Commercial Literacy > Accounting Literacy

Text Book >>

33 Pages
3 pages are Cliff Notes

Commentary

In Bookkeeping Literacy you learned the Art of Bookkeeping revolves around Recording and Categorizing Transactions Accurately in 1 Line Journals (except for the General Journal which is a multi-line journal). (expand for a complete summary in a "nut shell"...)

  • For transaction recording accuracy, you learned about Statement Reconciliation processes when third party statements existed.

  • For transaction categorization accuracy you discovered the Balance Sheet report serves as a cross check mechanism in healthy software

You discovered your 1 line journal data and your general journal data gets projected into the General Ledger as multi-record entries where it can be accessed by the software for two primary reports: 1) The Income Statement (aka the Net Income Statement) and 2) the Balance Sheet (aka the Comparative Net Worth Statement).

You learned there were Two broad categories of Accounting: Tax/Financial Accounting and Managerial/Cost Accounting.

  • You realize Tax/Financial Accounting is what we are educating you on first and that's easy to recognize because our first goals are the Income Statement and the Balance Sheet

  • You understand that Tax/Financial Accounting is also prioritized first because it's typically required for others like the IRS, Banks or Attorneys

  • You understand that Managerial/Cost Accounting, when done at all, is only done for your own reference only

You learned there are 5 "Account Types" in Accounting. Those are best remembered via the Acronym ALEIE

  • Assets, Liabilities, Equity, Income and Expense

You learned the business process for Bookkeeping for Tax/Financial Accounting can initially be summed up with the following 5 Step Routine: 1) Review Prior Work 2) Record Transactions Accurately 3) Categorize Transactions 4) Review the Income Statement 5) Review the Balance Sheet

And you realized you were able to learn all this with very little effort and no relevant stress. That's that best part. You have realized you are learning this to familiarize yourself with vocabulary and tools that will come in handy frequently in life, with the goal of getting on with the rest of your life with less regular stress related to these simple concepts.

The summary above is Bookkeeping Literacy in a nutshell.

In Accounting Literacy we are going to start with a graphic below that helps create an expanded, comparative view of Managerial/Cost Accounting vs Tax/Financial Accounting. Skip over the first column of images and boxes. Focus on the Second Column of Boxes...

  • Managerial/Cost Accounting has a purple dotted box around it with boxes 1, 2, 3 and 4 noted

  • Tax/Financial Accounting has a green dotted box around it and with boxes 5 and 6 noted

  • Bookkeeping as you are being taught is all generally contained in Box 5.

      • To the right of that box you will see references to "single entry" and "double entry" systems.

      • We are teaching you about a "double entry system".

      • You know that because we have a General Ledger involved

      • The General Ledger is table that stores two or multiple records for a single transaction.

      • NOTE: All of your 1 Line Journal Entries would be the basis for a single entry system. The fact that they get converted automatically into two records for the General Ledger (aka double entry) is what makes a system that looks like a single entry system on the front end a double entry system functionally.

This image above is courtesy of ZAP Accounting Software.

ZAP Accounting Software's product offerings are organized by Box #,
so learning about this model helps with navigating their website too.

With that intro you are ready to dive into the book which starts out with this same review and picks up from there!

Extended Studies

Reports

The Income Statement (aka the Net Income Statement)

The Cash Flow Statement (subtly mentioned prior but more relevant now for more in depth understanding of the Balance Sheet to follow)

The Balance Sheet (aka the Comparative Net Worth Statement)

Chart of Accounts

The "Chart of Accounts" is a list of Accounts that will be used in the Score Keeping Game.

Account Types

There are ONLY FIVE types of Accounts in the Accounting , and at this point it's critical to remind you that Accounting is "Score Keeping for the Game of Commerce" and games sometimes have rules that are not intuitive until you are taught a bit more about them.

The FIVE account types are best remembered with the Acronym ALEIE

  1. Assets

  2. Liabilities

  3. Equity

  4. Income

  5. Expense

The confusing part about this list is that these items are not "parallel" in use or type. If I asked you to make a list of colors, all the items in the list would be a color. If I asked you to make a list of names, all t he items in the list would be names. If I asked you to make a list of Accounting Account Types, you would list these five items, but if you tried to think of each as being like the others, they are only alike in that they are called Account Types.

Think of these five accounts like Fruit in a Basket with Labeling....

Assets and Liability accounts are opposites of each other and they are related to energy coming into and out of your game of commerce. (Lemons and Limes)

Equity Accounts are a bit unique. Like Asset and Liability accounts they are related to energy coming into and out of your game of commerce, but that money flow is NOT related directly to the business operations. You are either putting money in as an investment or you are taking money out for personal use. (pineapples)

Income and Expense Accounts are opposites of each other. These are category accounts used to categorize the majority of transactions that will go into and out of the Asset and Liability Accounts. (Labels on the fruit)