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Introduction

You may know individuals who make their living as accountants. You may be thankful that they’re the accountants and you’re not. You may prefer to leave accounting to the accountants and think that you don’t need to know anything about accounting. This attitude reminds us of the old Greyhound Bus advertising slogan: “Leave the Driving to Us.” Well, if you could get around everywhere you wanted to go on the bus, that would be no problem. But if you have to drive most places, you’d better know something about cars. Throughout your life, you do lots of “financial driving,” and you should know something about accounting.

Sure, accounting involves numbers. So does watching your car mileage, knowing your blood pressure, keeping track of your bank balance, negotiating the interest rate on your home mortgage, monitoring your retirement fund, and bragging about your kid’s grade point average. You deal with numbers all the time. Accountants provide financial numbers, and these numbers are very important in your financial life. Knowing nothing about financial numbers puts you at a serious disadvantage. In short, financial literacy requires a working knowledge of accounting, which this book provides.

About This Book

Here are some advantages this book offers over other accounting texts:

 We explain accounting in plain English, and we keep jargon and technical details to a minimum.

 We carefully follow a step-by-step approach in explaining topics.

 We include only topics that nonaccountants should understand. We avoid topics that only practicing accountants have to know.

 We include candid discussions of sensitive accounting topics that go unmentioned in many books.

 We combine our vast experience of both theoretical accounting (that is, how it is taught in the classroom) with actual practiced accounting (how accounting is applied in real-world businesses) to provide a deeper, more robust, and practical approach to understanding accounting.

 We’ve set up the book so you can read the chapters in any order you please. You can tailor your reading plan to give priority to the chapters of most interest to you and read other chapters as time permits.

We should mention one thing: This book is not an accounting textbook. Introductory accounting textbooks are dry as dust and overly detailed. However, textbooks have one useful feature: They include exercises and problems. If you have the time, you can gain additional insights and test your understanding of accounting by working the exercises and short problems in coauthor John’s book Accounting Workbook For Dummies (Wiley).

A quick note: Sidebars (shaded boxes of text) dig into the details of a given topic, but they aren’t crucial to understanding it. Feel free to skip them. You can also pass over the text accompanied by the Technical Stuff icon, as it offers some interesting but nonessential information about accounting.

Finally, within this book, you may note that some web addresses break across two lines of text. If you’re reading this book in print and want to visit one of these webpages, simply key in the address exactly as it’s noted in the text, pretending the line break doesn’t exist. If you’re reading this as an ebook, you have it easy — just click the web address to be taken directly to the webpage.

Foolish Assumptions

We’ve written this book with a wide audience in mind. You should find yourself more than once in the following list of potential readers:

 Business managers (at all levels): Trying to manage a business without a good grip on financial statements can lead to disaster. How can you manage the financial performance of your business if you don’t understand your financial statements in the first place?

 Business buyers and sellers: Anyone thinking of buying or selling a business should know how to read its financial statements and how to “true up” these accounting reports that serve as a key point of reference for setting a market value on the business.

 Entrepreneurs: As budding business managers, they need a solid grasp of accounting basics.

 Active investors: Investors in marketable securities, real estate, and other ventures need to know how to read financial statements, both to stay informed about their investments and to spot any signs of trouble.

 Passive investors: Many people let the pros manage their money by investing in mutual funds or using investment advisors to handle their money; even so, they need to understand the investment performance reports they get, which use plenty of accounting terms and measures.

 Accountants, bookkeepers, and controllers: Strengthening their knowledge of accounting should improve their effectiveness and value to the organization and advance their careers.

 People who want to take control of their personal finances: Many aspects of managing your personal finances involve the accounting vocabulary and accounting-based calculation methods.

 Anyone interested in following economic, business, and financial news: Articles in The Wall Street Journal and other financial news sources are heavy with accounting terms and measures.

 Administrators and managers of government and not-for-profit entities: Making profit is not the goal of these entities, but they have to stay within their revenue limits and keep on a sound financial footing.

 Politicians at local, state, and federal levels: These folks pass many laws having huge financial consequences, and the better they understand accounting, the better informed their votes should be (we hope).

 Investment bankers, institutional lenders, and loan officers: These folks should already know, but you would be amazed at how many times we’ve come across these types of professionals that still don’t have a complete understanding of accounting.

 Business and finance professionals: This includes lawyers and financial advisors, of course, but even clergy counsel members of their flock on financial matters occasionally.

Icons Used in This Book

The following icons can help you find information quickly and easily.

This icon points out accounting ideas that are particularly deserving of your attention. These concepts are the undergirding and building blocks of accounting — concepts that you should be very clear about and that clarify your understanding of accounting principles in general.

This icon calls your attention to useful advice on practical financial topics. It saves you the cost of buying a highlighter.

Taking special note of Warning material can steer you around a financial road hazard and keep you from blowing a fiscal tire. In short — watch out!

We use this icon sparingly. It refers to specialized accounting stuff that’s heavy going, which only a CPA could get really excited about. However, you may find these topics interesting enough to return to them when you have the time. Feel free to skip these points and stay with the main discussion.

Beyond the Book

This book is packed with useful information, but if you’re looking for a compact overview of the most important points, check out the online Cheat Sheet. Go to www.dummies.com and search for “Accounting For Dummies Cheat Sheet” in the Search box. You’ll find FAQs on financial statements, accounting tips for business managers, and definitions of key accounting terms. We also want to note that all of the figures presented in this book have been prepared in Excel and can be obtained free of charge by reaching out to us and requesting a copy of the workbook file at tagetracy@cox.net.

Where to Go from Here

There’s no law against starting on page 1 and reading through to the last page. However, you may first want to scan the book’s Contents at a Glance and see which chapters pique your interest.

Perhaps you’re an investor who’s interested in finding out more about financial statements and the key financial statement ratios for investors. In that case, you might start with Chapters 6, 7, and 8, which explain the three primary financial statements of businesses, and finish with Chapter 11, on reading a financial report. (And don’t overlook Chapter 20.)

Or maybe you’re a small-business owner/manager with a basic understanding of your financial statements, but you need to improve how you use accounting information for making key profit decisions and for planning and controlling your cash flow. You might jump right into Chapters 15 and 17, which explain analyzing profit behavior and budgeting cash flows.