Before trying to learn accounting fundamentals, it’s crucial to understand the overall objective of the profession.

“I had some classes in accounting, but I don’t know anything about accounting. I – you know, when my accountant tells me all the things he does, it’s a foreign language to me.”

Ray Romano

Accounting provides an objective way to record the financial effects of business transactions.  This results in a set of numbers that can be used to evaluate a company, compare it to other companies, and compare its performance in the current year to prior years.

Here is the FASB phrasing:

“The objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the entity.  Those decisions involve buying, selling, or holding equity and debt instruments and providing or settling loans and other forms of credit.“

FASB Statement of Financial Accounting Concepts No. 8

Whew.  That is a mouthful.  Let’s try to whittle that down to the essentials with the Practical Accounting Definition (PAD).

“Accounting should provide financial information to investors and creditors to help them make decisions about the company.“

Practical Accounting Definition

In order to accomplish this, financial statements must include accurate and relevant information about the business.  Investors should be able to look at a company’s financial statements and have confidence that the numbers accurately represent that financial results and standing of the firm.  Further, investors must be able to compare the statements to those of other companies, and from prior years.

There are a number of principles and rules that accountants follow when recording transactions and preparing financial statements that insure that these standards are met.  Rather than listing them all here, the rest of Part One will consist of working through an example of what the accounting for a real-world small business would look like.

Our example company will be Bill’s Lawn Care, a one-person firm providing lawn care services and products, starting business in the spring of 2019.

Bill’s Lawn Care

Bill is a hardworking man of forty with years of experience in landscaping, maintenance, and handyman services.  After working for other people all of his adult life, Bill is finally ready to strike out on his own.  He believes he has the knowledge and skills needed to successfully compete in his chosen industry.

There is only one problem – the accounting.  Bill wants to keep sound financial records of his business, but he doesn’t have any education or experience in this area, and accounting intimidates him.

That’s where we come in.  We’ll work with Bill as he starts his business and help him accurately record the financial implications of every transaction he makes.  We’ll learn a lot, and in the end, find out that accounting isn’t too scary after all.

Previous Chapter: Practical Accounting 1 – Introduction