Table of Contents

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