Understanding Business Accounting For Dummies, 2nd Edition (4 page)

Some Assumptions

Whilst this book is designed for all of you who have that nagging feeling that you really should know more about accounting, we have made a few assumptions about you:

You don't want to be an accountant, nor do you have any aspirations of ever sitting for the FCA (Fellow of the Institute of Chartered Accountants) exam. But you worry that ignorance of accounting may hamper your decision-making, and you know deep down that learning more about accounting would help.

We assume that you have a basic familiarity with the business world, but we take nothing for granted in this book regarding how much accounting you know. Even if you have some experience with accounting and financial statements, we think you'll find this book useful - especially for improving your communication with accountants.

We assume that you need to
use
accounting information. Many different types of people (business managers, investors, and solicitors, to name but three) need to understand accounting basics - not all the technical stuff, just the fundamentals.

We assume that you want to know something about accounting because it's an excellent gateway for understanding how business works, and it gives you an indispensable vocabulary for moving up in the business and investment worlds. Finding out more about accounting helps you understand earnings reports, mergers and takeovers, frauds and pyramid schemes, and business restructurings.

Let us point out one other very practical assumption that we have regarding why you should know some accounting. We call it the
defensive
reason. A lot of people out there in the cold, cruel financial world may take advantage of you, not necessarily by illegal means, but by withholding key information and by diverting your attention away from unfavourable aspects of certain financial decisions. These unscrupulous characters treat you as a lamb waiting to be fleeced. The best defence against such tactics is to learn some accounting basics, which can help you ask the right questions and understand the financial points that tricksters don't want you to know.

How This Book Is Organised

This book is divided into parts, and each part is further divided into chapters. The following sections describe what you can find in each part.

Part I: Accounting Basics

Part I of
Understanding Business
Accounting For Dummies
introduces accounting to non-accountants and discusses the basic features of bookkeeping and accounting record-keeping systems. This part also talks about taxes of all kinds that are involved in running a business, as well as accounting in the everyday lives of individuals.

Part II: Getting a Grip on Financial Statements

Part II moves on to the end product of the business accounting process - financial statements. Three main financial statements are prepared every period - one for each financial imperative of business: making profit, keeping financial condition in good shape, and controlling cash flow. The nature of profit and the financial effects of profit are explained in Chapter 5. The assets, liabilities, and owners' capital invested in a business are reported in the balance sheet, which is discussed in Chapter 6. Cash flow from profit and the cash flow statement are explained carefully in Chapter 7. The last chapter in this part, Chapter 8, explains what managers have to do to get financial statements ready for the annual financial report of the business to its owners.

Part III: Accounting in Managing a Business

Business managers should know their financial statements like the backs of their hands. However, just understanding these reports is not the end of accounting for managers. Chapter 9 kicks off this part with an extraordinarily important topic - building a basic profit model - that clearly focuses on the key variables that drive profit. This model is absolutely critical for decision-making analysis.

Chapter 10 discusses accounting-based planning and control techniques, especially budgeting
.
Business managers and owners have to decide on the best business ownership structure, which we discuss in Chapter 11. Managers in manufacturing businesses should be wary of how product costs are determined - as Chapter 12 explains. This chapter also explains other economic and accounting costs that business managers use in making decisions. Chapter 13 identifies and explains the alternative accounting methods for expenses and how the choice of method has a major impact on profit for the period, and on the cost of stock and fixed assets reported in the balance sheet.

Part IV: Financial Reports in the Outside World

Part IV explains financial statement reporting for investors. Chapter 14 presents a speed-reading approach that concentrates on the key financial ratios to look for in a financial report. The scope of the annual audit and what to look for in the auditor's report are explained in Chapter 15, which also explains the role of auditors as enforcers of financial accounting and disclosure standards.

Part V: The Part of Tens

This part of the book presents three chapters. Chapter 16 presents some practical ideas for managers to help them put their accounting knowledge to use whilst Chapter 17 lists various sources of finance available to the business. Chapter 18 gives business investors some handy tips on things to look for in a financial report - tips that can make the difference between making a good investment and a not-so-good one.

Part VI: Appendixes

At the back of the book, you can find two helpful appendixes that can assist you on your accounting safari. Appendix A provides you with a handy, succinct glossary of accounting terms. Appendix B fills you in on the accounting software programs available for your business.

Icons Used in This Book

This icon calls your attention to particularly important points and offers useful advice on practical financial topics. This icon saves you the cost of buying a yellow highlighter pen.

This icon serves as a friendly reminder that the topic at hand is important enough for you to put a note about it in the front of your wallet. This icon marks material that your college professor might put on the board before class starts, noting the important points that you should remember at the end of class.

Accounting is the language of business, and, like all languages, the vocabulary of accounting contains many specialised terms. This icon identifies key accounting terms and their definitions. You can also check the glossary (Appendix A) to find definitions of unfamiliar terms.

This icon is a caution sign that warns you about speed bumps and potholes on the accounting highway. Taking special note of this material can steer you around a financial road hazard and keep you from blowing a fiscal tyre. In short - watch out!

We use this icon sparingly; it refers to very specialised accounting stuff that is heavy going, which only an FCA could get really excited about. However, you may find these topics important enough to return to when you have the time. Feel free to skip over these points the first time through and stay with the main discussion.

This icon alerts you that we're using a practical example to illustrate and clarify an important accounting point. You can apply the example to your business or to a business in which you invest.

This icon points out especially important ideas and accounting concepts that are particularly deserving of your attention. The material marked by this icon describes concepts that are the underpinning and building blocks of accounting - concepts that you should be very clear about, and that clarify your understanding of accounting principles in general.