Accounting QuickStart Guide: The Simplified Beginner's Guide to Financial & Managerial Accounting For Students, Business Owners and Finance Professionals

Introduction

I never expected to like accounting. I was not even introduced to the subject voluntarily but rather was required to take the course during my senior year at Kent State University. Like most unwilling accounting students, I would rather have forfeited a limb taken some other course, any other course, really—history of bowling, tofu sculpture, patternmaking for dog garments.1 But it was accounting that stood between me and my diploma. So I took accounting—and loved it.

In retrospect, my taking to accounting like a fish to water should have been foreseeable. I grew up obsessed with sports statistics. While my childhood friends watched sports to follow the unfolding fortunes of their favorite players and teams, I was watching—with equal enthusiasm—to find out how the latest results would impact batting averages, pass completion percentages, and earned run averages.

During my first accounting class, it hit me: accounting is essentially the practice of generating and analyzing statistics for businesses. Instead of tracking target batting averages, we track target net incomes. Instead of home run to strikeout ratios, we track asset to liability ratios. Moreover, the drama of business is often sufficient to rival that of sports, and accountants are key players in the middle of it all.

Looking back on my time as a student, I must give credit where it is due. The fact that I had an extraordinary professor definitely helped open my eyes to the possibility that accounting could be something other than a punishing prerequisite to graduation, but could be instead an enjoyable and worthy professional pursuit. Professor McFall is one of Kent State’s best, and his enthusiasm for the craft of accounting went a long way toward inspiring my career in this field. I do expect that the time I spent under Professor McFall’s tutelage will carry over into this text, much to the benefit of you, the reader.

It was thanks in large part to Professor McFall’s course that I decided to change my major to accounting, even though doing so as a senior meant adding another two years to my college career (sorry, Mom and Dad!). Within a few years of earning my undergraduate degree and gaining some experience as a professional accountant, I completed the requisite graduate-level coursework, and I sat for the exams required to become a CPA.

While holding the CPA (certified public accountant) designation is nice insofar as it signifies the topmost level of expertise in the field, its main benefit is the peace of mind it provides to those seeking accounting services. Why? Let me tell you a secret—anyone can call themselves an accountant, even if they are not a CPA, even if they hold no degree at all. But for an individual or business in need of accounting support, the CPA designation acts as a public vote of confidence, because it verifies that the accountant possesses a significant level of education, experience, and board-certified licensing.

Obviously, there is a long road between newbie accounting student and CPA. And for many students the first few miles on this road can be disorienting, even grueling.

Here are a few incredibly simple but valuable pieces of advice, especially relevant if you are a pure beginner in this field:

Patience is key.

It gets easier.

You can do it! (You might even enjoy it.)

Speaking of beginners, this QuickStart Guide was written to be understandable by those who have zero to very little accounting knowhow. This includes newly enrolled accounting students as well as business owners, managers, bookkeepers, and others in the professional world seeking knowledge of accounting fundamentals.

I’ve found that newcomers to accounting require a lot of encouragement. At the college level, Intro to Accounting is often seen as a weed out course, a trial-by-fire for the undergraduate. Accounting is regarded with similar dread in the professional world. Many business owners view it as an arcane endeavor, practiced by strange and humorless creatures (accountants). These same business owners, as much as they would like to clarify their tax burdens and exert greater control over their business’s finances, are reluctant to take time out of their schedules to learn basic accounting themselves. That is a mistake.

I could tell you countless horror stories of clients who failed to grasp the importance of proper accounting in their businesses and ended up paying a big price for it. I could tell you about Linda (all names changed to protect the guilty), who failed to properly reflect her rental property in her accounting records and as a result paid over $15,000 in taxes she would not have had to pay otherwise. Or Dave, whose multimillion-dollar sale of his business fell through because his accounting records were so poor the purchaser decided the numbers could not be trusted. With so much at stake, why doesn’t every business owner and manager learn basic accounting?

One popular reason for avoiding accounting—prevalent in both the academic and business communities—is fear of math. People assume accounting requires the use of complex mathematics, and that those with average or subpar math skills will quickly lose their footing. Others put off learning accounting not because they are scared of the math, but because they do not believe that accounting can be learned outside of a classroom setting, so they see no reason to pursue an independent study or purchase a book such as this one. Still others, hailing from the opposite end of the misperception spectrum, believe that accounting is nothing more than glorified budgeting, and if you know how to use a calculator and maybe a spreadsheet or two, then you are totally equipped to work as a chief financial officer (CFO).

They are wrong, on all accounts (no pun intended). For starters, accounting centers on the organization of financial data; it has very little to do with any exotic mathematics. The main challenges you will face at the beginner level are conceptual, not quantitative. Second, you can definitely establish a very strong foundational and even advanced-level knowledge of accounting by way of independent study. Beginning with the book you are currently reading, there are a vast number of resources available to anyone willing to take advantage of them. There are several free searchable accounting websites that cover most any accounting topic under the sun. There are also virtual classroom-style learning opportunities.

HANDS-ON LEARNING: My personal online course in accounting is available through ClydeBank Media. Information about the course and a promotional code can be found at the front of this book. The online course is a strong companion learning aid that complements this book and is sure to maximize your grasp of the material.

Accounting is a skill and requires study. Learning accounting is like learning a language, the language of business. It is a language that is universal and incredibly useful. To succeed in your independent study of this subject you must be patient, persistent, and optimistic. You will need to put in some solid hours of study. Certain fundamental accounting concepts that I will introduce in this book will not seem intuitive at first. You will need to warm up to them, and I will be doing my best to break the ice for you, using simple explanations and examples to help make your study as smooth, efficient, and valuable as possible. You will be surprised and pleased with the return you get for your efforts.

Accounting skills prove very useful in a multitude of scenarios. I have listed a few here:

Loan shopping – Want to raise some money for your start-up? Or maybe you already have a proven business model and want to scale up before a swarm of copycats beats you to the punch. Banks, lenders, and other investors appreciate accurate, properly prepared financial statements. Speak their language. Get funded!

Starting a new job (or improving competency at your current job) – If you were hired to do bookkeeping or other financial work, a strong grasp of accounting fundamentals will make you much more proficient at your job. Understanding the fundamentals contained in this book can give you the confidence to widen your realm of responsibility at work or even to ask for a raise.

Rectifying cash flow problems – One of the most common problems businesses encounter—often leading them to seek help from a CPA like myself—is cash flow. In many cases, business seems to be moving at a decent pace, yet the bank account balance keeps shrinking. Basic accounting can help business owners monitor their financial activity and root out and correct cash flow problems.

Fraud prevention – You may not know this, but smaller businesses lose a lot more from fraud than do larger business (relative to their total incomes).2 To prevent fraud, larger businesses often spread accounting responsibilities out over multiple parties and even departments. In small businesses, it is often only one or a few persons controlling the books. If the owner or manager of the business has a fundamental understanding of accounting principles, then there is more opportunity for oversight and fraud prevention efforts.

Tax planning – Taxes are the fundamental concern for many of my clients. Good accounting allows businesses to clarify and thereby minimize their tax burdens. They pay on time, penalty-free, and no more than what’s required by law.

Self-employment – In the modern gig economy, 30 percent of the national workforce is self-employed.3 Whether you are an Uber driver, a real estate broker, or a freelance graphic designer, an understanding of basic accounting will help you better manage your business activity and tax obligations.

Day-by-day business decision-making – From Amazon and Etsy sellers to brick-and-mortar donut shop owners, better control of finances leads to better business decision-making. Take, for instance, the value of accurate and timely financial statements. If you are a small business owner with a lot of cash coming in and going out, it can be difficult to determine how much money you are actually making. Maybe you are considering buying a new house or car, or perhaps your teenager is headed to college soon, and you need to take some money out of the business. Basic accounting knowledge will help you zero in on the value of your equity holdings. You will know how much money you actually have and how much you can safely withdraw.

One final note before we dive into the content, structure, and theory behind this text: I would like to invite students who are pursuing college-level accounting coursework to make use of this text as a primer for what you will be encountering in the classroom. If you can find the time to read and study this book end to end, then you will surely possess a significant advantage. If you have a penchant for the schadenfreude that comes from watching others struggle to get their heads around concepts that you have already mastered, then this book will truly enhance your classroom experience! Enjoy!

Chapter by Chapter

Accounting encompasses several dimensions, the main branches being financial accounting and managerial accounting (the differences between the two are explained in chapter 1). While there are plenty of full-length textbooks devoted exclusively to financial accounting and others devoted to managerial accounting, I have attempted to include in this text the most useful and essential introductory concepts from each universe. For readers more interested in practical and immediate business applications of accounting concepts, you will find ample material throughout the text that will help you gain greater control over your business’s financial mechanics. I do not advise skipping the financial accounting chapters on the assumption that they offer little practical application for the day-by-day activities of a small business. In fact, many of the examples presented in the financial accounting chapters revolve around the working realities of small businesses (as well as large ones).

As far as charting a course for your reading, my belief is that students, entrepreneurs, bookkeepers, etc. will benefit from reading this book straight through and learning the concepts in the order in which they are presented. Since this is meant to be a beginner-level book, I have refrained from unnecessarily delving too deep into any given concept for the sake of showcasing my own knowledge. The objective throughout is to produce opportunities for learners to gain knowledge of fundamental accounting concepts as simply and clearly as possible.

In case you are still not convinced that a straight-through reading is in your best interest, I provide brief chapter summaries here to guide your reading choices:

Chapter 1: Accounting as a Tool of Business – This chapter explores some of the major business-related reference points used frequently in accounting, such as business entity types and the three main kinds of business activity. The chapter also introduces the four main branches of accounting.

Chapter 2: Introduction to Financial Statements – This chapter introduces common financial statements as well as other essential accounting concepts, such as accrual vs. cash-basis accounting and the use of fiscal years.

Chapter 3: Financial Statement Analysis – This chapter explores how certain metrics and formulas can be used to analyze financial statement data. Some common methods of asset depreciation are also introduced.

Chapter 4: Assets = Liability + Equity – This chapter introduces the fundamental accounting equation (assets = liabilities + equity) and explains why it is the basis for the widely used double-entry accounting system. Chapter 4 also explains in detail the critical concept of debits and credits.

Chapter 5: Recording Business Transactions – The accounting methods introduced in this chapter support organizational structures and protocols that keep accounting systems accurate and intelligible.

Chapter 6: Managerial Accounting: How to Put Accounting Fundamentals to Work on Behalf of Your Business – This chapter covers a broad range of managerial accounting concepts including cost-volume-profit analysis (CVP analysis), budgeting, and multi-product analysis.

Chapter 7: Using Financial Accounting to Select and Monitor Stocks and Other Investments – While the primary intent of this chapter is to showcase accounting as a useful tool for investment selection, perhaps more useful for accounting students is the chapter’s detailed review of GAAP (generally accepted accounting principles).

Chapter 8: Income Tax Accounting, or Keeping Your Business Out of IRS Crosshairs – This chapter provides a summary-level look at the critical role played by the accountant in the tax services industry. The anatomy and logic of the progressive income tax system is also detailed in this chapter.

Chapter 9: Detecting and Preventing Fraud – This chapter is a chronicle of dark deeds performed by unscrupulous office personnel. It explains how accountants sniff out fraud while minimizing fraud incentive and opportunity.

Chapter 10: Sizing Up the Software for Accounting and Bookkeeping – This chapter provides a look at the ever-present technological components of accounting, including when to implement new software and how to define selection criteria.

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Accounting as a Tool of Business

Chapter Overview

Business Entity Types

Business Activities

Financial Statements

Accounts

Branches of Accounting

An online retailer, let’s call her Kathi, who sells jewelry to customers all over the world, is considering hiring five new employees to help her expand her business. Kathi would like to offer these new employees fair and competitive compensation but is unsure of how much she can afford to pay them on an ongoing basis. Last month, Kathi moved her jewelry business out of her basement and rented a workshop and retail space in a midtown shopping center with heavy foot traffic. Paying rent every month is an added business expense, but having a new walk-in customer base to supplement online sales will (Kathi hopes) provide a strong boost to the business’s revenue.

In the same shopping center, a print shop owner/franchisee, let’s call him James, has been operating at a small loss for the last four months. At a recent national conference the print shop owner met other franchisees who claimed to have restored profitability to their businesses by eliminating certain product and service offerings. James is now studying his sales records, looking for products and services that do not generate enough revenue to justify their expense.

Meanwhile, the print shop owner’s franchise-issuing parent company, a multibillion-dollar publicly held corporation, has had a very profitable quarter and would like to return some of that money to its shareholders in the form of dividend payments. But how