Empirical research on the microstructure of exchanges ordinarily uses intraday price and trade data. However, the format and quality of the data differ greatly by exchange and data source. For measuring quoted spreads, a record of simultaneous bid and ask quotes is needed. In dealership or hybrid markets (with a designated specialist or market-makers with quote obligations), such data are sometimes available. However, one needs to be careful because the quotes may only be indicative (as they are, for example, in the foreign exchange markets) or there may be better prices available from a competing order book.

For the other measures discussed, prices of actual transactions are needed, and typically one also needs to know whether the transaction was initiated by the buyer (‘buy’) or by the seller (‘sell’). For some markets, this classification into buys and sells is easy to establish, since trading is at best quotes or the best prices available in the limit order book (LOB). An important exception is the NYSE, where trading can be within the specialist’s quotes, because either the specialist improves on his quoted price, or trading is with the LOB. Moreover, the NYSE data sources (notably the TAQ database) have two separate files for trades and quotes and the timing is not exactly simultaneous.

This sometimes makes it difficult to classify a trade as buy or sell. Lee and Ready (1991) developed a classification method that has become the standard measure for the TAQ data. In recent years, many high-quality data sets have become available from electronic limit order book markets, where all trades are cleared against the limit order book. This permits unambiguous classification of trades as buys or sells.

I made a point of explaining what a beginning wealth builder shouldn’t do.

1. First, when figuring your investable net worth, you really shouldn’t count the equity in your present home unless you plan to sell it and buy a less expensive home during retirement. And even if you do that, you can count only the difference between what your house is currently worth, the mortgage, and what it will cost you to buy another house that you’ll be happy with. Using the example of our dissatisfied conference attendee, he admitted that there was little or no hope of finding a nice retirement home in a community he liked for less than the equity he had in his present house.

2. Next, you shouldn’t be investing in stocks and options if your investable net worth is less than $25,000. In our example, the gentleman was playing the stock market with his entire savings: $18,000. Think about the risk this guy was taking!

Often, managed funds turn out to be different than expected. Savers primarily want their principal returned when a note or bond matures. Some funds are managed without regard to principal fluctuations. Many savers have found the government fund they purchased paid out both principal and interest so that at the end there was no principal left. Alternatively, the manager of the fund borrowed extensively to juice the returns from the fund and instead lost a substantial portion of the principal. You are likely to feel betrayed if you unwittingly purchased a fund with fluctuating principal values.

Bond investors often experience regret and resentment when other asset classes have dramatic rises. Longer duration bonds cause the most distress. Savers who put money into 30-year Treasuries in 1994 received annual yields up to 8 percent. They had to stand by and watch as stocks returned better than 20 percent a year for the next five years. However, the dramatic decline in 2000-2001 may have given them some satisfaction.

Volatility is an issue with notes and bonds that mature in two or more years. Before OPEC, floating interest rates, interest rate swaps, floating exchange rates, budget surpluses, and electronic trading, treasury bonds had low volatility. Today, Treasuries can lose 20 percent of their value in a month. Savers waiting for bonds to mature will feel fear when they learn of the current value of their holdings. They must be able to process the fear and wait to maturity. Savers who cash out may have regrets and resentments when bond prices turn up again.

The biggest issues with money market funds involve impulse buying of stuff you do not need and becoming a target for sales pitches from the sales force that sold you the money market fund. Money market funds can be tapped with checks, credit cards, and online transfers. Impulse buyers may want to avoid the opportunity to make quick purchases. Some brokers who are slightly unscrupulous tell money market fund owners that they should “put their money to work” and that “cash is trash.” Lured by potentially higher returns in stocks and other high-commission, high-spread investments, money market funds are easily and quickly converted. With CDs, you lose your interest if you liquidate before the term. Savings accounts often require several steps to convert into risky investments. Money market funds, particularly those attached to brokerage accounts, can be converted at the click of a mouse. If you are vulnerable to sales pitches or impulse buying, you may not want to own money market funds.

Important as it is, the general ledger doesn’t exist in a vacuum, but interacts rather cleverly with other parts of a company’s accounting system. This occurs through a process called posting.

Posting is simply entering into the G/L a summary of posted directly to the general ledger include returns of merchandise, allowances from a supplier for credit, asset acquisitions, asset sales, investor capital contributions, loan drawdowns, and loans. These are called journal entries.

Transactions transactions recorded in the subledgers or journals, with a reference number. We’ll get further into the entire process later.

Some transactions are posted only to the general ledger and not to the subledgers. These transactions tend to be unusual. But proceed with caution. Items that should be entered in subledgers but are simply posted to the general ledger for the sake of convenience can throw the bookkeeping out of whack and unbalance your balance. That’s an error no accounting system can afford.

In applying the ARTS formula identified earlier—Accurate, Relevant, Timely, and Simple—the accounting function can be a major source of information vital to the success of a business. The discipline of the balance sheet, although it may seem foreign to some, gives it the strength and application to help you master all accounting steps within your business cycle.

One more distinction to understand is the difference between cash basis and accrual basis. The choice depends on the type of business, and we don’t need to enter into the reasons here. What you do need to know is how the basis used by your company affects how financial transactions are handled.

The difference focuses to some degree on the question of cash flow. Accrual accounting, popular with large businesses, records transactions when they are made—regardless of whether any money has changed hands. The company is accruing sales revenue that will be deposited at a future date. The difference is that it is immediately posted to the general ledger. The actual cash is incidental to the accounting procedure under accrual accounting.

As you now know, asset and liability accounts go together, as opposite sides of a balanced equation—with owners’ equity, of course. That’s why they make up the balance sheet, which shows the financial position of the company. In a similar way, income and expense accounts go together and make up the income statement, which shows what’s coming in and going out.

It’s really two simple systems that become a little complicated when they’re put together, because the double-entry system sometimes requires entries that may at first seem strange, because of the need to balance. It’s usually easy enough to understand how assets and liabilities are affected by a transaction, but it may be harder with the effect of a transaction on income and expense accounts.

So, we’ll provide a few examples to show it all makes sense, with a little effort.