Introduction to Accounting (2020)

hi I'm Ned a financial analyst with several years of experience in one of the big four accounting firms I very much enjoy teaching and would love to share my expertise with you so I welcome you to this accounting course in which we will learn about bookkeeping credits and debits the main income statement and balance sheet items and how to construct an actual P&L and balance sheet the exercise that will carry out together will show you how to register accounting transactions and build complete financial statements we'll go step by step with nothing skipped we will then introduce the concept of cash flows and the importance of their timing very often business owners learn the hard way that profit does not equal cash in the bank in the third part of the course we will analyze the financials of one of the largest companies in the world P&G will learn the main financial ratios that are used in financial statement analysis and then will calculate these ratios in order to provide a real-world example as you can see we have lots of work ahead of us so dives straight in and let's begin this journey together hi in this first lesson we'll try to answer three main questions what is accounting why do we need it and what types of accounting are there I'm sure you'll agree with me that these are three important questions we should ask at the beginning of the course so let's answer the first one what is accounting accounting is an information science that is used to collect and organize financial data for organizations and individuals okay perfect let's break down this definition first of all we said that accounting is an information science it is concerned with analyzing collecting and organizing information but what type of information accounting organizes financial information it is about money it is quantitative in nature and measures money accounting isn't an abstract science it is much more practical than theoretical it's one of those things that you learn best by doing the last part of the definition says that accounting serves organizations and individuals how come well as one can imagine every firm needs to be able to organize the financial information related to its business a firm has to know how much of a product it was able to sell how much it cost to produce the product and how much money it has in the bank similarly an individual needs to be aware of their personal finances if they don't pay attention to how much comes in and how much goes out they may soon be in deep trouble I think we've answered the second question - accounting is a science that helps us organize and represent financial information and it helps corporations and individuals understand their finances and make decisions about the future accounting helps you to use the past in order to take action in the present and change the future pretty cool right however there is one more question that we need to answer what types of accounting are there there are four main areas of accounting first of all we have bookkeeping without bookkeeping we wouldn't be able to do anything because bookkeepers are responsible for all of the information that is collected and taken into consideration bookkeeping is a fundamental activity as it ensures that financial information has been gathered systematically then we have financial accounting which focuses on the three main statements income statement balance sheet and cash flow it is prepared for the company's ownership its lenders financial analysts and for other external stakeholders it is highly regulated given that the information is prepared for third-party users and they should be able to read it without having inside information the fact that the information is prepared according to a specific set of rules renders it comparable with the one prepared by other companies which in turn facilitates investors and lenders financial statements are prepared according to a uniform set of rules called accounting principles the aim of these reports is to allow externals like banks and investors to get an idea of your business how much sales you had was the company profitable how is it financed and so on the third type of accounting is managerial accounting it is available only for insiders it is not defined by accounting principles and is in most cases more detailed than financial accounting it contains strategic information that shouldn't be seen by the firm's competitors managerial accounting looks into topics like pricing competition marginality budgeting and so on the company does not want to reveal this information to outsiders because well otherwise Outsiders will prepare a counter plan and gain strategic advantage of course managerial and financial accounting are often interrelated and it is a frequent practice to reconcile managerial and financial accounting figures the fourth type of accounting that we need to mention is tax accounting this is the accounting that will determine the amount of taxes that a company has to pay tax accounting is a very technical field that varies for every single legislation in the world we won't cover it in this course in this course our main focus will be on bookkeeping and financial accounting as they are the solid foundation that one needs in order to understand financial transactions a warm welcome to 365 careers YouTube channel we are really excited you're watching this video our mission is to create some of the best business finance and office productivity tutorials and deliver them to you right here our channel is updated on a weekly basis so make sure you click the subscribe button below and stay in the loop for interesting and career enhancing video tutorials bookkeeping here is where it all starts the collection of information in order to be able to appreciate its importance try to imagine for a second that tomorrow you wake up and all the bookkeeping records in the world are gone the first thing that you find out is that you don't have any electricity at home the electricity company shut it down because they didn't have any records of you paying the bill that's an awful surprise right but wait there's or you decide to go to the nearest supermarket and buy some juice butter and bread but when you get there they tell you that they don't have any they didn't know that they were out of stock because all of their bookkeeping records are gone you're starving and you don't have any electricity at home miserable situation perhaps some shopping in the city center would cheer you up you decide to withdraw some money from the nearest bank but when you get there you find out that the bank doesn't have a record containing your name they've lost the information about your savings they are gone you get the point right modern society as we know it simply cannot function without bookkeeping bookkeeping is fundamental for corporations banks investment funds and even individuals let's provide another example think about GE the General Electric Company GE has over 300 thousand employees and it operates in more than 170 countries in the world the company operates in business sectors like appliances and lighting aviation financial services energy management health care oil and gas power and water and transportation can you imagine how complex its operations are is GE going to be able to monitor its businesses without a proper bookkeeping system in place is it going to be able to understand whether its operations in a given country are profitable or not or whether there is a product that is not profitable and should be discontinued recording every single transaction that takes place within the firm is paramount at this level of complexity it is proper bookkeeping that ensures that all necessary information has been recorded and is ready to use I am sure that you get the point bookkeeping is the cornerstone around which all accounting is constructed [Music] okay so in our previous video we talked about bookkeeping and why it is important here we'll focus on financial accounting the set of financial reports that a company prepares for people that are outside the organization such reports enable outsiders to gain an understanding of the company's business about how many sales the company made this year about how many sales the company had last year and they also show how profitable the company's business was and what kind of costs it's sustained in addition to that financial accounting reports show what a company owns and what it owes they show how much cash was available in the company's bank accounts at the time of preparation of the report and so on we can conclude that financial accounting allows people who are outside an organization to make a reasonable judgment about its business and why is this important why should a company go through all the trouble in order to prepare such reports think about the opposite situation what if the company did not provide financial information what would have been different in that case is there a bank that would be willing to lend money without knowing how you are going to repay the loan is there an investor who would be willing to put up their money without knowing anything about the financials of the company's business the answer is no and that's why companies prepare their financial reports it enables them to communicate their financial performance to those who are interested think about General Electric it's a huge company right in 2014 their revenues were north of 148 billion dollars and being a public company they have thousands of investors who are located not only in the United States but all over the world their investors are in France Germany UK Japan everywhere and how is it that they monitor the company's business and decide whether they would like to hold their shares or sell they use the company's financial reports they analyze the company's financial statements and all of the details that are necessary in order to understand the company's business I'm sure that you understand just how crucial role financial accounting plays in today's financial system without financial reporting as we know it most businesses would have been denied the capital that they need [Music] Financial Accounting revolves around three main statements the income statement also known as profit and loss or simply P&L the balance sheet and the cash flow statement each one serves a different purpose and contains important information about how a business is running the income statement answers the question how did the company perform throughout the period under consideration did it produce a profit or a loss typically an income statement is prepared for a one-year period but sometimes larger companies presented on a quarterly basis as well the P&L statement helps us understand whether the operations of the firm created economic value it also enables us to find important trends such as revenue growth and the incidence of gross profit on revenues the balance sheet answers the questions what does a company oh and owned on a certain date and what is the company's financial position it shows the assets that the business controls the liabilities that it owes and the amount of equity that belongs to equity holders the reason why it is called a balance sheet is because total assets must equal liabilities plus shareholders equity it is important to remember that assets stand on the left side of the balance sheet while liabilities and shareholders equity are on the right side the statement of cash flows answers the question how much cash did the company make during the period under consideration and where did it come from given that income and cash generation are two different things we need a statement that shows us the movements of cash providing an idea of the liquidity that is generated by the firm's operations you will find these statements in every company's annual report anyone who would like to get an idea about a given business should start here [Music] in this lesson we will talk about the main income statement items that a firm will register throughout its business cycle we have to start with revenue also known as net sales this item represents an inflow of economic resources usually the main type of revenue for a given firm are its day to day sales customers buying goods that the firm sells there can be other sources of revenue as well companies can and do make money outside their core operations for example they can earn money by renting some of their real estate or by selling goods that they do not typically sell the account that unites these sources of additional revenue is called other revenue okay so this is the top line of the income statement this is how the firm makes money the sum of net sales and other revenue equals total revenue let's provide a practical example think of a dairy company it produces milk and cheese and then sells it to chains of supermarkets when the company sells milk and cheese on a daily basis it registers sales right its clients the supermarket chains have to pay for the goods that they have received this is the firm's core business and the amount of sales that the firm makes will be registered as net sales at the same time the company also rents out a real estate property that it owns and receives rental income for it it will be registered as other revenue because this activity is not part of the core business of the firm such distinction is necessary because it allows us to separate sales coming from core business activities from income that is a result of non core activities and as we said before the sum of net sales and other revenue equals total revenue below total revenue will be listed the firm's expenses outflows of economic resources in order to fuel its sales and produce the goods that it delivers to clients the firm needs to sustain certain costs the most common types of expenses are cost of goods sold selling general and administrative costs depreciation and amortization and interest expenses cost of goods sold are expenses that are necessary to produce the goods that the firm sells our dairy company needs to buy raw milk from local producers transport process and then package it before it can sell it to the large supermarket chains it sustains additional costs in order to produce cheese from the milk all of the expenses that are directly attributable to the production of goods that are later sold are registered as cost of goods sold the difference between total revenues and cost of goods sold is called gross profit this is the profit a company makes after deducting the costs associated with making and selling its products selling general and administrative expenses are a large category of costs the dairy company classifies here its expenses for advertising and promotions salaries of its management and personnel that is not directly involved with production accounting office and auxiliary personnel rent for its offices and utility bills such as electricity phone and water bills depreciation and amortization are two accounts that reflect the using up of tangible and intangible assets depreciation refers to assets of a physical nature while amortization is the term that is used for intangible assets goodwill licences copyrights etc every year the plants that the dairy company owns become one year older and therefore their value is reduced in order to account for such reduction the company registers a depreciation expense interest expenses are the costs that a company bears for receiving financing typically firms receive bank loans and pay interest expenses for the amounts they owe the dairy company from our example had to ask for a bank loan when it acquired a new milk processing system the bank agreed to lend the necessary funds add an interest rate of 6% every year the firm has to pay an interest expense on the amount that it still owes such interest expense is registered in the company's income statement and finally we have taxes there are two things that no person can avoid and one of them is paying taxes every firm pays corporate taxes that are proportional to the amount of pre-tax profit that it generated the rules according to which the amount of pre-tax income generated by the firm is measured may vary depending on the country where the company operates once all expenses are considered we arrive at the bottom line which is called net income this is the excess of revenues over expenses the profitability of a venture after accounting for all costs these are the typical items that you will find on an income statement later on in the course we will go through a complete case study and show you how the items are registered and organized in order to form a complete statement this will do for now thanks for watching you [Music] as we have said before a balance sheet is a statement that shows what the company owns and owes every balance sheet has two sides on one side are the company's assets what the company owns and on the other side are the company's liabilities and equity what the company owes it is important to remember that assets stand on the left and liabilities and equity are on the right side in this lesson we will describe the main asset liability and equity accounts our goal is to understand how these accounts contribute to the company's business cycle and the nature of the items that these accounts describe let's start on the assets side the cash account is one of the most important drivers for a business it shows how much of the firm's assets are cash or can easily be converted into cash it gives us an idea of the liquidity of the company we know very well that a business cannot function properly if sufficient cash is not available for its day-to-day operations the next important item that we will see on the asset side is accounts receivable also known as trade receivables when customers buy a firm's products they have to pay for them right and until they do the firm will register this amount in accounts receivable which indicates the money owed by customers the firm registers that it has earned a payment from these customers but has not yet received the payment inventory is the account that shows the value of raw materials goods that are in the process of elaboration and finished goods that are ready to be sold to customers the company has all of these goods in its warehouse finished goods are products that can be immediately shipped to customers while raw materials and work-in-progress goods require additional processing property plant and equipment are a group of assets that are vital to business operations imagine a production company it certainly needs plants and equipment in order to transform raw materials into finished products usually this is a hefty investment that cannot be easily liquidated the value of property plant and equipment is reduced each year or should we say depreciated in order to account for the fact that the asset will be obsolete after its useful economic life ends these are some of the main types of assets that we will see in financial statements let's focus our attention on the liability side accounts payable are certainly one of the most important items on the liability side when a company buys raw materials for its production process it registers the amount in accounts payable until the actual payment has been made the firm owes its supplier a given amount of money because it received the goods financial liabilities are a significant item for a lot of businesses out there a financial liability appears on the balance sheet of a company when it receives external financing which is usually a bank loan the firm uses the funds in order to finance its operations and commits to repaying its lender in the future on the same side of liabilities stand the ownership claims such as paid in capital this is the firm's capital that it technically owes to its owners this capital would not be repaid to the shareholders but the company will try to pay them a decent amount of dividends if its business is successful these are some of the most frequently seen balance sheet items I am sure that after this lesson you'll have a better idea of their meaning we are always open for any questions that you might have so if you would like to ask something please don't be shy and post your questions in the discussion board in our next lesson we will go a step further introducing the main accounting equation [Music] hi welcome back this is 365 careers accounting course so we've learned what accounting is and why it is useful the four types of accounting the three main financial statements and also some details about the accounts that form each of these statements you should feel pretty good about the progress that we are making so now is the time to look at the main accounting equation do you remember what a balance sheet is I'm sure you do a balance sheet shows what a company owns and owes at a specific point in time on the left side are the company's assets the things that it owns on the right side are the company's liabilities and equity showing how the company was financed this is what the balance sheet portrays the reason it is called a balance sheet is because assets must equal liabilities and equity the two sides have to be equal or else a mistake has been made this principle is known as the accounting equation and is one of the core principles around which accounting has been built assets are equal to liabilities and equity this is very logical right on the right side we have liabilities and equity which are the firm's sources of financing liabilities are other people's money and equity is our money on the left side we have the firm's assets the things that it has bought with the money that it received given that we are thinking about the same amount of money on both sides it is only natural that one side is equal to the other the accounting equation must be satisfied for every business you will ever see it balances for the gelato shop on the next corner as well as for Walmart and Chevron [Music]

Channel: 365 Careers

Views: 380,050

Keywords: accounting, introduction accounting, 365 careers, financial accounting, debits and credits, introduction course, online courses

Id: bG963a00ZvM

Length: 27min 26sec (1646 seconds)

Published: Mon Dec 10 2018