Accounting Made Simple summary

Chapter 1: The Basic Accounting Equation

Accounting Made Simple by Mike Piper Master the essential rules of business and finance through this straightforward guide to reading financial statements and understanding accounting without the jargon. Accounting Made Simple Accounting explained in 100 pages or less Have you ever looked at financial statements and felt like they were written in hieroglyphics? You are not alone. Accounting is the language of business, recording and analyzing your transactions.

Understanding its fundamentals tells you the real story of your company's health, showing you exactly where to save or invest to help it grow.

Chapter 2: The Balance Sheet Fundamentals

A basic accounting equation measures a company's financial position using assets, liabilities, and owner's equity. Accounting can seem impenetrable and mysterious, but it is no dark art. In fact, a balance sheet follows a clear logical order. You just need to know how to decipher it.

Let us start with the fundamentals. An accounting equation measures financial position using assets, liabilities, and owner's equity. Here is a refresher on what those terms stand for. Assets are everything a company owns, such as properties, inventory, and cash.

Liabilities are all the company's debts, such as loans. Owner's equity, also called shareholder's equity, is the difference between the two, meaning the company's ownership of assets after paying off liabilities. The accounting equation states that no matter what, the following will be valid: assets equal liabilities plus owner's equity. You can also write the equation like this: assets minus liabilities equals owner's equity.

The equation is applicable for any kind of company, big or small. Imagine you run a lemonade stand. Your assets are lemonade, the stand, cups, and uniforms worth $100 in total. You took out $60 worth of loans from your sister and mom, however, which are your liabilities.

So here is how we would figure out the owner's equity. Assets, $100 minus liabilities, $60 equals owner's equity, giving us $40. You could use the same equation to measure your financial position when buying a home. If you want to purchase a property for $300 ,000, you probably would not pay it all up front.

You might take a mortgage for $230 ,000. That means your home equity would be calculated as $300 ,000 in assets minus $230 ,000 in liabilities, which would equal $70 ,000 in equity. And a few years later, once you have paid off $30 ,000 of the mortgage, your home equity would be $300 ,000 in assets minus $200 ,000 in liabilities, which would equal $100 ,000 in equity. One thing to remember about assets and liabilities is that your asset might be someone else's liability and vice versa.

For instance, in the scenario above, the mortgage is your liability, but it is the bank's asset.