Four Essential Accounting Principles For Executives

Accounting Department, Grossman-Weinfield Mill...

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Many business executives have a hole in their basic accounting education. Either they forgot what they learned in b-school or never got formal accounting training. A business leader that doesn’t know what they don’t know is in a dangerous position.

Do you trust your accountant and finance manager? A vast majority of them are trustworthy and reliable. However, business history is full of cases where people in charge of the company purse abused their position of trust through accounting manipulation, book-cooking and outright fraud. The essential foundation for financial oversight is an elementary study of financial record keeping and reporting.

Here are the four essential things business executives need to know about accounting:

  1. Know your history.  Luca Pacioli is generally considered the Father of Accounting.  Pacioli was born in Tuscany around 1445.  He gets most of the credit for creating the system of debits and credits we use today.
  2. The accounting cycle is circular and predictable.  Each accounting period usually flows from transactions to the general journal, and then to the ledger, trial balance and finally the financial statements.   There are steps in between but this is the high level picture of the accounting cycle.
  3. Financial statements are either snapshots or time lapsed accounting images.  The balance sheet captures a specific date while the income statement and cash flow statement look at an interval of time like a month, quarter or year.
  4. Accrual accounting is different from cash basis accounting.  The heavy lifting of accrual accounting is typically handled by your accounting people.  You need to know that accrual accounting smooths out the lumpy nature of cash transactions and is a generally accepted format for publishing financial statements.  It’s harder though so you may have to pay and accountant to do it correctly.

Get smart on accounting.  Then you will have the essential tools to understand your company financial record keeping procedures and make informed business decisions from the financial statements.  You will be able to have confident conversations with your accounting staff, CPA and tax adviser and be a more financially capable executive.

About Michael Shelton

Your Business Coach Facilitating Delegation and Work Group Engagement Michael Shelton has over twenty-five years of business and military accomplishments, including extensive experience with one of the largest, publicly traded real estate investment trusts (REIT). He is a qualified business coach with assignments in cross-functional work group management, strategic planning, unit leadership, joint venture acquisitions, executive education, mentoring, training and merger integration. Michael has accumulated best practices for building committed work groups from more than $4 billion of capital markets transactions and commercial property development. He served as a commissioned officer and helicopter pilot in the U.S. Army, and earned his MBA from The University of Arizona. Michael has served as a major conference panelist and is the author of Cash Flow Rich, Winning Ways to Evaluate and Finance Real Estate. Today, he helps business owners get more work group engagement as President and CEO of Shelton Business Services, LLC in Scottsdale, Arizona. Disclaimer: I don't offer investment, legal or tax advice. Talk to your broker, accountant or lawyer for investment, tax and legal help. I might own stock in the companies I mention on-line. My posts, tweets and other on-line activity are my personal thoughts and don't represent my employer or company.
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