The term “accounting” conjures up many different images in people’s minds.  Some imagine a bespectacled, balding office worker wearing a transparent green visor furiously completing tax returns in a dreary office.  Others who have worked with accountants in corporate settings associate the term with arcane language and acronyms, complex spreadsheets, and excessive stress during “close.”  Still others think back with dread to an accounting class endured in high school or college and thank their lucky stars they picked a different career.

Whatever image comes into one’s mind when thinking of accounting, the end result is usually the same.  Most non-accountants want to stay as far away from the subject as possible.  It’s often perceived as complicated, confusing, and difficult to learn.

“You have to understand accounting and you have to understand the nuances of accounting. It’s the language of business and it’s an imperfect language, but unless you are willing to put in the effort to learn accounting … you really shouldn’t select stocks yourself.”

Warren Buffett

However, accounting basics are quite straightforward, logical and accessible to anyone once the unnecessary complexities and jargon are stripped away.  As reflected in the Warren Buffett quote above, knowledge of accounting fundamentals can give you a great advantage in business and finance. This is true even if you don’t work in accounting directly.

If you own a business, invest, or work in a corporate environment, understanding the basics of accounting is a must.  Ultimately, all companies are judged on their financial performance as presented in the accounting results.  As such, it’s imperative that you comprehend financial statements and understand how your actions and decisions affect them.

Bad Introductions

Unfortunately, many people are scared away from accounting by the poor methods used to introduce the subject.  For example, within the first week of an introductory accounting class, you will probably encounter something like this:

This diagram, known as a “T-Account,” can be a helpful tool for experienced accountants, but it is a poor way to introduce the subject.  

Introducing accounting with T-Accounts is similar to trying to teach a complicated dribbling drill to someone who has never seen a basketball game.  Dribbling drills are valuable, but the learner needs to understand the objectives and rules of basketball before working on fundamentals.  Without context, the drill is senseless and confusing, and could cause the beginner to give up before even getting started.  For someone who understands the objectives of the game, the drill makes much more sense.

My goal is to provide the objectives and rules of the game before diving into fundamentals and complexities.  In doing so, I will answer two main questions:

1. What is the purpose of accounting?
2. How are business transactions reflected in accounting statements?

Like many professions, accounting is full of terms with dense and complicated definitions.  These primarily come from the field’s governing body, the Financial Accounting Standards Board, referred to hereafter as FASB [pronounced FAZZ-BEE]. Alternatively, I think of them as the Fancy Accounting Super Board, since their job seems to be mainly to make things more complicated than necessary).

Whenever we encounter a key accounting term that we need to understand, I’ll give the official FASB definition, but also provide a more down-to-earth explanation.  I’ll call this the Practical Accounting Definition (PAD).

Let’s get started!