Accounting 101: An Introduction to the Field

Accounting is one of the most important internal aspects to any business that is to be financially successful in today’s market. It is the process of documenting all relevant economic information about a firm and communicating that information to key players. Managers and Executives need accounting information to make decisions and run their business to achieve maximum profitability. Shareholders need accounting information to make informed investments.

There are many types of accounting that all have different roles in the business world. Probably the best-known and most ‘classic’ type of accountant is a CPA, or Certified Public Accountant. A CPA has a very diverse client list. They can serve anyone including individuals, private firms, large publicly traded corporations, the government, or non-profit organizations. They can perform the role of an independent auditor, tax advisor, or financial consultant.

When performing an audit, a CPA will produce an independent auditor’s report that will tell the client four key pieces of information. First it identifies the documents that were audited and describes that the purpose of this report is to express an opinion about the documents in questions. Next it explains the standards used to analyze the data. Third is the actual opinion of the auditor in regards to the financial documents reviewed. Finally, the auditor elaborates on his opinion regarding the effectiveness of the financial reporting of the firm.

Another type of accountant is a CMA, or Certified Management Accountant. A CMA serves a smaller customer base, because they typically work for a single firm. The major role is to advise the company on their financial management, accounting processes, and budgetary issues. A CMA may work with individual employees of that company, but their main function is to advise the executives on the company’s complete financial structure. They are often involved in major decisions for the company.

A subset of managerial accounting is cost accounting. A cost accountant works closely with the budget structure of a company. They are typically involved with determining the internal costs of many functions and the profitability of the routine company operations.  Cost accountants have a very future-oriented job in that they are primarily concerned with using historical data to forecast what the prospective financial strength of the company will be.

A third major type of accounting is a financial accounting. Financial accountants are primarily responsible for the preparations of the financial documents for review by the corporate decision makers. Managerial accountants, cost accountants, top management, and shareholders use these documents to make major business decisions. Financial accountants assemble an annual report including balance sheets, income statement, statement of cash flows, and statement of change in owners’ equity (or retained earnings). These documents are usually targeted to an external audience.

Financial statements are vital to the success of any profitable business. Their purpose is to formally record all financial activities of the company or individual.  These statements summarize in a standard format the financial status of the company in both the short term and the long term. There are four main types of financial statements.

First, the balance sheet summarizes the company’s total assets, liabilities and owners’ equity at a given point in time. This report is also known as the statement of financial position. The balance sheet is used at the beginning of year as a starting point. At the end of the year a new balance sheet will conclude the fiscal cycle. The other financial statements that will be discussed are used to fill in the gap, because a lot can happen in a year.

The income statement summarizes the revenue and expenses for the year and highlights if the company operated at a profit or at a loss. It is in this report that the total gross income is defined as well as all of the expenses that were incurred along the way. The top line of the statement is net sales and the bottom line is net income.

The statement of change in owners’ equity, or statement of change in retained earnings also analyzes data over a time period. Typically this is over a fiscal year. The two major components of owners’ equity are paid-in capital, or cash investments, and retained earnings, or the net income less dividends. If retained earnings are negative because dividends have exceeded net income, this is considered a deficit.

The final major financial statement commonly used by shareholders is the statement of cash flows. The purpose of this report is to follow the company’s cash activities during the year. This is mainly concerned with cash transactions pertaining to operating, investing, and other financial activities.

Shareholders use the four major financial statements to make investment decisions and to see what the company is doing with their money. Executives and top management use statements to make internal budgetary decisions and forecast out for the future success of the business. There are many components that go into the financial reporting for a company, and all information is vital to its continued financial health.

The World Of An Accountant

When it comes to the profession of accountancy, most people think that you just need to be very good with numbers in order to be an accountant. In reality, you would need to undergo and learn a number of things before you can actually qualify to be an accountant.

One of the things that a would-be accountant would need to know is the different accounting areas. Each of this area has their own concepts and theories. These areas are basic accounting or bookkeeping, financial accounting, cost accounting, managerial accounting, auditing, government accounting, and tax accounting.

What makes one area different from the rest?

Basic Accounting is all about the routine functions involved in accounting – recording, classifying, and summarizing. On the other hand, Financial Accounting is involved in the preparation and interpretation of financial statements for the benefit of external users. Cost Accounting is all about the record-keeping, classification and summarization of all finances connected with the production and selling of a product or a service. The presentation of financial and non-financial information is known as Managerial Accounting while the examination and verification of all financial records is under the area of Auditing. Tax Accounting deals with the tax matters affecting business entities while government accounting, which uses fund accounting, is all about the use of public funds. Fund accounting is the same method used in accounting for non profit organizations.

Of all these areas, it is the government accounting, particularly the subsequent Fund Accounting method, which rarely gets public attention. If most of the methods, procedures and areas of Accounting deal with profitability, fund accounting deals with where the money went as opposed to the profit-centered ideals of commercial accounting. This is the reason why, when accounting for non profit organizations, one makes use of Fund Accounting. When one says non profit organization, however, this does not only mean religious groups. This could also include providers of health care services, colleges and universities, and voluntary health and wellness organizations.

As opposed to commercial accounting, accounting for non profit organization entails various net asset classes and different revenue classifications. All expenses are classified as unrestricted and are reported by function. Although these might seem as more complex, in reality, very few entities make use of the fund accounting system.

Online Accounting Schools And Career In The Field Of Accounting

If you are looking to make a career in the field of accounting, but you don’t have the time to attend full time or part time college, then an online accounting degree is just the right choice for you. With a number of online accounting schools to choose from, you can now make sure that you get that accounting degree you want at your own pace.

Nowadays, there is a lot of demand for professionals in the field of accounting. If you are someone who would like to analyze the financial documents of a company or be involved in the different aspects of accounting administration within a company, then you can really do well as a professional accountant.

Typically, you would have to get your CPA (Chartered Public Accountant) degree. You can also specialize in a variety of areas within the field of accounting such as governmental accounting, managerial accounting and internal auditing. All of these career options have a lot of scope for advancement for you.

The curriculum will generally include a number of subjects like tax law, risk management, raising and managing capital, corporate finance, financial management, budgeting and planning.

Studying for your accounting degree online is the best option for you, especially if you are working in a full time job or have family or some other commitments which do not allow you to attend a full time course. Of course, this will involve you studying at home and sending in your assignments via e-mail.

You can study for a number of basic degrees before you apply for your CPA certificate. You can study for a Bachelors Degree in Accounting, or an Associate of Science Degree in Accounting. You can also go for a Bachelor of Science Degree in Accounting. You can also take a Bachelors Degree in Managerial Accounting or Financial Accounting. A number of options are available for you. You can apply for an online accounting degree course with almost any university or college. Most of the universities today will offer both – a full time course and an online course. Some may also offer part time courses. As a Certified accounting professional, you can expect to earn an annual salary in the range of ,000 to ,000.

Thus studying for an accounting degree and certification via an online accounting course can also help you to chart your career path in the field of accounting.

Chicago Accountant Reveals Next 5 Financial Mistakes Business Owners Make & How To Avoid Them

Now that the first 5 mistakes have been described in my first article and detailed in my associated whitepaper and podcast, here are . . .

The Next 5 Mistakes






OK, there’s the list, six through ten.  Now let me explain to you what I mean for each of these points.


As an accountant in Chicago, Illinois, I often see business owners making this mistake when the economy is beginning to slow or has slowed. The natural reaction for most business owners is to pull back on spending and often this only exacerbates the less than ideal conditions. Many business owners will immediately cut their selling and marketing budgets in an attempt to conserve cash. However, this is often the last thing you want to do in a slowing economy

Marketing and selling are the lifeblood of any business and so long as you are measuring results properly and you can demonstrate (through your managerial accounting) that marketing dollars invested are returning revenue dollars at a positive rate of return you should continue to invest in these areas. In fact, you might even consider expanding your marketing and selling efforts to take advantage of the fact that your competitors are likely pulling back and leaving you with a tremendous opportunity to expand your market share.

The other area that every business owner should be investing in is developing the skills that they possess and their employees possess. Especially in today’s day and age!  What makes more sense?  Investing in your business or some Wall Street fund that just lost you 50% of your capital?  I think you can guess what my advice as a Chicago accountant will be!


There will likely come a time in your business when it grows large enough that you will have to begin delegating authority and decisions to others.

This brings to mind several points:

First, you must be certain that the person to whom you are delegating has the skills and knowledge necessary to perform the task well. This might require some additional training, education, or skill development.

Second, you must be certain that the person to whom you are delegating approaches the task with the same level of importance that you, the business owner, do.  This person will be functioning on your behalf.

Third, you must look beyond the update reports your employees hand you and question the validity and accuracy of the information you are being handed. Don’t simply toss the report on a pile of 50 other unread reports or someday (perhaps soon) you will be surprised to find that your business is in deep, deep trouble.

Delegating authority is not abdicating authority! In the end your business will never be as important to anyone else as it is to you.  However with the proper training, monitoring, and incentives you can build a team that will allow the business to grow and allow you the work-life balance you desire.


Albert Einstein once said “The hardest thing to understand in the world is income tax.” Boy was he right! The tax code is very complicated and often there are peculiar provisions for each industry. So it’s very important that your tax professional or accountant have experience in your industry to be certain that you are taking advantage of all of the various possibilities.

Let’s take something like a desk, a fairly common small business capital asset. There is a provision known as a Section 179 election that allows you to write-off the purchase price of that asset in the first year. Now the alternative to Section 179 is to depreciate that desk over seven years! So you can see that there is a significant tax benefit to Section 179 if you qualify to take it.

Contractors are one of many areas where I have special accountant expertise in the Chicago area.  Contractors with less than million a year in revenue have the ability to do what is called the completed contract method of accounting. What that means is they are not required to recognize the revenue from a job until the job is completed. This can sometimes be very advantageous when the contractor has jobs that stretch over multiple years.

For larger contractors, those with revenues exceeding million a year, there is something known as percentage of completion which provides the contractor the ability to recognize profits pro-rata along the way. In some instances this method can be very advantageous. In the end, you’ll end up paying taxes no matter what method you choose but a skilled accountant can explain the distinct advantages available to you depending upon your particular circumstances.

It is impossible for the average business owner to be an expert in tax compliance accounting and often what I see here in Chicago is that they are misled by what they read in the local paper, trade journals and other sources of information. In some cases I have seen costly mistakes made and penalties incurred, not because the business owner was trying to do something sneaky or illegal, but simply because the advice they had gotten was incorrect for their particular circumstance.


In my role as an Accounting-CFO I am frequently called upon to help my clients define their business culture and help them identify talent both within their existing employee pool as well as external to the company.

A second area I can bring specific insights is the concept of matching the right talents for the right job. This frequently manifests itself when I notice that high-priced talent within an organization is spending an inordinate amount of time doing busy work or paperwork that could easily be handled by a far lower priced administrative employee.

Often times as organizations grow the most talented individuals seem to accumulate or acquire an unusually high proportion of non-revenue-generating tasks simply because of their “get it done” nature. I’ll see vice presidents and even presidents of companies who are filling the copy machine, un-jamming the fax machine or doing the bookkeeping because they have always done it that way.  When all of these things should be done by lower paid employees, accountants, or simply outsourced, thereby freeing up the executive for additional revenue generating opportunities.

The flip side is also true though. I sometime see situations where lower level employees are performing critical tasks with little or no oversight from management or outside expertise. For example, to help control costs one Chicago based business owner was relying upon an internal bookkeeper to keep the day-to-day operations running and act as an accountant. This was fine until I performed an external audit on his business and found that the bookkeeper/accountant was in over her head and that the entire Accounts Payable and Accounts Receivable ledgers were in disarray! Let me tell you it was not a good day when that business owner suddenly realized that his company didn’t have the money to make payroll or replenish inventory!


Accounting software is only as good as the data that goes into it and the talent that is using it. Yet all too often I have been called into situations where a business owner has bought new accounting software thinking that it would somehow miraculously solve their managerial accounting problems. This is simply absurd.

As an accountant in Chicago, I have found that no matter what accounting software you use, you must have the supporting processes in place in order to assure that the correct data is getting into the software package and just as importantly that the correct data is being accessed and displayed in a useful fashion.

When considering changes to your accounting systems you must be certain to take into account all of the investments necessary to make a successful change. Often times the cost of the financial software itself is relatively small in comparison to the impact on the organization from a training, downtime, and implementation perspective.

In some cases you may need to have the old system and the new system running in parallel for an extended period of time. It always seems to be that conversions to new systems are never as easy as they are promised to be and that they typically cost 2 to 3 times more (when all costs are accounted for) than what the business owner anticipated.

Remember, your accounting systems are the foundation of your financial house! You must be absolutely certain that any changes you make to the accounting software you use improve the strength and flexibility of your financial house’s foundation!

What is Accounting?

They say that accounting is a language of business. You can be a professional musician or a computer genius, but it’s not enough to get money. We also need to think about income and expenditures, and of course taxes. Filing a tax return can be rather a hard problem, especially in our country where we can observe instability in accounting laws and governmental orders concerning this field of business. So to get maximum profit, to speak to taxmen one language and not to let them  tease you every person got in touch with any type of business needs to know rules and principles of accounting.

So, what is it, accounting?

Accounting, as it’s said in dictionaries, is keeping financial records, recording income and expenditures, valuing assets and liabilities and so on. Accounting is a service activity. Its function is to provide quantitative information about economic entities. The information is primarily financial in nature and is used in making economic decisions. Accounting records are used in describing the activities and financial status of many different kinds of economic entities including hospitals, schools, cities, governmental agencies and profit-oriented businesses.

how does it work, you wonder? There are a lot of principles being used in the local and international practice, but to start with you should remember the simple rule: you nave to keep records that accurately reflect your financial life. That’s the bottom line, and then you go and get more complex forms of bookkeeping. By the way it seems to be necessary to explain what bookkeeping means. It’s the process of getting financial information, writing down the details of transactions (all economic exchanges of goods, services, money between two or more people). Actually, bookkeeping is only a part of accounting – the record-making part. And accounting itself includes also analytical and interpretation part, it shows the relationship between the financial results and events which have created them.

There are three main steps in making records in bookkeeping:

1) Recording every purchase and sale that a business makes in a journal

2) Entering these temporary records in the ledger (a book of secondary, final entry, containing individual accounts)

3) Transferring all the relevant totals to the profit and loss account.

The main principle of bookkeeping is a double-entry principle. It states that each transaction must be recorded as two separate entries: a value both received and parted with. Payments made or debits are entered on the left-hand (debtor) side of an account, and payments received or credits on the right-hand (creditor) side.

And what seems to be of importance is the way of recording expenses. You should not just take what comes in and what goes out, but it’s better to set up various categories to keep track of the income and expenses and to help with tax return problems.

As I’ve already said, accounting helps to control, evaluate and plan the work of the company. But what concerns accounting, from the different points of view we can speak about different aims and therefore different areas of accounting. For instance, financial accounting prepares financial statements of various kinds, and managerial accounting prepares financial information, such as budget and other financial reports, necessary for the company itself. We can speak about cost accounting , which aim is to work out the unit cost of product, including materials, labour and all other expenses. And we can speak about tax accounting with the process of calculating an individual’s or a company’s liabilities for tax. All these procedures are usually done by the company’s own accountants, but sometimes it should be checked by a second set of accountants. I am talking about auditing as an inspection and evaluation of accounts necessary to be done for some types of business and preferable for others.

But as you know not everyone wants to pay all taxes, so many companies use all available procedures and tricks to disguise the true financial position of a company. Of course it’s illegal, but rather wide-spread, and even has  its name – creative accounting. This funny name causes many misunderstanding as many people think it’s a certain sphere, area of accounting. But it’s the same as window-dressing or Chinese accounting – just illegal tricks.

So one more question can arise -what particular skills are needed for different kinds of accountants. I don’t speak about creative accounting, but about honest  business. It seems to be rather logical to say that all bookkeepers need accuracy and concentration as well as mathematical (or at least arithmetical) abilities. Tax accounting requires knowledge of tax laws and accounting, auditing requires strong analytic and synthetic skills, while   managerial and cost accounting require analytical and mathematical competence.

In accounting it’s always assumed that a business is a “going concern”, I mean it will continue indefinitely into the future. So, the current market value of its fixed assets is irrelevant, as they are not for sale. Consequently, the most common accounting system is historical cost accounting, which records assets at their original purchase price, minus accumulated depreciation charges. But this method understates the value of appreciating assets such as land, but overstates profits as it doesn’t record the replacement cost of plant or stock. So countries with persistently high inflation often prefer to use current cost or replacement cost accounting, which values assets at the price that would have to be paid to replace them today.

To be able to compare the activity of different companies, working in different spheres, to run accounting of the firm, European and American accountants follow GAAP (generally accepted accounting principles). They allow to run the company using unificated methods and rules, which is very useful. And speaking about our country I can say that Russian accountants are also follow these principles or at least part of them.

So according to International Accounting Standards, we can speak about

1) principle of the separate entity or accounting entity concept . An organisation is a separated establishment and it’s property is separated from the property of its’ owners and other firms’ assets.

2) the continuity or going concern concept. We presume that a firm is going to go on its activity

3) the unit-of-measure concept

4) the time-period or accounting period concept

5)  the revenue or realisation principle

We also know matching principle and consistency one, objectivity and conservatism principles, full disclosure and confidentiality ones and many other.

All these principles are of usage to speak one language with for example the American Institute  of Certified Public Accountants or IPS (Internal Revenue Service) – for American accountants or for instance Ministry of taxes or Institute of Professional Accountants of RF.

All information, all work accountants are doing throughout  a year is combined in the annual report, aimed to provide the shareholders with the information on the company performance and to file the tax return. This report consists of verbal and financial parts. At the second one we can observe figures presented by the three financial statements, notes, letters of auditor’s opinion. I’d like to talk in details about these three financial statements. The profit and loss account (income statement), the balance sheet and the source and application of funds statement (the statement of changes in financial position).

The profit and loss account shows the company’s revenue (inflows of assets received in exchange for goods and services  provided to customers as part of the major or central operations of the business) and expenditures (outflows or using up of assets as a result of the major or central operations of a business). Income statement usually gives figures for total sales or turnover (the amount of business done by a company over a year), and costs and overheads  (the various expenses of operating a business that cannot be charged to any one product, process or department). Part of the profit goes to the government in taxation, part is usually distributed to shareholders as a dividend, and part is retained by the company.

The second financial statement is called the balance sheet which shows a company’s financial situation on a particular date, generally the last day of the financial year. It lists the company’s assets, its liabilities, and shareholders’ (stockholders’) funds, which are written in two parts: assets on the left, and liabilities and share capital – on the right. What is important is that both parts should be balanced, I mean equal as they depict the same, but from the different points of view.

So to show it through mathematical equation I should say that Assets=Liabilities+Owners’ Equity(net assets).

Negative items on financial statements such as creditors, taxation and dividends are usually enclosed in brackets.

May be I should explain more accurately some definitions I’m talking about. First of all assets. it’s anything owned by a business (cash investments, buildings, machines, and so on) that can be used to produce goods and pay liabilities. Assets can be tangible and intangible. Intangibles are those assets whose value cannot be quantified or converted into cash without difficulty, such as goodwill, copyright, trademark, data base, know-how. Tangibles include current (inventory, marketable securities, accounts receivable, cash in hand and at bank) and fixed or capital or permanent (freehold property, machinery, office equipment, motor vehicles, etc) assets.

Liabilities are debts to lenders, all money that a company will have to pay to  someone else in the future, including taxes, debts, interests and mortgage payments. They can be current (to be paid out within one year) or long-term, with the term of payment more then one year. Sometimes this payments can be defined as prepayments (money paid in advance before the goods are delivered to the customer), sometimes – as deferred charges (money, whose payment is put off at a later date).

There are two types of liabilities – current and long-term ones. Current liabilities can be paid out within one year. Non-current or long-term liabilities are those, which should be paid within a period of time which, is more than one year.

Shareholders’ equity (net assets) includes share capital (money, received from the issue of shares), share premium (GB) or paid-in surpluses (US) – money, released by selling shares at above their nominal value -, and the company reserves including the year’s retained profits.

Some ratios can be applied to Balance sheet analysis. They are the liquidity ratio, the current ratio, return on capital employed ratio, profit on sales, debtors ratio, creditors ratio, debt/equity ratio.  Return on capital employed and profit on sales show a company’s profitability.

Return on capital employed =net profit/capital employed. (this ratio allows bankers to compare a company’s performance with similar companies in the industry)

Profit on sales = net profit/turnover (it shows the overall profit margins achieved on sales)

Debtors, creditors and debt/equity ratios display a company’s performance.

Debtors ratio =debtors/sales*365 days (it shows the effectiveness of credit control procedures and allows comparison with payment periods to creditors)

Creditors ratio =creditors/purchases *365 days (due to it we can see how much business is financed by trade creditors)

Debt/equity ratio =long-term loans/shareholders funds (it shows the degree to which the company depends on outside finance, e.g. banks, to run its business)

The third financial statement is the source and application of funds statement and it shows the flow of cash in and out of the business between balance sheet dates. Sources of funds include trading profits, depreciation provisions, borrowing, the sale of assets and the issuing of shares. Application of funds includes the purchases of fixed or financial assets, the payments of dividends, the repayment of loans and trading losses, if exist.

So we can speak about several types of assets. Current assets comprise inventories, marketable securities, accounts receivable, cash in hand and in bank. Liquid assets are anything that can quickly be turned into cash. Fixed assets consist of freehold properties, plants and machinery, office equipment, motor vehicles. We can also use words “capital assets”, “permanent assets” for fixed assets.

I’ve told a lot about different principles of accounting and different financial statements. And at the end I’d like to cover the last aspect – aspect of human factor in accounting. We can’t say that accounting is completely objective, because it’s not merely a collection of arithmetical techniques, but a set of complex processes and most accounting reports depend to a greater or lesser extent on people’s opinion. So to be professional it’s not enough just to study all rules and order of filing documents. You should feel the inner principles of all these numbers, understand accurately where our incomes and expenditures can be and try to get the maximum profit (of course without window-dressing)