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Accounting Made Simple

~Mike Piper, CPA


This book is only 100 pages - it is brief, and therefore intended to give you a basic understanding of the topic. It is a great place to start, and can be read in a few hours.


You will achieve a decent understanding of the most fundamental accounting topics, including the 3 main financial statements: Balance sheets, Income statements, and Cash flow statements, as well as a look at accounting standards (GAAP).

 

Accounting is the system of tracking the income, expenses, assets and debts, of a business.


The single most fundamental concept of accounting;


The Accounting Equation


The accounting equation states that at all times, and without exceptions, the following will be true;


Assets = Liabilities + Owners Equity.


This can also be stated as: Assets - Liabilities = Owners Equity


Assets: All of the property owned by the company

Liabilities: All of the debts that the company currently has outstanding to lenders

Owners Equity (a.k.a. Shareholder's equity): The company's ownership interest in its assets, after all debts have been repaid.


Owners equity is just what's left over after paying off debts.

 

My Asset is Your Liability


A liability for one person, is an asset for another.


If you take out a loan with a bank, the loan is a liability for you. For the bank, however, it's an asset.

The balance in your savings account is an asset (to you), but for the bank, it is a liability - they owe you that money - full or partial, at any time.

 

The Balance Sheet


A balance sheet shows a company's financial position at a given point in time - it is a snapshot of the company's net-worth.

It is a formal representation of the accounting equation, and so, the 3 sections of the balance sheet are: Assets, Liabilities, and Owners Equity.



















Assets

Cash and Cash Equivalents: Balances in checking and savings accounts, and investments that will mature within 3 months or less


Inventory: Goods kept in stock, available for sale


Accounts Receivable: Amounts due from customers for goods and services that have already been delivered


Property, Plant, and Equipment: Assets that cannot readily be converted into cash - things such as computers, manufacturing equipment, vehicles, furniture etc



Liabilities

Accounts Payable: Amounts due to suppliers for goods or services that have already been received


Notes Payable: Contractual obligations due to lenders (e.g. bank loans)



Owners Equity

Common Stock: Amounts invested by the owners of the company.


Retained Earnings: The sum of all net income over the life of the business that has not been distributed to owners in the form of a dividend


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The assets and liabilities on a balance sheet will be broken down into current assets/liabilities and long-term assets/liabilities.


Current assets are those that are expected to be converted into cash within 12 months or less, e.g. accounts receivable, cash, inventory.


Everything that isn't a current asset, is by default, a long-term asset (non-current), e.g. property, plant, equipment.


Current liabilities will need to be paid off within 12 months or less, e.g. accounts payable (money you owe to suppliers)


Notes payable may be due in less than or more than 12 months, and will be separated between current and long-term on the balance sheet accordingly.

 

The Income Statement


A company's income statement (or profit + loss statement) shows the financial performance over a period of time (usually a year).

Note that it is over a period of time, as opposed to the balance sheet, which is at a point in time.

analogy: balance sheet = photograph, income statement = video


The first section details revenues, the second details expenses.



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