Chap 01 Lecture -- The Accounting Equation

talk about content I love trying to get you off to a good start I love answering all your questions about out of new things and all that but nothing thrills me more than introducing you to the topic I sincerely believe this course is required for a reason it wasn't my idea to require it it was the colleagues on the hallway and similar people all over the United States and perhaps all over the world who realize this course is one of the fundamental things you know if your interest is to be in business any way shape or form as an employee as a self-employed individual however it is I believe that each of these chapters feeds the others it's a cumulative course you need to know the content of chapters 1 2 4 to succeed in chapter 5 you need to know this semester to do next semester this course will help you in upper division classes in the College of Business it'll help you in grad school it'll help you on the job someday please be serious about the course content please master everything you can it's important that you master this week before we start next week lectures nature is one-way communication I'm trying to give you a guy the handout to take notes on it's not there's no prize for the person who fills in all the blanks correctly did you hear me just then hello nobody was listening did you get a price for filling in all the blanks correctly no it's for you to be able to be a better listener not a poorer listener I'm hoping you'll embellish the notes right out in the margins if I tell stories right yourself so write yourself some little note if you have a question writing out in the margin and get an answer for it on your own or ask me now or later it's a tool my pastor few months weeks years later after I started doing this started using a note-taking guide in the sermons and I found that I would tune out until he got to the next blank and then I'd write that one out him too now I tried it for six months or so and put the thing aside it wasn't helping me it was hurting me I don't want to hurt you I want to help I want you to take away something from the class that would be useful for you to use in studying the chapter drafts out and for homework use the note-taking guide with discretion use it wet okay let's talk about account many people refer to accounting as the language of business if this were French how did we conduct class today if this were intro to Spanish if this is German how would we start class today let's back up a step what's the purpose of language thank you to communicate and if we speak English as our first language and we wanted to learn another language the teacher in whatever language it was might introduce us to a term and define it and have us say it and write it down pronounce it yes there's some tournament for we need to know and that's why it's referred to commonly as the language of business no wonder it's required this is the way business talks I talked to pre-law students students who are law school panel who aren't business majors at all and I say you better take a county line you'll be glad because when you get to law school and you're in a group with sociology and English and and business and government and pre-law majors the business students are going to know the terms in the cases and the other students are not this is the language of business this is how people talk in business and we need to know what they're talking about but how can we know what they're talking about if we don't understand the term I'll teach you some terms today and I'll teach you some procedures today and we'll work on it all week and all year long and apply them and get better and better this is just a brief introduction it starts with something called the business entity concept the business entity concept is that the owner and the business are separate distinct economic units the owner and the business are separate let me illustrate maybe you've heard of a mom-and-pop grocery store in a densely populated area there is a store in which many in the community shop mom-and-pop owned it they live in the apartment at the back you go into in at lunch time perhaps you smell the aroma of lunch you walk at the back of the store and perhaps you see in the crack of the curtain pop eating lunch while mom runs the cash register somebody outside the store mentions mom or pop you immediately think of their grocery store and you immediately think of them how am i doing you're with me or not mom and pop are so entwined with their entity their business it's hard to think of one without thinking of the other but we must the business entity concept says the owner and the business are separate and it even has a little afterthought and we are accounting for the business it's important our point of view is from the businesses perspective the owner and the business are separate and we're accounting for the business and because of this concept the owner and the business can transact with each other now there's a word that I haven't defined yet and I'm about to but some of the things that we're going to do in the first chapter our see events takes place between the owner and the business the same thing when you know is what a business transaction is a transaction is something that happens in the business that's important enough for us to write it down now the same person that just said that wrote what you're writing now that because it's written on the screen it's more important than the Living Translation you heard me give just now this is the King James and I paraphrased it did anybody hearing a business transaction is something that's important enough that we ought to write it down and usually we write it down in dollar terms as imperfect as they are dollars are our common denominator dollars are the way we write things that we don't write down gallons or miles or inches or hours we write events in terms of dollars in monetary terms you've heard the word you've used the word appropriately let's think about the word in this context assets the book says that's an abbreviation for the author's names the book says are resources owned by a business well I think that's a teeny bit tunneled vision mr. Elliott and I made the joint decision to go with the 10th edition of this book and I like it I like it better than other books that we found that doesn't mean that I like everything about it I can be myself I can think and reason for myself I can have my own opinions and you'll hear them from time to time about how I wish they had done it to say that its resources owned by a business seems to limit it to just businesses and eliminate other possibilities I'm thinking that there may be some other people that benefit from the information that accounting provides I like a broader definition I like things of value that our own not restricting it to a business click with me a moment who might used accounting information I think there are at least four broad roots who could benefit from accounting information one of them is businesses and this is a business course and this is a business book and nobody should be surprised that the examples throughout the book our business in nature but does that mean that it's just restricted to business that nobody else can benefit from this how many politicians have you heard lately that run with the plank in their platform as I'd like to run government like a business yeah well then there must be some things here that are business principles that others could use how about nonprofit organizations churches the YMCA the Red Cross often entities missions missionary organizations could benefit from accounting information the government sure could how would we know about the national debt if there weren't an accounting system in place for us to keep up with it how would we know that the budgets not balanced how would we know these problems that exist if somebody weren't keeping score yes or no doesn't apply just at the federal level no cities and counties and school districts are raising tax dollars to provide us with services schools and buses and what's the name of that Creek that runs through this campus that looks so nice now you people aren't old enough to know how bad it used to look but those were tax dollars that helped improve that and that's a governmental unit providing that for us and we're grateful for it individuals you and I can benefit from accounting information I'm teaching this course from a professional perspective trying to prepare you for your career path can you gain something individually from this course that's going to be good for you and your family ultimately someday I think so I think so there are more practical courses than this for personal benefit personal financial planning being at the top of the list this course doesn't pale in comparison to that but sure there will be some individual things that you could benefit from if we take a narrow tunnel vision look and say that this course is for a business we're missing the money it could be for all those things so I like the definition assets are things of value that our own how about you naming Tim for me let's see some hands up let me respond to you you respond to me name me ten assets yes sir house woo but shooting right over your head I'm coming back to you second a car a house a laptop come on let's go faster somebody somebody here yes huh car was named take up the phone I'm listening it's hard guitar did you say guitar no you said car thank close name one clothing got it twice here we go pump insurance cell phone go laying two more let's go faster off stocks and bonds jewelry jewelry did we name on the assets in the whole wide world would you like to sit here the rest of the name assets we could goody wait yeah we could we could do name and asset your dorm room we could do name an asset that you have with you today I lost 10 minutes in the beginning the hour will you allow me to not do that right now and know what an asset is yes or not things of value that our own I contend that everything that can be owned is owned our attempt to explain who owns the assets is a concept called equities equities every these are rights and claims to assets or I should have said rights or claims to assets we're explaining who owns the asset how do you know it's your car because you have a time how do you know it's your vote yeah but tiger how do you know it's your motorcycle you have a time how do you know it's your house you have a deed same thing it's a deed right how do you know it's your book you got to write your name in the front cover I know it's your laptop you want to engrave something on you got to do something to it to identify you know there's not a time for everything but the concept is still the same equities are rights or claims facets I contend that everything that can be owned is owned so on the one hand we have assets on the other hand we have equities I think we might have best running slap-dab in to our first equality assets are equal to equities things fade their own are oh is that too tough to swallow things around that our own our own that's what we're said we just want to know who who owned stuff I think ownership falls into two broad categories rights and claims to assets equities fall into two broad categories the first big root is the claims of creditors creditors claims on assets are called liabilities depth things that we oh say debts it's a little funny word to say say debts what's so funny about you don't say to be say deaths this thing's owed so you've got a car in the parking lot on the dorm wing you hear little rustle hustle-bustle you overhear a whole bunch of people congregating and you raise your head up stick that up our way you see a whole group of people on their way to get pizza and you say oh no and you start trailing along in the conversation from there down the steps down the elevator however is whose cars are going in who's going to drive you say I'll Drive you get out to the parking lot and you know you parked near this lamppost I can't see my car anywhere here what happened no better time I should have reminded that you that you haven't made the last three payments on the car the story would have been better maybe I'll do it better when pitching this afternoon you want to come back and see it this is my dress rehearsal your car got repoed in the parking lot are you with me or not they exercised their claim on the asset the assets the car the creditors have a claim on if you don't do what you're obligated to do they're going to invoke their right and take the car back even if it's never happened to you and pray that it never will you've heard about it haven't you well this is the accounting version of that this is the explanation of that this is how we're writing that down the third the second claim is the owners claim we call it owner's equity it's explanatory in the term we don't say creditors equity we say liabilities but we say owner's equity and that's the best way to explain it those words talk to you if you'll listen owners claim on assets to mean to these assets belong they belong to the creditors or the owners their liabilities or capital we call it owner's equity has a synonym capital and capital and owner's equity are tied for first place in an acceptable way to say that if you want to say owner's equity you can the book says owners what equity most of the time if I can eliminate a syllable or two to talk faster I'm going to I say capital sometimes an owner exactly sometimes and I think that equation we started with assets things of a their own are equal to whoever owns them the claims on them we can now elaborate on it could be said what we know now assets are equal to liabilities plus owner's equity or you can say assets are equal to liabilities plus capital that's also true assets are equal to owner's equity plus liabilities you can rearrange the terms and mathematically algebraically they would still be true but there's concept in theory behind writing it this way owners claims come sorry creditors claims come before owners claims there's a method to our madness we do it that way on purpose because of what it explains I think you need to know this it's the accounting equation it's the foundation for everything we do we could use the accounting equation only for the rest of the year and skip chapter 2 and it would work we need this foundation now chapter 1 calls this the basic equation and that's the one I hope you take away from the course I hope ten years from now when I see you at homecoming I won't but I'd love to ask you if you know the accounting equation then and I'd love for you to know it when he like comes up to me at a ball game Jahna here Elias yes or no Eli's our mascot he's a furry little creature with a beak of the tail fifteen okay when I see Eli and an event I always whispering his ear and say do you know the accounting equation and sometimes he does somehow that didn't go across very well I won't lose that he started it he came up to me one time and told me that he knew it so I just asked him he still remembers okay the accounting equation is I think you can do better than that say the accounting equation for me thank you very much the book calls that the basic equation I have ought against the book they've changed chapter one they jump immediately from this basic equation to what they call the expanded equation and now I'm in a quandary do I go against my opinion beliefs and teach it the way I think it ought to be taught or do I teach it the way you're going to refer to in the book and harm you because you won't understand it as well I don't think as the way we've done it for years I don't know what to do I'm going to take a risk that I'm going to try to teach it the basic accounting equation and the way I've done it forever I think you'll understand it better and you've got to learn about the expanded version of this and how it too is correct but has some limitations we'll talk about some of the discussions today in class I'm limiting myself to the basic accounting equation I believe that generally speaking there are only four reasons that the basic account for only four ways that the basic equation would change its algebra don't don't run from it don't be afraid of it it's algebra it's inequality left side has to equal right side and rear done now what's it going to take to change it you know about algebra to know that if you enter pluses on opposite sides it would remain imbalanced sure Falls if you enter minuses I'm the equal sign if you enter minuses on opposite sides it'll balance yes or no yes or up together now if you enter a plus and a minus on one side it's possible would it be in balance they would offset each other and it would balance yes what if you entered a plus a minus on the other side would it balance mathematically speaking yes or no you would now I contend those are the only four possibilities the things that we encounter the things that we try to write down that are important enough for us to make record of them in monetary terms will fit into one of these four broad categories pick up a situation let's say that you've decided to tutor some of your classmates with they're in their classes you've decided to become a - you're an entrepreneurial kind of person you're going to start a business tutoring and to get started you're going to observe this business into the concept thing you've got a checking account with some money in it but you've decided to take some of that money and put it in a new checking account solely for your business purposes you're going to call that checking account your business manager so sure enough you go down to the bank and make a deposit for your business with anybody venture a guess how that business transaction affected the accounting equation do I have any volunteers right this minute let's go faster yes ma'am does this work class she said increase assets increase owner's equity would that keep the accounting equation in balance yes or no yes it is an increase in assets and an increase in owner's equity that is the business now has the money and the owner owns it belongs to the business if you're with me right this minute say yes yes what else might happen to change this I wonder well I have nothing with which to tutor maybe when the prospective student comes to me I'd like some legal pets to use a scratch paper I'd like some pans I'd like some supplies and you have no car there's an office depot right down the street within walking distance you go to Office Depot you round up a few things you go to the cash register you write a check on your business bank account you give them the check you put the things that you bought in a sack and you walk back to campus would anybody venture to guess how that changed the accounting equation quickly yes sir one asset increase then the other one decreased class does this work mathematically speaking yes or no it does the accounting equation will balance which asset decreased which asset increased you went back to the dorm room you put those things on the Shelf you haven't used them yet they are assets to you two you're going to use them in the future but right now you have less cash and more supplies than you did before if you're with me and you know it said yes yes then low and behold one of your friends needs to drink so you spend some time helping them with one classes and they don't have any money they get paid on Friday and you say okay I can wait till Friday did the accounting equation change did we have a business transaction here I think we did somebody want to venture against yes sir how did it no credits no debits don't curse words this is chapter one about the dog and yes ma'am liabilities increase that's a good try betting correct yes ma'am in increased assets and it increased owner's equity would this keep the accounting equation in balance yes or no the name of this asset I heard correctly this is terminology this is why you're going to do better in law school than an English major sociology and a pre-law major because you're about to learn this term and you said it correctly what is the name of the asset that went up it's called accounts receivable accounts receivable is the name of the asset that describes what others show us you did some work here and they didn't pay you they owe you we're saying they owe you by increasing accounts receivable now somebody explain to me why owner's equity also increased young ma'am that said this to me can you that's this side of it this is the cash side cash went up but why did owner's equity go up it still belongs to the owner it's not cashed by the way it's accounts receivable but we owe that we own that accounts receivable there's a name for that and we're trying to talk about terms and that's the one I was about to fish for you learn about the out-of-state this is an increase in assets and increase in liabilities the name of what just happened is revenue and the recognition of revenue is an important concept that goes throughout this book but it's introduced in this chapter and we should attempt to master it in this chapter revenue is defined as assets coming into the business because of work performed is that what happened just now is that what happened just now yes we did work we tutored the person it didn't matter that they didn't pay us they still owe us but we got an asset for that assets came into the business because we did the work we're in business to do does that make sense yes or no you now know the definition of revenue be alert look for ways to use that this week understand it better before the week's over it's all about when you do the work it's not about when you get the cash and that's a good example of it to drive home the point one more time doing work dozen does not have to be a company by the receipt of cash it's not about when you get the cash it's about when you do the work that's the key lesson we're trying to get across in that state so we placed an ad in the newspaper would you write in the margin and remember we placed an ad in the campus paper and they ran an ad for us we're available for tutoring and they're going to send us the bill and we're going to pay for that next week what happened to the accounting equation some new volunteer quickly yes sir did you pay anything it says place an ad in the paper to be paid next week that's a good tribe and it's okay it's so intimidating makes it stick in here and I want you to learn sooner or later that's okay to make a mistake in here it's just hard the first day that's incorrect we need to tweak that just a little bit because we didn't pay the cash now I saw another hand I think right there yes sir give it a truck lot of Buddhas went up and could we agree on liabilities went up we didn't pay for it something happened that we're going to pay but we haven't paid it could we agree on liabilities went up yes or no yes I've got a lot of people agreeing on that how about you explain the rest of it for me liabilities went up owners equity goes down does the accounting equation balance class does this work come on speak Tim does this now but this guy's yeah yes it is correct liabilities went up owner's equity went down like the liability that went up has a name anybody want to give it a name whoo look at all those hands this is called accounts payable a little while ago we learned that accounts receivable is an asset now we're learning that accounts payable is a liability what other people owe us is an asset what we other people is a liability accounts receivable accounts payable get them straight you can be clear on why did owner's equity go down could somebody address that for me yes sir this is called an expense a minute ago we learned about revenue and revenue increased owner's equity expenses are opposite of revenue expenses decrease owner's equity the definition of expenses is sacrifices that we make in order to earn revenue there needs to be a revenue connection in order to call it an expense it needs to help us are those is that ad in the newspaper going to help us or in revenue we hope so we hope some students will read the ad and respond to the end and allow us to render services to them so that we can earn revenue it's got a revenue connection are you with me right this minute say yes or not good as the next transaction listed on the handout is received $40 from students tutored this transaction would increase assets and increase owner's equity the accounting equation would balance the asset increased would be cash the reason owner's equity increased would be because of revenue which we defined earlier to be assets coming into the business because of work performed this time we did work for cash we actually got the money that's not what it made that's not what made it revenue it was revenue because we did the work at this point the next transaction on the handout says paid student newspaper for ad placed earlier recall that two transactions ago we placed a fifteen dollar ad in the student newspaper and promised to pay it next week this payment in fulfillment of an obligation we had written down previously would decrease assets and decrease liabilities since we paid cash cash would be decreased the liability decreased would be Accounts Payable owner's equity would be unchanged in this transaction the final transaction is received payment from student who earlier had promised to pay at the top of the this page on the handout it says we tutored a student who promised to pay us on Friday and now we're receiving payment from that student this would be an increase in one asset and a decrease in another it would increase the asset cash would decrease the asset accounts receivable that student no longer owes us this is not revenue even though we're dealing with a customer because no work is performed at this point revenue recognition is an important concept in this chapter at the very back of your handout there's a brief description of the person that's attributable for what we're studying this year these concepts that I've introduced you today are the result of the thinking of who we've labeled the father of account his name is Pesci over he lived about the time Columbus did about the time Columbus discovered here okay it's that oh there's a mention of him and look it's in the book and it's quoted in your handout is this quote that I'd like to leave with you today and for you to ponder the rest of the year I knew it but I didn't know it to this extent and it kind of opened my eyes and I'm hoping it will doors pardon me for reading to you it's one way that I know we covered it okay Pacioli published a revolutionary book in 1494 we're going to call it the Summa Guffey said that it was one of the finest discoveries of human intellect and economists and sociologists said bookkeeping is born with the same spirit is the spirit system of Galileo and Newton pecchì always work was dedicated to the glory of God he wrote in the Summa that people should begin all their economic transactions in the name of God the methodology he developed changed the future of business forever and led to the development of spreadsheets like Excel his ingenious accounting equation of come on set with me assets equals liabilities plus owner's is use worldwide today this humble servant of Jesus Christ has provided the world a vital tool for business to the greater glory of God is the Bible the only thing that's divinely inspired did you hear me that's unfortunate I'm not going to repeat it but I'm sure about Pacioli and I'm thankful that the Lord spoke to Pacioli and Pacioli listened and that he attributed his thoughts to God and he left us this great legacy that we study in a place dedicated to God but with the secular textbook we can do this you

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Keywords: accounting equation, assets, equities, transactions, revenue, expense

Id: QPhf1Dw9TeI

Length: 37min 38sec (2258 seconds)

Published: Fri Aug 26 2011