An astonishingly simple guide to the fundamental principles of accounting, written specifically for those without a financial background. Simple, easily absorbed and clearly explained, this book will guide you through all the major accounting concepts. You will learn how to master company accounts, understand balance sheets, profit and loss accounts and cash flow systems and how to analyse and monitor your company's financial performance. This new edition is updated throughout to incorporate changes in accounting regulations and includes a new chapter on keeping personal accounts. Whether you manage a small company, are a trainee accountant, an entrepreneur, a business studies or MBA student, an investor on the stock market or a manager in a big corporation, you will not want to be without this definitive and user-friendly guide to the fundamental principles of accounting.

Table of Contents

Contents Preface xi Acknowledgements xii Prologue xiii Introduction xv Part 1: The basics of accounting 1 The balance sheet and the fundamental principle 3 Assets, liabilities and balance sheets 4 Sarah's personal' balance sheet 4 The balance sheet of a company 7 The balance sheet chart 10 Summary 12 2 Creating a balance sheet 13 Procedure for creating a balance sheet 13 SBL's balance sheet 14 The different forms of balance sheet 38 Basic concepts of accounting 40 Summary 42 3 The profit & loss account and cash flow statement 43 The profit & loss account 43 The cash flow statement 45 Definitive' vs descriptive' statements 46 Summary 48 4 Creating the profit & loss account and cash flow statement 49 Creating the profit & loss account 49 Creating the cash flow statement 53 Summary 61 5 Book-keeping jargon 63 Basic terminology 63 The debt and credit convention 66 Part 2: Interpretation of accounts 6 Wingate's annual report 75 Accounting rules 76 The reports 77 Assets 78 Liabilities 86 Shareholders' equity 91 Terminology 93 The P&L and cash flow statement 94 The notes to the accounts 99 Summary 100 7 Further features of company accounts 101 Investments 102 Associates and subsidiaries 104 Accounting for associates 105 Accounting for subsidiaries 107 Funding 108 Debt 109 Equity 111 Revaluation reserves 113 Statement of recognised gains and losses 115 Note of historical cost profits and losses 115 Intangible fixed assets 116 Pensions 117 Leases 118 Corporation tax 121 Exchange gains and losses 121 Fully diluted earnings per share 123 Summary 125 Part 3: Analysing company accounts 8 Financial analysis introduction 129 The ultimate goal 130 The two components of a company 133 The general approach to financial analysis 140 Wingate's highlights 142 Summary 144 9 Analysis of the enterprise 145 Return on capital employed (ROCE) 145 The components of ROCE 148 Where do we go from here? 151 Expense ratios 152 Capital ratios 157 Summary 163 10 Analysis of the funding structure 165 The funding structure ratios 165 Lenders' perspective 168 Gearing 170 Shareholders' perspective 173 Liquidity 179 Summary 182 11 Valuation of companies 183 Book value vs market value 183 Valuation techniques 185 Summary 189 12 Tricks of the trade 191 Self-serving presentation 192 Creative accounting 193 Why bother? 212 Summary 214 Glossary 215 Appendix 235 Index 249