Free Understanding Business Accounting For Dummies, 2nd Edition by Colin Barrow, John A. Tracy Page A

detail than what's reported on tax returns and external financial statements. And, as Chapter 9 explains, expenses should be regrouped into different categories for management decision-making analysis. A good chart of accounts looks to both the external and the internal (management) needs for information.
So what's the answer for a manager who receives poorly formatted reports? Demand a report format that suits your needs! See Chapter 9 for a useful profit analysis model (and make sure that your accountant reads that chapter as well).
    Double-Entry Accounting for Non-Accountants
A business is a two-sided entity. It accumulates assets on one side - by borrowing money, persuading investors to put money in the business as owners, purchasing assets on credit, and making profit. Profit (net income) is essentially an increase in assets, not from increasing liabilities and not from additional capital infusion from owners, but rather as the net result of sales revenue less expenses. Assets don't fall on a business like manna from heaven. Assets have sources , and these sources are claims of one sort or another on the assets of a business. He asked the class, ‘Shouldn't a business keep track of the sources of assets, according to the type of claim each source has against the assets?' We all said ‘yes,' of course. He then told us that this is precisely the reason for and nature of double-entry accounting.
The two-sided nature of a business entity and its activities
In a nutshell, double-entry accounting means two-sided accounting. Both the assets of a business and the sources of and claims on its assets are accounted for. Suppose that a business reports £10 million in total assets. That means the total sources of and claims on its assets are also reported at a total of £10 million. Each asset source has a different type of claim. Some liabilities charge interest and some don't; some have to be paid soon, and other loans to the business may not come due for five or ten years. Owners' equity may be mainly from capital invested by the owners and very little from retained earnings (profit not distributed to the owners). Or the mix of owners' equity sources may be just the reverse.
The sources of and claims on the assets of a business fall into two broad categories: liabilities and owners' equity. With a few technical exceptions that we won't go into, the amount of liabilities that the business reports are the amounts that will be paid to the creditors at the maturity dates of the liabilities. In other words, the amounts of liabilities are definite amounts to be paid at certain future dates.
In contrast, the amounts reported for owners' equity are historical amounts, based on how much capital the owners invested in the business in the past and how much profit the business has recorded. Owners' equity, unlike the liabilities of a business, has no maturity date at which time the money has to be returned to the owners. When looking at the amount of owners' equity reported in a balance sheet, don't think that this amount could be taken out of the business. Owners' equity is tied up in the business indefinitely.
So one reason for double-entry accounting is the two-sided nature of a business entity - assets are on one side and the sources of and claims on assets are on the other side. The second reason for double-entry accounting is the economic exchange nature of business activities, referring to the give-and-receive nature of the transactions that a business engages in to pursue its financial objectives. Consider a few typical transactions:
A business borrows £10 million. It receives money, so the company's cash increases. In exchange, the business promises to return the £10 million to the lender at some future date so the company's debt increases. Interest on the loan is paid in exchange for the use of the money over time.
     
The business buys products that it will later resell to its customers: It gives money for the products (the