Page 46 - Finance for Non-Financial Managers

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The Structure and Interrelationship of Financial Statements
Don’t Get Hung Up on Debits and Credits!
In almost any discussion of accounting, you’ll hear some-
one talk about debits and credits.Those elusive terms that 27
seem to exemplify the technical jargon of accounting are not, in my
opinion, terribly useful for non-accountants.You don’t really need to
know that debits increase assets and decrease liabilities or that credits
do the reverse.You only need to know the nature of the transactions
that accomplish those things, and that has been well covered in this
book. If you understand the idea of accrual accounting and the “buck-
ets” discussed above, you won’t need to worry about the debits and
credits—unless you are applying for a job in Accounting, in which case
this is the wrong book to be reading.

transactions other than those that affect income and expense.
Having tossed around the names of financial reports that we
haven’t yet defined, let’s take a moment to do that and add the
next piece to this puzzle called finance, before we move onto
the next chapter.

The Principal Financial Statements Defined

There are three primary financial statement formats that appear
in every annual report and most internal monthly financial
reports as well. We mentioned them briefly during the football
game analogy, but I want to reintroduce them here before we go
into the next few chapters in which we’ll discuss in excruciating
detail their contents and appearance.

The Balance Sheet
This is the report showing the financial condition of the compa-
ny as of a particular date, usually the end of a month, a quarter,
or a year. It shows all the assets of the company, valued typical-
ly at the cost to acquire them, but in some cases assets might
be shown at the lower of cost or market value, when the
accounting rules indicate a permanent reduction in value below
cost. Similarly, the company’s liabilities are shown at the
amounts borrowed or owed. As you’ll see, some of these are
exact amounts, and some may be estimated based on the best