Accounting Made Simple - Piper, Mike

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• The text introduces accounting and financial statements. It aims to cover the topic in around 100 pages at a high level for those new to accounting.

• It outlines the two main parts which will be covered: 1) important financial statements (balance sheet, income statement, etc.) and 2) Generally Accepted Accounting Principles (GAAP).

• The accounting equation (Assets = Liabilities + Owner’s Equity) is introduced as the fundamental concept. Assets are what is owned, liabilities are what is owed, and owner’s equity is the residual claim.

• The balance sheet is explained as a snapshot of financial position at a point in time, broken into assets, liabilities, and owner’s equity sections. Common asset, liability and equity accounts are defined.

• Subsequent chapters will cover additional financial statements like the income statement, statement of retained earnings, and cash flow statement. GAAP topics like the double entry system, cash vs. accrual accounting, depreciation, and inventory will also be discussed.

In summary, the introduction provides a high-level overview of the scope and structure of the book, emphasizing understanding key financial statements and basic GAAP concepts for those new to the field of accounting.

Here is a summary of the key points about the Statement of Retained Earnings:

• The statement of retained earnings details the changes in a company’s retained earnings account over a period of time, usually one year.

• Retained earnings is the total of all undistributed profits the company has earned since inception. It represents the portion of profits that have not been paid out as dividends to shareholders.

• The statement of retained earnings shows the beginning retained earnings balance, additions from net income, deductions from dividends paid, and the ending retained earnings balance.

• It bridges the income statement and balance sheet by taking the net income figure from the income statement and providing the ending retained earnings balance to the balance sheet.

• An important note is that dividend payments are not considered an expense - they are deductions from retained earnings that represent profits paid out to shareholders rather than retained by the company.

• The purpose of the statement is to disclose and explain changes in a key component of shareholders’ equity, which is the retained earnings account. It reveals how much of the company’s cumulative net earnings have been retained in the business over time.

Here is a summary of the key points about financial ratios from the chapter:

• Financial ratios are calculated numbers that allow analysts to better understand and evaluate a company’s financial statements.

• Liquidity ratios measure a company’s ability to meet its short-term financial obligations. The current ratio and quick ratio are common liquidity ratios, with a higher ratio generally being better.

• Profitability ratios measure how efficient a company is at generating profits relative to its assets/resources. Return on assets and return on equity are common profitability ratios. These ratios allow comparison between companies of different sizes.

• Current ratio = current assets / current liabilities. Measures ability to pay short-term debts with current assets.

• Quick ratio excludes inventory from current assets. Provides a more conservative view of short-term liquidity.

• Return on assets = net income / total assets. Measures profitability relative to total assets used.

• Return on equity = net income / shareholders’ equity. Measures profitability relative to shareholders’ investment.

So in summary, financial ratios are calculated metrics that provide insight into a company’s liquidity, profitability, and performance by relating various line items from the financial statements.

• Double-entry accounting requires each transaction to have two entries to maintain the accounting equation of Assets = Liabilities + Equity.

• Journal entries record the two sides of each transaction, with one account being debited and the other credited.

• A debit increases asset accounts and decreases liability/equity accounts.

• A credit decreases asset accounts and increases liability/equity accounts.

• For a bank account, which is a liability from the bank’s perspective, credits increase and debits decrease the balance, opposite of the typical asset treatment.

• The debit-credit system ensures the accounting equation remains balanced after every transaction through double-entry bookkeeping. This allows for accurate financial reporting under GAAP.

So in summary, debits and credits are the two sides of journal entries used in double-entry accounting to properly record transactions and maintain the balancing of the accounting equation for financial statements.

Here is a summary of the key points about cash vs accrual accounting:

• Cash accounting records transactions when cash is received or paid. Accrual accounting records transactions when the underlying economic event occurs, regardless of cash flow.

• Cash accounting can distort a company’s actual financial performance if there are timing differences between cash receipts/payments and revenues/expenses.

• Under accrual accounting, revenues are recorded when earned rather than when cash is received. Expenses are recorded when incurred rather than when cash is paid out.

• Accrual accounting uses accounts receivable and accounts payable accounts to track revenues/expenses that have been recorded but not yet received or paid in cash.

• The accrual method provides a more accurate picture of a company’s financial performance as it matches revenues to the period in which they were earned and expenses to the period in which goods/services were used.

• Accrual accounting is required under GAAP, while cash accounting can be used by small businesses and individuals for tax purposes.

Here is a summary of the key points from Chapter 11:

• Depreciation is the process of allocating the cost of a fixed asset over its estimated useful life. It recognizes that while fixed assets provide benefits over multiple years, their costs are actually expenses associated with generating revenue during those years.

• Straight-line depreciation allocates the cost evenly over the estimated useful life. It is the simplest and most commonly used method.

• Declining balance depreciation allocates a higher percentage of depreciation in the early years by applying a constant depreciation rate to the declining book value. This also front-loads the depreciation expense.

• Useful life is management’s estimate of the number of years an asset will be useful to the company. It considers physical deterioration, obsolescence, and legal or other limits on use.

• Salvage value is an estimate of what the asset will be worth at the end of its useful life. Depreciation calculations subtract salvage value so the full cost is allocated over useful life.

• Periodic depreciation is recorded as an expense on the income statement and reduces the asset’s book value on the balance sheet over time until fully depreciated.

So in summary, depreciation systematically allocates the cost of long-term assets over their useful lives for financial reporting purposes using various allocation methods.

• Depreciation allows the cost of a long-term asset to be allocated over its useful life through regular charges against earnings. This process is known as depreciation.

• Straight-line depreciation spreads the cost of the asset evenly over its estimated useful life. The annual depreciation expense is calculated by taking the asset’s cost minus its estimated salvage value and dividing by its estimated useful life.

• Accumulated depreciation is a contra-asset account that tracks the total depreciation recorded on the asset over its life. Subtracting the accumulated depreciation from the original asset cost yields the asset’s net book value.

• Intangible assets like patents and copyrights are amortized in a similar way to depreciation, by allocating their costs over their estimated useful lives or legal lives.

• Immaterial asset purchases under a certain threshold are often expensed immediately rather than depreciated/amortized due to the negligible impact on the financial statements.

Here is a summary of the key points about inventory methods from the passage:

• Perpetual method: Inventory is tracked on a continuous basis, allowing the business to know inventory levels at any time. It improves accuracy of financial statements and recordkeeping. However, it can be costly to implement.

• Periodic method: Inventory is counted periodically (e.g. monthly). The business only knows inventory levels at the beginning and end of periods, not in between. It does not track inventory on an item-by-item basis.

• Cost of Goods Sold is calculated under the periodic method using the formula: Beginning Inventory + Purchases - Ending Inventory = Cost of Goods Sold.

• Assumptions need to be made about which inventory items were sold when costs change over time. FIFO, LIFO, and average cost methods provide different assumptions.

• FIFO assumes oldest inventory units are sold first. LIFO assumes newest units are sold first. Average cost calculates an average unit cost for the period.

• The periodic method has limitations like not accounting for inventory theft accurately. Perpetual method allows for more precise tracking and recordkeeping.

In summary, the passage compares the perpetual and periodic inventory methods, explaining how Cost of Goods Sold is calculated under each and the key assumptions and considerations involved.

Here is a summary of the provided text:

Nolo Press is now a well-established and respected publisher of legal self-help books. Their books aim to help laypeople handle common legal issues without hiring an attorney. Some recommended titles include QuickBooks for Dummies and QuickBooks: The Missing Manual for accounting and bookkeeping help. The website for the Financial Accounting Standards Board is also provided as a reference for accounting standards and regulations.