skills are as useful as a basic understanding of accounting language. And with the right resources, learning the language of business can be intuitive, empowering, and fun.

Accounting For Dummies is the perfect place to start, whether you're operating a small business, just need help managing the family budget, or you're a rising star in corporate America. It's a financial blueprint for the everyday person, easy-to-understand, and full of practical advice.

You'll learn the basic ABC's of accounting, how to read and understand financial statements, create best in class budgets & forecasts, craft profitable business plans, take control of your own finances, gain insight on how companies get money from investors and banks, and avoid common money mistakes that trip up even the best of us. You'll also find out how to:

  • Diagnose the financial health of your business and make a realistic plan to grow your company
  • Improve your own or your family's money situation with sound financial planning and understanding
  • Understand each of the three basic financial statements and what they say about a company's past, present, and future
  • Enhance your knowledge of how accounting functions and operates in today's digital age and cloud-based world

As a useful tool for business or as a guide to your personal finances, nothing compares to accounting mastery. And once you've nailed the basics, you'll wonder how you ever lived without this universal and beautiful language.

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About The Author

John A. Tracy, CPA, is an award-winning professor emeritus of accounting at the University of Colorado at Boulder. He has authored The Fast Forward MBA in Finance, 2nd Edition, and Accounting Workbook For Dummies.

Tage C. Tracy, CPA, operates a financial consulting firm focused on offering CFO support and planning services to private companies. He is the author of Business Financial Information Secrets and has coauthored several For Dummies titles.

Sample Chapters

accounting for dummies

CHEAT SHEET

Accountants keep the books of businesses, not-for-profits, and government entities by following systematic methods of recording all financial activities. If you invest your hard-earned money in a private business or a real estate venture, save money in a credit union, or are a member of a nonprofit association or organization, you likely receive regular financial reports.

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Articles from
the book

How can accounting help make you a better business manager? That’s the bottom-line question, and the bottom line is the best place to start. Accounting provides the financial information you need for making good profit decisions — and it stops you from plunging ahead with gut-level decisions that feel right but don’t hold water after due-diligence analysis.
Knowing the correct accounting terms and what they mean can make a world of difference when you’re deciphering financial statements and reports and determining profits and losses. It’s easy to get debits and credits confused, and it’s a must to know which documents make up a complete financial report. A ton of cash could depend on your understanding of the following basic accounting terms: Accounting: The methods and procedures for identifying, analyzing, recording, accumulating, and storing information and data about the activities of an entity that has financial results and for preparing summary reports of these activities internally for managers and externally for those entitled to receive financial reports about the entity.
You can compare reading a business’s financial report with shucking an oyster: You have to know what you’re doing and work to get at the meat. You need a good reason to pry into a financial report. The main reason to become informed about the financial performance and condition of a business is because you have a stake in the business.
For accounting purposes, there are two types of owners’ equity. Every business — regardless of how big it is, whether it’s publicly or privately owned, and whether it’s just getting started or is a mature enterprise — has owners. No business can get all the capital it needs by borrowing. The owners provide the business with its start-up and its continuing base of capital, which is generally referred to as equity.
Accountants keep the books of businesses, not-for-profits, and government entities by following systematic methods of recording all financial activities. If you invest your hard-earned money in a private business or a real estate venture, save money in a credit union, or are a member of a nonprofit association or organization, you likely receive regular financial reports.
Business managers should get the most out of their accounting information — to know how the business is doing and how to do better, and whether or not it is on the verge of serious cash flow and financial problems. You wouldn’t pilot a plane without knowing how to read the flight map. A business manager should know how to read the financial map of the business provided by accounting information.
The three primary financial statements (income statement, balance sheet, and cash flow statement) accountants use — as important as they are — can’t convey all the information that the lenders and investors of a business want to know and are entitled to know, so a business should include additional information.
Business managers, creditors, and investors rely on financial reports because these reports provide information regarding how the business is doing and where it stands financially. Like newspapers, financial reports deliver financial “news” about the business. One big difference between newspapers and business external financial reports is that businesses themselves, not independent reporters, decide what goes into their financial reports.
Keep your eye out for accounting tricks. You shouldn’t be surprised to learn that business managers are under tremendous pressure to make profit and keep profit on the up escalator year after year. Managers strive to make their numbers and to hit the milestone markers set for the business. Reporting a loss for the year, or even a dip below the profit trend line, is a red flag that stock analysts and investors view with alarm.
When approaching the accounting, you need to be aware of window dressing. Suppose you manage a business and your controller has just submitted for your review the preliminary, or first draft, of the year-end balance sheet. This example shows the current assets and current liabilities sections of the balance sheet draft.
Managers are problem solvers and accountants. Every business has problems, perhaps even some serious ones. However, external financial statements aren’t designed to highlight such problems. Except in extreme cases — in which the business is obviously in dire financial straits — you’d never learn about its problems just from reading its external financial statements.
In a financial report, accounting information is presented in the form of financial statements packaged with other information, such as explanatory footnotes and a letter from top management. Financial statements are prepared at the end of each accounting period, which may be one month, one quarter (three calendar months), or one year.
The accountant has to wear four different hats. And the accounting system of a business has to serve all four of the following demands on it. Accounting serves critical functions in a business: Recordkeeping: A business needs a dependable recordkeeping and bookkeeping system for operating in a smooth and efficient manner.
Reading the footnotes in annual financial reports is no walk in the park for accountants. The investment pros read them because in providing service and consultation to their clients, they’re required to comply with due diligence standards — or because of their legal duties and responsibilities of managing other peoples’ money.
As you’ve undoubtedly heard, there’s no such thing as a free lunch. Budgeting has its costs, which business managers should take into account before rushing into (or continuing with) a full-scale budgeting process. Whether to engage in budgeting is a prime example of how managers make tough decisions: Comparing costs versus benefits.
Standards and regulatory requirements for accounting and financial reporting don’t stand still. For many years, accounting and financial reporting standards moved like glaciers — slowly and not too far. But just like the climate, the activity of the accounting and financial reporting authorities has warmed up.
Sometimes, accountants need to leverage equity capital with debt. Suppose a business has $10 million in total assets (you find assets in the balance sheet of a business). This doesn’t mean that it has $10 million in owners’ equity. Assuming the business has a good credit rating, it probably has some amount of trade credit, which is recorded in accounts payable and accrued expenses payable liability accounts.
There were days before the cash flow statement was required in the externally reported financial statements of businesses. In 1987, the cash flow statement was made mandatory. Most financial report users thought that this new financial statement would be quite useful and should open the door for deeper insights into the business.
Knowing the difference between financial reports of private and public companies is important for accounting. Public companies make their financial reports available to the public at large; they don’t limit distribution only to their present shareowners and lenders. In contrast, private companies generally keep their financial reports private — they distribute their financial reports only to their shareowners and lenders.
The financial statements reported by a business are just one version of its financial history and accounting performance. A different accountant for the business undoubtedly would have recorded a different version, at least to some extent. The income statement and balance sheet of a business depend on which particular accounting methods the accountant chooses.
Budgeting has advantages and ramifications that go beyond the financial and accounting dimension and have more to do with business management in general. Consider the following: Budgeting puts pressure on managers to do better forecasting. Managers should be constantly scanning the business environment to spot changes that will impact the business.
Accountants aren’t the only ones with access to financial information. An investment opportunity in a private business won’t show up on your doorstep every day. However, if you make it known that you have money to invest as an equity shareholder, you may be surprised at how many offers come your way.Alternatively, you can invest in publicly traded securities, those stocks and bonds traded every day in major securities markets.
One broad misconception about profit when it comes to accounting is that the numbers reported in the income statement are precise and accurate and can be relied on down to the last dollar. Call this the exactitude misconception. Virtually every dollar amount you see in an income statement probably would have been different if a different accountant had been in charge.
Every business needs capital. As far as accountants are concerned, capital provides the money for the assets a business needs to make sales and carry on its operations. Common examples of assets are the working cash balance a business needs for day-to-day activities, products held in inventory for sale, and long-life operating assets (buildings, machines, computers, office equipment, and so on).
External financial statements, including the profit report (income statement), comply with well-established rules and conventions. In contrast, the format and content of internal accounting reports to managers is a wide-open field.If you could sneak a peek at the internal financial reports of several businesses, you would be surprised at the diversity among the businesses.
The term free cash flow has emerged in the lexicon of finance and investing. This piece of language is not — let’s repeat, not — officially defined by the rule-making body of any authoritative accounting or financial institution. Furthermore, the term does not appear in cash flow statements reported by businesses.
It’s useful to distinguish between bookkeeping and accounting because they aren’t completely interchangeable. Bookkeeping refers mainly to the recordkeeping aspects of accounting; it’s essentially the process (some would say the drudgery) of preparing documents or making computer-based data entries for recording all the detailed information regarding the transactions and other activities of a business (or other organization, venture, or project).
Suppose you’re starting a new business with one or more other owners, but you don’t want it to be a corporation. For accounting and business purposes, you can choose to create a partnership or a limited liability company, which are the main alternatives to the corporate form of business. A partnership is also called a firm.
It’s important to understand budgeting for accounting purposes. The topic of budgeting lies in the larger field of management — in particular, management planning and control. Planning reasons for budgeting Budgeting is optional for most businesses; the business is not required to do any budgeting. In contrast, the operating policies of not-for-profit entities typically require that formal budgeting be used.
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