Introduction 1
About This Book 2
Foolish Assumptions 2
Icons Used in This Book 2
Beyond the Book 3
Where to Go From Here 3
Book I: Keeping the Books 5
Chapter 1: Basic Bookkeeping 7
Bookkeepers: The Record Keepers of the Business World 7
Delving into Bookkeeping Basics 8
Picking your accounting method: Cash basis versus accrual 9
Understanding assets, liabilities, and equity 9
Introducing debits and credits 9
Charting your bookkeeping course 10
Recognizing the Importance of an Accurate Paper Trail 10
Maintaining a ledger 11
Keeping journals 11
Instituting internal controls 11
Computerizing 12
Using Bookkeeping’s Tools to Manage Daily Finances 12
Maintaining inventory 12
Tracking sales 13
Handling payroll 13
Running Tests for Accuracy 14
Proving out your cash 14
Testing your balance 14
Doing bookkeeping corrections 14
Finally Showing Off Your Financial Success 14
Preparing financial reports 15
Paying taxes 15
Wading through Bookkeeping Lingo 16
Accounts for the balance sheet 16
Accounts for the income statement 17
Other common terms 17
Pedaling through the Accounting Cycle 18
Tackling the Big Decision: Cash ]basis or Accrual Accounting 20
Waiting for funds with cash ]basis accounting 20
Recording right away with accrual accounting 21
Seeing Double with Double ]Entry Bookkeeping 22
Differentiating Debits and Credits 24
Chapter 2: Charting the Accounts 25
Getting to Know the Chart of Accounts 25
Starting with the Balance Sheet Accounts 27
Tackling assets 28
Laying out your liabilities 31
Eyeing the equity 33
Tracking the Income Statement Accounts 34
Recording the money you make 34
Tracking the Cost of Sales 35
Acknowledging the money you spend 35
Setting Up Your Chart of Accounts 37
Chapter 3: The General Ledger 41
The Eyes and Ears of a Business 41
Developing Entries for the Ledger 42
Posting Entries to the Ledger 46
Adjusting for Ledger Errors 50
Using Computerized Transactions to Post and Adjust in the General Ledger 51
Chapter 4: Keeping Journals 53
Establishing a Transaction’s Point of Entry 53
When Cash Changes Hands 54
Keeping track of incoming cash 54
Following outgoing cash 56
Managing Sales Like a Pro 58
Keeping Track of Purchases 60
Dealing with Transactions that Don’t Fit 62
Posting Journal Information to Accounts 64
Simplifying Your Journaling with Computerized Accounting 66
Chapter 5: Controlling Your Records 71
Putting Controls on Your Business’s Cash 71
Checking accounts 72
Savings accounts 77
Petty cash accounts 77
Cash registers 78
Keeping the Right Paperwork 80
Creating a filing system 81
Figuring out what to keep and for how long 82
Protecting Your Business Against Internal Fraud 83
Facing the reality of financial fraud 83
Dividing staff responsibilities 85
Balancing control costs 87
Insuring Your Cash through Employee Bonding 88
Chapter 6: Computer Options for Bookkeeping.89
Surveying Your Software Options 90
Bookkeeper 90
Sage 50 Pro 91
QuickBooks Pro 92
Setting Up Your Computerized Books 93
Customizing software to match your operations 95
Converting your manual bookkeeping to a computerized system 97
Chapter 7: Financial Statements and Accounting Standards 99
Reviewing the Basic Content of Financial Statements 100
Realizing that form follows function in financial statements 100
Income statements 102
Balance sheets 104
Statement of cash flows 108
A note about the statement of changes in shareowners’ equity 111
Contrasting Profit and Cash Flow from Profit 111
Gleaning Key Information from Financial Statements 113
How’s profit performance? 113
Is there enough cash? 114
Can you trust financial statement numbers? 115
Why no cash distribution from profit? 116
Keeping in Step with Accounting and Financial Reporting Standards 117
Recognizing U.S. standards 117
Getting to know the U.S. standard setters 119
Internationalization of accounting standards (maybe, maybe not) 120
Divorcing public and private companies 121
Following the rules and bending the rules 122
Book II: Accounting and Financial Reports 125
Chapter 1: Financial Report Basics 127
Figuring Out Financial Reporting 128
Preparing the reports 128
Seeing why financial reporting counts (and who’s counting) 129
Checking Out Types of Reporting 131
Keeping everyone informed 131
Following the rules: Government requirements 132
Going global 133
Staying within the walls of the company: Internal reporting 134
Introducing the Annual Report 135
Breaking down the parts 135
Getting to the meat of the matter 136
Keeping the number crunchers in line 137
Digging Deeper into the Annual Report 138
Debunking the letter to shareholders 138
Making sense of the corporate message 140
Meeting the people in charge 140
Finding basic shareholder information 140
Getting the skinny from management 141
Management as a whole? 144
Getting guarantees from management 144
Bringing the auditors’ answers to light 145
Summarizing the Financial Data 148
Finding the highlights 148
Reading the notes 149
Chapter 2: Reporting Profit 151
Introducing Income Statements 152
Looking at a product business 152
Looking at a service business 153
Taking care of some housekeeping details 154
Your job: Asking questions! 156
Finding Profit 157
Getting Particular about Assets and Operating Liabilities 160
Making sales on credit → Accounts receivable asset 161
Selling products → Inventory asset 161
Prepaying operating costs → Prepaid expense asset 162
Fixed assets → Depreciation expense 163
Unpaid expenses → Accounts payable, accrued expenses payable, and income tax payable 164
Summing Up the Diverse Financial Effects of Making Profit 165
Reporting Extraordinary Gains and Losses 167
Correcting Common Misconceptions About Profit 170
Closing Comments 170
Chapter 3: Exploring Business Structures 173
Flying Solo: Sole Proprietorships 174
Keeping taxes personal 174
Reviewing requirements for reporting 175
Joining Forces: Partnerships 175
Partnering up on taxes 176
Meeting reporting requirements 176
Seeking Protection with Limited Liability Companies 176
Taking stock of taxes 177
Reviewing reporting requirements 177
Shielding Your Assets: S and C Corporations 177
Paying taxes the corporate way 178
Getting familiar with reporting requirements 180
Investigating Private Companies 181
Checking out the benefits 181
Defining disadvantages 182
Figuring out reporting 183
Understanding Public Companies 184
Examining the perks 186
Looking at the negative side 186
Filing and more filing: Government and shareholder reports 187
Entering a Whole New World: How a Company Goes from Private to Public 190
Teaming up with an investment banker 190
Making a public offering 191
Chapter 4: The Balance Sheet: Assets, Liabilities, and Equity 193
Understanding the Balance Equation 193
Introducing the Balance Sheet 194
Digging into dates 194
Nailing down the numbers 196
Figuring out format 196
Ogling Assets 198
Current assets 198
Long ]term assets 201
Accumulated depreciation 204
Looking at Liabilities 205
Current liabilities 205
Long ]term liabilities 206
Navigating the Equity Maze 206
Stock 207
Retained earnings 208
Capital 208
Drawing 208
Chapter 5: The Income Statement 209
Introducing the Income Statement 209
Digging into dates 210
Figuring out format 211
Delving into the Tricky Business of Revenues 214
Defining revenue 214
Adjusting sales 215
Considering cost of goods sold 217
Gauging gross profit 218
Acknowledging Expenses 219
Sorting Out the Profit and Loss Types 221
EBITDA 221
Non ]operating income or expense 222
Net profit or loss 223
Calculating Earnings per Share 223
Chapter 6: The Statement of Cash Flows 225
Digging into the Statement of Cash Flows 225
The parts 226
The formats 227
Checking Out Operating Activities 229
Depreciation 230
Inventory 230
Accounts receivable 231
Accounts payable 231
The cash flow from activities section, summed up 232
Investigating Investing Activities 232
Understanding Financing Activities 233
Issuing stock 233
Buying back stock 234
Paying dividends 235
Incurring new debt 235
Paying off debt 235
Recognizing the Special Line Items 236
Discontinued operations 236
Foreign currency exchange 236
Adding It All Up 237
Chapter 7: Getting a Financial Report Ready 239
Recognizing Top Management’s Role 240
Reviewing the Purposes of Financial Reporting 242
Keeping Current with Accounting and Financial Reporting Standards 243
Making Sure Disclosure Is Adequate 244
Footnotes: Nettlesome but needed 245
Other disclosures in financial reports 246
Putting a Spin on the Numbers (Short of Cooking the Books) 249
Window dressing for fluffing up the cash balance and cash flow 250
Sanding the rough edges off the year ]to ]year profit numbers 251
Going Public or Keeping Things Private 256
Reports from publicly owned companies 256
Reports from private businesses 257
Dealing with Information Overload 258
Browsing based on your interests 258
Recognizing condensed versions 259
Using other sources of business information 260
Statement of Changes in Owners’ Equity 260
Chapter 8: Accounting Alternatives 263
Setting the Stage 264
Taking Financial Statements with a Grain of Salt 264
Taking an alternative look at the company’s financial statements 265
Spotting significant differences 266
Explaining the Differences 268
Accounts receivable and sales revenue 269
Inventory and cost of goods sold expense 270
Fixed assets and depreciation expense 271
Accrued expenses payable, income tax payable, and expenses 272
Wrapping things up 273
Calculating Cost of Goods Sold Expense and Inventory Cost 274
FIFO 274
LIFO 275
Recording Depreciation Expense 278
Scanning Revenue and Expense Horizons 280
Book III: Day ]to ]Day Bookkeeping 283
Chapter 1: Buying and Tracking Your Purchases 285
Keeping Track of Inventory 286
Entering initial cost 287
Managing inventory and its value 290
Practice: Working with Inventory and Calculating Cost of Goods Sold 295
Buying and Monitoring Supplies 298
Staying on Top of Your Bills 298
Keeping tasks separate 298
Developing a system for Accounts Payable 299
Paying early if it benefits you 300
Practice: Calculating Discounts 300
Answers to Problems on Buying and Tracking Your Purchases 301
Chapter 2: Counting Your Sales 303
Collecting on Cash Sales 303
Discovering the value of sales receipts 304
Recording cash transactions in the books 305
Practice: Recording Sales in the Books 307
Selling on Credit 308
Deciding whether to offer store credit 309
Recording store credit transactions in the books 310
Practice: Sales on Store (Direct) Credit 313
Proving Out the Cash Register 315
Practice: Proving Out 317
Tracking Sales Discounts 319
Practice: Recording Discounts 320
Recording Sales Returns and Allowances 322
Practice: Tracking Sales Returns and Allowances 323
Monitoring Accounts Receivable 324
Practice: Aging Summary 325
Accepting Your Losses 326
Answers to Counting Your Sales 326
Chapter 3: Employee Payroll and Benefits 329
Setting the Stage for Staffing: Making Payroll Decisions 329
Completing government forms 330
Picking pay periods 332
Determining wage and salary types 332
Collecting Employee Taxes 334
Sorting out Social Security tax 334
Making sense of Medicare tax 335
Figuring out federal withholding tax 335
Settling up state and local withholding taxes 336
Determining Net Pay 336
Practice: Payroll Tax Calculations 337
Surveying Your Benefits Options 338
Tax ]exempt benefits 338
Taxable benefits 339
Dealing with cafeteria plans 340
Preparing Payroll and Posting It in the Books 340
Calculating payroll for hourly employees 341
Doling out funds to salaried employees 341
Totaling up for commission checks 341
Determining base salary plus tips 342
Practice: Payroll Preparation 343
Finishing the Job 344
Depositing Employee Taxes 345
Outsourcing Payroll and Benefits Work 346
Answers to Problems on Employee Payroll and Benefits 347
Chapter 4: Employer ]Paid Taxes and Government Payroll Reporting 349
Paying Employer Taxes on Social Security and Medicare 350
Filing Form 941 350
Knowing how often to file 351
Completing Unemployment Reports and Paying Unemployment Taxes 352
Examining how states calculate the FUTA tax rate 353
Calculating FUTA tax 354
Filing and paying unemployment taxes to state governments 355
Practice: Calculating FUTA Tax 356
Carrying Workers’ Compensation Insurance 356
Maintaining Employee Records 358
Answers to Problems on Employer-Paid Taxes and Government Payroll Reporting 360
Book IV: Preparing for Year’s End 363
Chapter 1: Depreciating Your Assets 365
Defining Depreciation 365
Knowing what you can and can’t depreciate 366
Figuring out the useful life of a fixed asset 367
Delving into cost basis 368
Reducing the Value of Assets 368
Evaluating your depreciation options 369
Tackling Taxes and Depreciation 372
Section 179 372
MACRS 373
Setting Up Depreciation Schedules 373
Recording Depreciation Expenses 374
Chapter 2: Paying and Collecting Interest 375
Deciphering Types of Interest 375
Simple interest 376
Compound interest 376
Handling Interest Income 377
Delving into Loans and Interest Expenses 378
Short ]term debt 379
Long ]term debt 382
Chapter 3: Proving Out the Cash 387
Why Prove Out the Books? 387
Making Sure Ending Cash Is Right 388
Closing the Cash Journals 389
Finalizing cash receipts 391
Finalizing cash outlays 395
Using a Temporary Posting Journal 396
Reconciling Bank Accounts 396
Tracking down errors 397
Using a computerized system 398
Posting Adjustments and Corrections 400
Chapter 4: Closing the Journals 401
Prepping to Close: Checking for Accuracy and Tallying Things Up 401
Paying attention to initial transaction details 402
Summarizing journal entries 402
Analyzing summary results 405
Planning for cash flow 406
Posting to the General Ledger 407
Checking Out Computerized Journal Records 408
Chapter 5: Checking Your Accuracy 413
Working with a Trial Balance 413
Conducting your trial balance 414
Dealing with trial balance errors 416
Testing Your Balance Using Computerized Accounting Systems 417
Developing a Financial Statement Worksheet 419
Replacing Worksheets with Computerized Reports 421
Chapter 6: Adjusting the Books 423
Adjusting All the Right Areas 423
Depreciating assets 424
Allocating prepaid expenses 425
Counting inventory 426
Allowing for bad debts 427
Recognizing unpaid salaries and wages 428
Testing Out an Adjusted Trial Balance 430
Changing Your Chart of Accounts 431
Book V: Accounting and Managing Your Business 433
Chapter 1: Managing Profit 435
Helping Managers: The Fourth Vital Task of Accounting 436
Following the organizational structure 436
Centering on profit centers 437
Internal Profit Reporting 438
Designing internal profit (P&L) reports 438
Reporting operating expenses 439
Presenting a Profit Analysis Template 441
Separating variable and fixed expenses 442
Stopping at operating earnings 444
Focusing on margin — the catalyst of profit 444
Answering Critical Profit Questions 445
How did you make profit? 446
How did you increase profit? 447
Taking a Closer Look at the Lines in the Profit Template 448
Sales volume 448
Sales revenue 448
Cost of goods sold 449
Variable operating expenses 450
Fixed operating expenses 450
Using the Profit Template for Decision ]Making Analysis 451
Tucking Away Some Valuable Lessons 453
Recognize the leverage effect caused by fixed operating expenses 453
Don’t underestimate the impact of small changes in sales price 453
Know your options for improving profit 454
Closing with a Boozy Example 455
Chapter 2: Budgeting 457
Exploring the Reasons for Budgeting 458
Modeling reasons for budgeting 459
Planning reasons for budgeting 460
Control reasons for budgeting 461
Additional Benefits of Budgeting 462
Is Budgeting Worth Its Costs? 464
Realizing That Not Everyone Budgets 465
Avoiding budgeting 465
Relying on internal accounting reports 466
Watching Budgeting in Action 468
Developing your profit improvement strategy and profit budget 469
Budgeting cash flow for the coming year 472
Considering Capital Expenditures and Other Cash Needs 474
Chapter 3: Cost Accounting 477
Looking Down the Road to the Destination of Costs 478
Are Costs Really That Important? 479
Becoming More Familiar with Costs 482
Direct versus indirect costs 482
Fixed versus variable costs 483
Relevant versus irrelevant costs 484
Actual, budgeted, and standard costs 485
Product versus period costs 486
Assembling the Product Cost of Manufacturers 486
Minding manufacturing costs 487
Classifying costs properly 489
Calculating product cost 491
Examining fixed manufacturing costs and production capacity 492
Puffing Profit by Excessive Production 495
Shifting fixed manufacturing costs to the future 495
Cranking up production output 496
Being careful when production output is out of kilter with sales volume 498
Chapter 4: Filing and Paying Business Taxes 501
Finding the Right Business Type 501
Sole proprietorship 502
Partnership 502
Limited Liability Companies (LLCs) 503
Corporations 503
Tackling Tax Reporting for Sole Proprietors 504
Filing Tax Forms for Partnerships 505
Paying Corporate Taxes 506
Reporting for an S corporation 506
Reporting for a C corporation 506
Taking Care of Sales Taxes Obligations 507
Chapter 5: Prepping the Books for a New Accounting Cycle 509
Finalizing the General Ledger 509
Zeroing out income statement accounts 510
Carrying over balance sheet accounts 511
Conducting Special Year ]End Bookkeeping Tasks 511
Checking customer accounts 512
Assessing vendor accounts 513
Deleting accounts 513
Starting the Cycle Anew 514
Index 515
