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The McGraw-Hill 36-Hour Accounting Course
By Robert L. Dixon and Harold E. Arnett
Business owners who are looking for a quick and solid overview of double-entry accounting should pick up a copy of The McGraw-Hill 36-Hour Accounting Course by Robert L. Dixon and Harold E. Arnett. Double-entry accounting involves making two accounting entries for each accounting-business transaction. One entry is always a "debit." The other is always a "credit."
The book gives many examples of making debit and credit journal entries to record a business's financial transactions. For example, consider a business selling magazine subscriptions. Suppose we collect $100,000 worth of prepaid subscriptions.
Dixon and Arnett tell us that to record this transaction we could make the following entry:
"Cash in Bank 100,000 Deferred Subscription Income 100,000 To record collections from subscriptions during month of June."
Cash in the Bank has been debited (Debits increase asset accounts. Cash is an asset account, so debiting cash increases it.). Deferred Subscription Income has been credited. Debits are always shown as the first entry on the left-hand side, while credits are the second entry on the right-hand side (think debit = left-hand-side entry; credit = right-hand-side entry). Credits are always indented further to the right to make it clear they are credits.
Dixon and Arnett write: "How do you like that entry? Well, the debit title is OK and we must assume the dollar amounts are correct (though most of us are suspicious of 'round' numbers, but the accountant stumbles badly in coining the credit title. Now, in exchange for the $100,000 cash received, the company is obliged to deliver 12 monthly copies per year to each subscriber. As each monthly batch of magazines is sent out, the company 'earns' one-twelfth of the amount it has collected on each annual subscription. So, as deliveries are made, the accountant will make the following entry:
Deferred Subscription Income xxx Subscription Revenue xxx To recognize revenue earned by delivery of magazines Against subscriptions collected in advance."
Dixon and Arnett use "xxx" to denote the dollar values of journal entries which are immaterial to the discussion. Dixon and Arnett go on to explain that the $100,000 collected and recorded in the entry above isn't revenue or income when the entry is made. It becomes revenue as the magazine deliveries are made. Until the magazine deliveries are made, we have created a liability payable to the customer. So, we conclude rather than " Deferred Subscription Income," we might want to name the credit entry something like "Customer Prepaid Subscriptions." Whatever we choose to call it, it's a liability.
"Most so-called deferred credits will turn out to be liabilities if properly analyzed. Think, for example, of advance collections of insurance premiums, club dues, telephone service charges, and a host of similar transactions," Dixon and Arnett note.
The McGraw-Hill 36-Hour Accounting Course explains that a "deferred credits" account is an example of an account created by accountants who don't quite understand the nature of the credits and debits going into such an account. The McGraw-Hill 36-Hour Accounting Course is particularly good at explaining the rationale behind various accounts and their debits and credits. It is important to understand whether the account in question is an asset account, a liability account, or an equity account.
While the book starts off with simpler journal entries, it advances into more sophisticated debit-credit entries, such as dealing with stock splits, stock rights, stock options, treasury stock, convertible preferred stock, and stock warrants. Issuing capital stock above par is discussed, and appropriate debit-credit entries are shown. This is probably more advanced accounting than many business owners require, as they will never issue stock options or do any complex equity financing.
But, if you own a corporation, you'll want to know how to account for dividends declared and paid. Also, when you form a corporation and pay cash into the company in exchange for stock, you'll make the basic accounting entry of debiting cash (Debits increase asset accounts, remember) and crediting capital stock (Credits increase liabilities and equity accounts). As Dixon and Arnett explain:
"Entries to record the issue of common stock and preferred stock are the same. Assume, for example, that 100 shares of $10 par common stock are issued for $12 each, in cash. The entries are:
Cash in Bank 12,000 Capital Stock-Par 10,000 Capital paid in excess of Par 2,000"
In addition to discussing corporate accounts, The McGraw-Hill 36-Hour Accounting Course gives detailed examples of accounting for inventories, fixed assets with depreciation, and long-term debt. Debit-Credit examples of issuing bonds at par, issuing bonds at a premium to par, and issuing bonds at a discount to par are given. Again, most small business owners won't need to know how to account for bond issues. But, reading this topic will help solidify your knowledge of accounting.
Business owners will probably learn much by reading the examples in The McGraw-Hill 36-Hour Accounting Course. You'll probably find an example debit-credit entry analogous to any entry which currently baffles you that you need to make in your real-world business. Adjusting entries, closing entries, and contra accounts are covered in detail.
Each chapter of The McGraw-Hill 36-Hour Accounting Course ends with a test problem to help you remember and understand the concepts, and there are supplementary accounting exercises at the end of the book for the truly ambitious. All exercises and test problems have solutions at the back of the book.
While reading The McGraw-Hill 36-Hour Accounting Course probably isn't as educational as taking a full accounting class at a local community college or university (partially, because the college course will be more 'encouraging' in getting you to work out the exercises J
), reading this book (and, certainly, working the exercises) will give business owners an excellent understanding of double-entry accounting.
In particular, being alert to any opportunities to turn income or profits from any endeavor into long-term capital gains from a tax standpoint is always something worth contemplating. Historically, the long-term capital gains tax rates have been far less than income tax rates. This, of course, partially explains the explosion of stock options as a form of high-level management, employee compensation. But, if you're looking for detailed tax advice, you'll want to find a more up-to-date book.
The chapter mentions passive activity limitations and goes on to give potential investors some good advice: "First, and foremost, a tax shelter should be examined on its merits as an investment, not merely as a means of tax savings."
Chapters are also devoted to internal management accounting and cost accounting. And, I found the discussion of cash flow in The McGraw-Hill 36-Hour Accounting Course to be highly readable. The book discusses the three sources of cash flow: investing activities, financing activities, and operating activities.
The cash budget is discussed. On that subject, Dixon and Arnett conclude: "Past experience, the market outlook, and plans for improvement go into the preparation of the budgeted figures. ...Isn't it amazing, the number of newly formed businesses that fail before they ever get off the ground? If everyone who contemplates setting up in business could somehow be required to prepare in detail a comprehensive budget for the first year or two, and in rough form for the first five years, what a lot of business failures would be avoided simply because they would not be started in the first place!...All hail the budget as a means of avoiding losses by planning in advance."
The McGraw-Hill 36-Hour Accounting Course is an excellent addition to a business owner's library.