By Mike Piper
Table of Contents
1. Accounting Equation
Always true, no exceptions
Owners’ Equity is just a plug
My asset is your liability
2. Balance Sheet
It’s a snapshot
Assets
Liabilities
Equity
Current assets and liabilities vs. long-term assets and liabilities
Two-period balance sheets
3. Income Statement
Shows period of time rather than point in time
Gross Profit & Cost of Goods Sold
Operating Income vs. Net Income
4. Statement of Retained Earnings
Bridge between financial statements
Dividends are not an expense!
Retained Earnings: Not the same as cash
5. Cash Flow Statement
As opposed to income statement
Cash flow from operating activities
Cash flow from investing activities
Cash flow from financing activities
6. Financial Ratios
Liquidity ratios
Profitability ratios
Financial leverage ratios
Asset turnover ratios
Part Two Generally Accepted Accounting Principles (GAAP)
7. What is GAAP?
Who has to follow GAAP?
8. Debits and Credits
Double-entry system
The general ledger
T-accounts
The trial balance
9. Cash vs. Accrual
Cash method
Accrual method
Prepaid expenses
Unearned revenue
10. Other GAAP Concepts & Assumptions
Historical cost
Materiality
Money unit assumption
Entity assumption
Matching principle
11. Depreciation of Fixed Assets
Straight-line depreciation
Accumulated Depreciation
Salvage value
Gain or loss on sale
Other depreciation methods
Expensing immaterial purchases
12. Amortization of Intangible Assets
What are intangible assets?
Straight-line amortization
Legal life vs. expected useful life
13. Inventory & CoGS
Perpetual method
Periodic method
Calculating Cost of Goods Sold
FIFO vs. LIFO
Average cost method
Conclusion: The Humble Little Journal Entry
Introduction
Like the other books in the “…in 100 Pages or Less” series, this book is designed to give you a basic understanding of the topic (in this case, accounting), and do it as quickly as possible.
The only way to pack a topic such as accounting into just 100 pages is to be as brief as possible. In other words, the goal is not to turn you into an expert. With 100 pages, it’s simply not possible to provide a comprehensive discussion of every topic in the field of accounting. (So if that’s what you’re looking for, look for a different book.)
Now, having made that little disclaimer, I should state that I do think this book will help you achieve a decent understanding of the most important accounting concepts.
So What Exactly Is Accounting?
Some professors like to say that accounting is “the language of business.” That definition has always been somewhat too abstract for my tastes. That said, all those professors are right.
At its most fundamental level, accounting is the system of tracking the income, expenses, assets, and debts of a business. When looked at with a trained eye, a business’s accounting records truly tell the story of the business. Using nothing but a business’s “books” (accounting records), you can learn practically anything about a business. You can learn simple things such as whether it’s growing or declining, healthy or in trouble. Or, if you look closely, you can see things such as potential threats to the business’s health that might not be apparent even to people within the company.