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!

The range of emotion from government notes and bonds is similar to that for short-term securities. While many may be asking why corporate notes and bonds are not included here, the answer is simple. Corporate debt is risky. Only investors and speculators should consider it. U.S. government notes and bonds are for savers whose primary concern is the return of their principal and whose secondary concern is the receipt of interest. There is a
real possibility of losing some principal with corporate debt.

Before purchasing treasuries, you will be exposed to complexity. The possibilities in government bonds are great. You can invest for one year or 29 years or any period in between. Certain bonds, such as Series EE, H, and I have tax advantages. Interest rates differ for every maturity and every type of bond. For most notes and bonds, the principal value is fixed.

For inflation-indexed treasuries, known as TIPs, the principal value increases every year we experience inflation. The principal value of I bonds also adjusts with inflation. However, even though the principal value of most bonds or notes is fixed, bonds sell at prices higher or lower than the principal value, depending on the current level of interest rates and the supply and demand of similar bonds and notes. The mathematics of computing the proper price for a note or bond is complex.

During ownership, some savers also experience a sense of regret. High inflation in the 1970s reduced the purchasing power of savings and was not compensated for by interest paid. When real estate was hot in the early 1980s, savers regretted they were not participating. The stock bubble of the late 1990s also led to regrets and jealousy. However, savers who hold out experience a sense of satisfaction when bubbles burst and speculators scramble to place their remaining funds in savings instruments.

When CDs mature and must be rolled over, savers experience a mixed set of emotions. Higher interest rates can lead to joy unless inflation has risen such that purchasing power will be lost. Lower rates can lead to regret that a long-term investment was not made.

Liquidating savings often triggers many emotions. A source of security is dying. When savings must be substantially liquidated, a grieving process begins. The saver may experience a wide range of emotions including sadness, regret, anger, resentment, helplessness, confusion, and free-floating fear. Generally, the cause of liquidation will compound the emotional mix. A divorce often requires a non-working spouse to both watch her savings dwindle as she reenters the work force and grieves the loss of her marriage.

The general ledger exists for three main purposes: It serves as a summary of every transaction as recorded in the books of original entry; it’s the source document for all financial reports; and it offers an audit trail for tracking individual transactions, should that become necessary.

As the heart of the company’s financial body, the G/L records all transactions that occur within the company’s business activities. It also functions as the center of the firm’s books of original entry. When individual transactions are recorded anywhere within the subsidiary ledgers (subledgers), such as accounts payable or accounts receivable, they feed up to the G/L. (If a business is relatively small, there may not be any subledgers. However, even if you work in a company with such a simplified accounting system, it’s good to know how a more sophisticated system works.)

But the G/L is not a single document. Its content is augmented by receipts, journal entries, invoices—paperwork known as “source documents” that support the transactions recorded within. They all roll together, in fact, to form the company’s accounting system, with the G/L at its heart.

Why is it important for any manager not responsible for financial matters to understand general ledger processing? Well, why is it important for a salesperson to understand the nature, properties, and construction of the item he or she is selling? Financial management is a crucial part of your position. The more you know about what takes place on the accounting side of the fence, the better off you’ll be.

The next figure shows the same kind of relationship between the assets and liabilities accounts. If we add $100 to assets, the debits go up $100, and the credits go down $100. At the same time, in the liabilities account, debits go down $100 and credits go up $100.

The figure shows how an accountant would record four common transactions in terms of debits and credits:

The company borrows $8,000. Cash (an asset) is debited and Notes Payable (a liability) is credited.

The company sells $5,000 in merchandise on credit. Sales Income (an income account) is credited and Accounts Receivable (an asset) is debited.

The company pays its electricity bill of $200 immediately. Utilities Expense (an expense account) is debited and Cash (an asset) is credited.

The company sells some of its older computers for $1,500. Office Equipment (an asset) is credited and Cash (an asset) is debited.

Simple as it should be, the concept of debits and credits is a little like a Zen koan (a paradox). Terms are easily defined, but how they integrate into your balance sheet and income statement and the effect they have on your accounts… Well, that’s not so clearly understood without first understanding how liabilities and owners’ equity are treated in relation to assets. That may take a little getting used to.