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Introduction

Accounting is known as the language of business because it communicates financial and economic facts about a business to all sorts of interested parties — both internal (employees of the company) and external (people not employed by the company in question). External users include investors, creditors, banks, and regulatory agencies such as the Internal Revenue Service and the U.S. Securities and Exchange Commission.

Zeroing in on the external users of accounting information, this book is about financial accounting. Financial accounting serves the needs of external users by providing them with understandable, materially correct financial statements. There are three financial statements: the income statement, balance sheet, and statement of cash flows. This book is a step-by-step guide on how to prepare all three.

You also find out the purposes of the financial statements:

 To report on the financial position of the company — what types of assets the company owns and what types of liabilities it owes.

 To show how well the company performs over a period of time, which is referred to as an accounting period. You measure performance by seeing whether the company made or lost money during the accounting period.

A lot of first-time accounting students tell me that they are afraid they won’t do well in their financial accounting class because they haven’t done well in math classes they’ve taken in the past. Forgot about the math — that’s why you have a computer and a calculator! Financial accounting is less about adding and subtracting than using logic-based skills. Added to the mix is the importance of gaining a working understanding of the standards set in place by authoritative accounting bodies.

After years spent in the classroom as both a professor and student, I realize that many accounting textbooks are, well, boring. My purpose in writing this book is to breathe some life into the subject of financial accounting and make it more understandable.

About This Book

This book, like all For Dummies books, is written so that each chapter stands on its own. I always assume that whatever chapter you’re reading is the first one you’ve tackled in the book. Therefore, you can understand the concepts I explain in each chapter regardless of whether it’s your first chapter or your last.

However, certain terms and concepts pertain to more than one subject in this book. To avoid writing the same explanations over and over, whenever I reference a financial accounting term, method, or other type of fact that I fully explain in another chapter, I give you a brief overview and direct you to the spot where you can get more information. For example, I may suggest that you “see Chapter 11” (which, by the way, discusses the statement of cash flows).

Also, in this book I break financial accounting down to its lowest common denominator. I avoid using jargon that only accounting majors with several accounting classes already under their belts will understand. Please keep in mind that the list of financial accounting topics and methods I present in this book isn’t all-inclusive. I simply can’t cover every possible nuance and twist related to preparing financial accounting data and statements. This book is meant to illuminate the rather dry presentation of topics given in all the financial accounting textbooks from which I’ve taught, providing a perfect companion to the financial accounting textbook your professor is using.

Furthermore, I briefly discuss the Sarbanes-Oxley Act of 2002 (SOX) and the watchdog over the audits of publicly traded companies, the Public Company Accounting Oversight Board (PCAOB). If you have the time, I recommend reading Sarbanes-Oxley For Dummies by Jill Gilbert Welytok, JD, CPA (published by Wiley). This handbook walks you through the new and revised SOX laws.

Foolish Assumptions

I assume you don’t have more than a rudimentary knowledge of accounting, and I’m guessing you’re one of the following people:

 A college financial accounting student who just isn’t getting it by reading (and rereading) the assigned textbook. (I’ve seen that deer-in-the-headlights look many times in my classroom.)

 A non-accounting student currently enrolled in either business or liberal arts who’s considering changing his major to accounting.

 A business owner (particularly someone operating a small business with gross receipts of under $1 million) who wants to attempt preparing her own financial statements or just wants to have a better understanding about the financial statements prepared by the in-house or external accountant.

 A brand-new accountant working in financial accounting who needs a plain-talk refresher of accounting concepts.

Icons Used in This Book

Throughout the book, you see the following icons in the left margin:

Text accompanied by this icon contains useful hints that you can apply during your class (or on the job) to make your studies (or work) a bit easier and more successful.

When you see this icon, warm up your brain cells, because it sits next to information you want to commit to memory.

Looking for what not to do in the world of financial accounting? Check out paragraphs next to this icon because they alert you to what can trip you up while taking your class or working in the field.

This icon includes information that enhances the topic under discussion but isn’t necessary to understand the topic.

Beyond the Book

In addition to what you’re reading right now, this product also comes with a free access-anywhere Cheat Sheet that talks about the three key financial statements and covers important terms and definitions. To get this Cheat Sheet, simply go to www.dummies.com and search for Financial Accounting For Dummies Cheat Sheet in the Search box.

Where to Go from Here

Each chapter stands on its own, so no matter where you start, you won’t feel like you’re coming in on a movie halfway through. Your motivation for purchasing this book will likely dictate which chapters you want to read first and which you’ll read only if you have some spare time in the future.

If you’re a financial accounting student, flip to the chapter explaining a topic you’re a little fuzzy on after reading your textbook. Business owners can get a good overview of the financial accounting process by starting with Chapters 1 and 3; these two chapters explain the nuts and bolts of financial accounting and its concepts. Otherwise, check out the table of contents or index for a topic that interests you, or jump in anywhere in the book that covers the financial accounting information you’re wondering about.