Über die Autorin bzw. den Autor

JEFFRY R. HABER is a Certified Public Accountant and financial, strategic, and tax consultant, and an assistant professor at Iona College. He is also the founder and former president of SUDZ Laundromats, Inc. He lives in Brooklyn, New York.

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Accounting Demystified

AMACOM

Contents

Acknowledgments..............................................ixChapter 1 Introduction.......................................1Chapter 2 Financial Statements...............................4Chapter 3 The Accounting Process.............................13Chapter 4 Making the Entries.................................25Chapter 5 Assets.............................................30Chapter 6 Cash...............................................32Chapter 7 Accounts Receivable................................41Chapter 8 Inventory..........................................52Chapter 9 Prepaid Expenses...................................66Chapter 10 Other Receivables.................................68Chapter 11 Fixed Assets......................................72Chapter 12 Intangible Assets.................................85Chapter 13 Liabilities.......................................89Chapter 14 Accounts Payable..................................92Chapter 15 Other Payables....................................95Chapter 16 Stockholders' Equity..............................99Chapter 17 Merchandising Companies...........................107Chapter 18 Adjusting and Closing Entries.....................118Chapter 19 Specialized Journals..............................129Chapter 20 Statement of Cash Flows...........................136Chapter 21 Ratio Analysis....................................143Glossary.....................................................151Index........................................................167

Chapter One

The success or failure of a business is measured in dollars. And dollars are recorded and reported using accounting. Accounting is truly the language of business. No matter what your role may be, if you are involved in business, you can benefit from learning accounting. That's what this book is all about—taking the subject and making it understandable and accessible.

This book makes an excellent companion to any standard text, or it can be used as a stand-alone volume. It is designed to present the subject in a straightforward, approachable manner. Financial accounting is an incremental process. What you learn in earlier chapters is used in later ones. There are no shortcuts to learning financial accounting, but at the same time, if it is taught clearly, it is not difficult.

Financial accounting involves all the steps from the original entries in the accounting records to the preparation of financial statements. There are other types of accounting as well, such as managerial accounting, cost accounting, and tax accounting, to name a few. These other types of accounting are covered in other books. The end user of financial accounting is the public; therefore, financial accounting has a lot of rules. These rules are necessary to make the information presented in the financial statements consistent and understandable. In contrast, in managerial accounting, which is used by the managers of a business to improve the business's operations, efficiency, and profitability, there are relatively few rules. Instead, it primarily consists of techniques that have proved themselves over time.

The organization of this book is intended to present the material in the order in which it needs to be understood. Therefore, we start with the end product of financial accounting, the financial statements, then jump back to the first step in the accounting process, making journal entries. This may seem out of order, but it follows the way accounting is best understood and learned rather than following the chronology of how accounting is done.

You cannot be a good accountant if you are not a good bookkeeper. Bookkeeping is considered a lower-level profession than accounting, and this perception is accurate because accountants possess skills that bookkeepers do not. However, the first step in learning accounting is to learn bookkeeping. What makes it accounting and not simply bookkeeping is going beyond just recording the entries into such areas as preparing the financial statements, analyzing the statements, and making necessary adjusting entries at the end of the accounting period.

A last thing to keep in mind when reading this book and looking at the examples and descriptions is that how things are presented and how they are arranged are highly variable in practice. Companies and managers adapt forms, schedules, and statements to meet their own needs (within the existing rules). Except as specifically prescribed by accounting guidance, there is an abundance of flexibility. A nimble mind will come in handy in trying to reconcile what is described in this book with what you may see in the real world. Sometimes these will be the same and sometimes there will be minor differences in presentation, but even given that variability, it should not be hard to take what you learn from this book and relate it directly to real-world situations.

Chapter Two

The end product of the financial accounting process is the financial statements. There are four basic financial statements: the Balance Sheet, the Income Statement, the Statement of Retained Earnings, and the Statement of Cash Flows. In addition to the four financial statements there will also be a section called "notes to the financial statements" or "footnotes." This section provides additional information that helps the reader understand certain details without making the basic statements overly long.

Sometimes the basic financial statements will have slightly different names, such as the Statement of Income instead of the Income Statement or the Statement of Changes in Owner's Equity instead of the Statement of Retained Earnings. Accountants have flexibility when it comes to account titles and statement names; the important thing is that anyone can recognize what the account or statement is. The names and titles used in this book are both typical and descriptive.

Income Statement

The Income Statement lists the company's revenues and expenses and gives the difference between them. This difference is called net income. For the most part, revenues arise from selling goods or services. Expenses are the costs involved in operating the business.

Some examples of accounts that are classified as revenues and expenses are:

Revenues Expenses

Sales Cost of goods sold Interest income Salary expense Rent expense Tax expense Interest expense

This is a very short list of the accounts that may be found on the Income Statement. Salary expense is also known as Wage expense or Payroll expense. The names are synonymous and are used interchangeably. It is also common not to use the full title Rent expense, but to call it simply Rent. This is done for most items where there is not a revenue and an expense with similar names. For instance, in the list given here, we cannot call Interest income simply Interest, since if we did, we would not be able to distinguish between the income and expense accounts. We have to use the full name Interest income in order not to confuse this account with Interest expense. When an account comes in two flavors (income and expense), we cannot shorten its name.

The Income Statement is concerned with how much money the company brought in and how much it spent in order to...