Accounting - A Step by Step Introduction | Bill Hanna | Skillshare

Accounting - A Step by Step Introduction

Bill Hanna, CPA & Controller

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11 Lessons (54m)
    • 1. Intro

      2:31
    • 2. Why Accounting

      1:46
    • 3. Let's Define Accounting

      6:15
    • 4. Debits and Credits Explained!

      6:51
    • 5. Trial Balance Explained!

      6:58
    • 6. Matching Principle

      4:31
    • 7. Revenue Recognition

      4:31
    • 8. Accrual

      5:53
    • 9. Historical Cost

      4:06
    • 10. Enron's Fraud

      6:59
    • 11. Objectivity

      3:55

About This Class

Welcome to my Accounting A Step by Step Introduction Course! I will walk you through the following areas:

  • The purpose and definition of Accounting
  • The concept of Debits and Credits, with examples
  • The Trial Balance Explained
  • I provide real life example for each concept because we learn best via examples.

Happy learning!

Transcripts

1. Intro: If you look at this company's balance sheet, do you know how much cash they have? Is it $12 million? Mm, Maybe. But maybe not in this video. I'm gonna show you how to see through the accounting tricks and see the real through is behind the cash balance. My name is Bill Hannah and I'm a licensed C p A in the great state of New York on I put out these videos to share with you the lessons that I learned during my 15 year career in accounting. Let's put this another way just by looking at this cash balance. How much of this $12 million with the shareholders keep if the company liquidates its business today? Okay, let's review the answer together. If the company liquidates its business today, shareholders would keep $4 million out of the $12 million cash balance. Let me explain. See the first thing the company will have to pay if it liquidated its business. Today is the long term loan for $5 million. Leaving the company was just $7 million. Secondly, look at this liabilities item unearned revenue for $3 million. Unearned revenue represents cash that the company received for services or products that have not yet been shipped or delivered to clients. So although the $3 million is included in the $12 million cash balance, thes services or products have not yet been shipped or delivered to customers, and hence the company does not have the right to this cash. That's why a liability is recorded for that unearned revenue. So to summarize, here's the cash that the shareholders will be entitled to if the company liquidates its business today. The cash balance off $12 million minus on on revenue, $3 million miners, long term depth, $5 million equals and it cash available to shareholders off $4 million. So remember, even though you see the cash balance on the balance sheet as $12 million you need to realize that the only cash that the company has the rights to is $4 million after accounting for long term debt and unearned revenue. That's how you read the cash balance and not just take the line item cash balance for granted. And by the way, this is how bankers and analysts look at the real cash balance 2. Why Accounting: I think this video I want to talk about. Why are we talking about that counting? Why are we talking about accounting now? Accounting has been always the language of business, and so accounting is the way to measure the performance off the business on DSO. If you want to be successful, that business, you need to understand the basic concepts of accounting. And so business leaders wither. CFO's or CEOs increasingly need to be verse in accounting on. But many of the CFO's that I see today approximately between 10 and 20% of CFO's come out of a accounting background. As far as why am I talking about accounting now? Why do I choose to teach accounting now? I think listen less. Over the years, accountants are being seen as a back office there, now being Seymour and Mawr as someone who has insight into the business, a someone who knows what's going on in the business on. So it's really a good time now to get into accounting. You could easily transform into a business leader by knowing the ins and outs of the business. The second reason is compensation for accountants has been on the rise over the years on now, you know, seeing compensation easily between 300,000. Especially if you live in the metropolitan area. Andi. Especially if you get specialized and get your CPL license. I really recommend accounting as a career. 3. Let's Define Accounting: in this video. Let's go over the definition of accounting and let's understand what accounting is. Andi. First, let's understand what accounting isn't the basic. One of the major misconceptions that I hear is accounting equals mass. And although there is some truth to that, um, you know, accounting involves calculations, but I have to say that this is wrong. Accounting doesn't equal math. We use calculators and excel sheets. You know, we're not crunching numbers. Accounting is about measuring the performance of the business. And so accounting the finishing of accounting is a way to measure the performance of the business by recording activities over the business. And so you know what activities in the business you know, sales coast of sales expenses. And so what are you doing in accounting is that you're measuring and recording thes activities so you can summarize activities of the business in the form off financial statements, and we'll get into the financial statements. You know, the major financial statements are the three financial statements, balance sheets, income statement and cash flow statement. These are the major financial statements Let's get into the life cycle of business transactions, and so they just raise this. How does transactions make their way into the financial statements? And so any business involves business activities or what we see as buying and selling. And so it begins with business activities. The's business activities result in transactions, so an example of a business activity would be sailed. So maybe you're selling you own a supermarket or a retail outlet. You're selling goods that leads to, um, transactions, which would be, um, selling. They say a pair of sneakers transactions are then summarized in tow journal entries. And you know, the basic journal entry for selling and item is to record debit to cash and credit toe sales revenue. And so journal entry comes from transaction, you know, journal entries then are summarized into a general ledger. General Ledger, just a summary off all of the journal entries that go into a specific account. So if we are talking about sales, we will have a sales ledger, the summarizes all of the sales. Um, the ending balance off all of the General ledger accounts will lead to a trial balance. What is a tribe balance? Try balance is basically the summary off all of the general ledger activity. Um you know, there, somebody, all the debits and credits. In a basic concept, all the debits equal all the credits that you record in the period on DSO try balance is a summary or the balance from the general Ledger. Then the tribe balance is what we use to create the financial statements. And so you see here the lifecycle off how transactions or business activity make their way into the financial statements. We begin from business activities of the business. Which is this the basic buying and selling. You know, these activities will result in transactions transactions selling an item. Then this make its way into a journal. Entry. Drawn entries are summarizing the ledger we call General Ledger than the balance in every account. Manager Ledger result in creating a try a balance, which is a summary of all of activity and debits and credits you need equal. That's why school balance, then from the tri balance we group certain accounts together on that can give us the financial statements, and you see it's really easy. Once you understand it, this flow is really important to know on. Make note off on. That's how transactions create financial statements 4. Debits and Credits Explained!: in this video One of those costs. One of the basic concepts of accounting, which is debits and credits to really understand it. Let's go to an example and understand how we're recording our debits and credits. And this example will be selling a car. And so, um, let me quickly throw this car here. This is how I learned how to draw a car as a kid here on headlights. And so if we are selling a car, you know, there's two sides of every transaction. So in this case, there is the, um, dealer. And then there is you. You're buying the car from a dealer. So from the dealer perspective, they are given away a car, and so they're given the car up for in return for cash. You're paying them cash. And so what they need to record is there is two sides of this transaction. There is revenue, and there is cash eso We recorded debits and credits in the form of a T account. And let me explain what the account is in this case. They'll have a T account for sales and at the account for cash. And so the reason why I had chosen example of selling a car is because I wanted to go over the war dealer. And this is the trick that if you remember this war dealer, you will never forget the debit and credit side of each transaction. And so the trick goes like this dealer. Uh, okay, right. Help our de stands for dividend E stands for expenses. A stands for assets, the l. And maybe I'll change colors. Here stands for liabilities. Lyon, Billy thes e Think I may have misspelled at, um e is for equity. R is for revenue for sales. And so the trick here is the world dealer. The 1st 3 letter in dealer, those are debits. So this year, our debits and the e r. Dealer is the credit. Um, you know, I have been an accountant for 15 years. Now I have a c p a license, and this is what I use. And so, um, dealer if we apply it here, um, in this case, the merchant happens to be a dealer. What they need to record is a sale By looking at our chart here for remembering sales, and I forgot the sales for revenue. Um, it's worth. It's the letter R Revenue has a critic nature. And so if this car is $20,000 then we record $20,000. Here on the credit side, that debe side is always gonna be the left, and the credit side is going to be the right for cash. Cash? What kind of an account is cash by looking here. It's an asset. Eso it's a debits $20,000. And so the purpose for recording the drone entries is because we want to be able for the dealer standpoint, Do you want to be able to measure their business at month end on dso the summary of all these tea accounts sales, You know, they sold the car to you for 20,000. They sold the car to somebody else for 30,000 on another four of 10,000 eso, then the some of this is sales of 20 plus 30%. That's 60,000 and cash, um, in the same way. So cash 60,000. Then in their financial statements for the dealer on the balance sheet, their cash would have moved by 60,000 um, months over months and their sales would have gone up on the income statement by 60,000 month over months. Now, as a Sfar as you and I don't have space here, this'd the credits. What journal? Entry. Are you going to record a few black car? Um, not right, because you don't really need to measure your own performance and produce financial statements. You don't have investors. Although you could say your parents and your significant other is invested in new, but they have to produce financial statements for them. So, uh, dealer is the way to remember debits and credits. Remember the E A dividend expenses, Assets have a debate. Nature liabilities. Equity revenue has a credit nature. And so this is a trick to remembering debits and credits. Remember it. Memorize it, Andi, you'll never forget your debits and credits on See You in the next video. 5. Trial Balance Explained! : Hi, guys. Welcome to another video. My name is Bill Hanna and today will be talking about the trial balance. The reason why we have a try a balance is because we want to summarize all of the business activities that we've recorded throughout the monks in the form of journal entries. These journal entries will result in a balance for each account in the General Ledger. And so in this video we will look at an example off unadjusted, try a balance, go through the month and adjustments and arrive at the month end. Try balance. So let's jump right in. Let's look at an example. Try a balance. As of January 31 2020 Thedc tribe balance would consist off all of the active accounts in our general ledger. So pretty much we're looking at the cash accounts, accounts receivable, inventory, PayPal's aled, the equity accounts and then revenue and, of course, accounts. And then we're looking at the balance for each of these geo codes and pretty much you got to remember that assets will have a debate. Nature liabilities will have a credit nature on to help you remember all that. Let's look at this pneumonic here, which is dealer the e A L E R, which then stands for dividend expenses, assets, liabilities, equity and revenue. And so this is the easiest way to remember guys. Which accounts will have a debate nature and which accounts will have a credit nature. So pretty much dividend have debit nature expenses is the same way. When you record an experience, you record a debit to expense and a credit to either cash or accounts payable, as is the same way. Um, it's a debate nature. While liabilities equity and revenue whenever you record a journal entry for them, they have a credit nature. Um, and so this is the easiest way to remember what accounts has a debit nature and what which ones have a credit nature? Remember, the purpose of a try a balance is to make sure that the journal entries that we've recorded throughout the period equal or net out to zero. So the debits, equal credits, and so in this example here of a try a balance As of January 31 you can see that the total zero, meaning that the sum of all debits equals the sum of all credits UM, which is a good start. It doesn't mean that you're try. A balance is 100% correct, because you could have recorded the same entry twice, and you'll still net out zero. Or you could have reversed a journal entry or a recorded in the floodway. So it's wrong, but you still it out to zero. So having a try balance that miss out zero is a good start, but it doesn't mean that everything is correct. You still have to check it and make sure that you recorded everything in the right way, which is pretty much the purpose often audit on. And so that's that's really the only way to get comfort over. Try a balance. Now let's go through an example of a working try, balance and idea of a working try. Balance is that at the last day of the months, you have a what's called unadjusted Try balance, and what you do is you look a month and adjustments pretty much like any invoices you received a month's end. Um, if you haven't recorded revenue for the months, you record revenue on all these adjusting entries. So let's go through an example of that and let's work through the same example by looking at January off 2020 and so pretty much we're looking at January 30th. So this is like one day before months and and we're looking to close the books and we have a couple of transactions that we want to get in so that we can have oh, are closed. Try a balance. So in this example will look at a few transactions. One is we're buying inventory for 100 thousands. We've received invoice for monthly rent for 50,000 on, and we've sold goods for $2 million at a cost off $1.5 million. So let's go ahead and work through that. So let's work through transaction number one, which is buying inventory for $100,000. You know, obviously you record a debate to inventory for 100,000 and a credit to accounts payable, so this means that you are buying inventory and credit. Not for cash means that you'll pay in the future. De Brito inventory credit to accounts payable Transaction number two, which is a monthly rent. You know, we said before expenses have a debate nature. So whenever you record an expense is debit to that expense and credit easier to cash or accounts payable if you're buying on credit. In this case, we are recording 50,000 as a debit to rent expense and 50,000 to accounts payable, meaning that we are paying that in the future. Maybe in the next week or so. Let's look a transaction number three, which is selling goods for $2 million. Obviously the first entries to record a debit to accounts receivable for two million and a credit to revenue. Um, for $2 million. Don't forget the cost if you sold inventory for $2 million were saying of the course is 1.5 million, so you need to go ahead and record the cost Journal entry for the cost will be debit to Costa, Good sold and credit to inventory. You are recording the costs as a debit, which cost, remember, has a debit nature. Um, and you're recording reduction to inventory. That's why you credit inventory for 1.5 million. And now that you've recorded your three transactions, you're pretty much ready to look at the adjusted. Try a balance as of January 31 2020. And that's gonna be then, um, taking the beginning balance as of January 30 and adding in across these transactions on arriving at the ending balance for each of these Jill codes, which will, um, some 20 which indicates your debits equals your credit on. And now you have a month end. Try balance, which then you can use to generate your financial statements. 6. Matching Principle: in this video, I want to talk about one of the core principles of accounting, which is the matching principle when we say matching principle. What we are matching here is revenues and expenses. Let me just put that here. And so basically, the concept goes that we in each accounting period we need to be recording revenues and the matching expenses on DSO to give you an example, if we are recording a revenue off $100,000 and so this is revenue. So if we are recording $100,000 from revenue from one contract, let's say in the month off Marsh 2000 and 20 critical of the revenue off $100,000 there is a commission expense. So let's say we're paying a commission to one of the sales people for this sale to see the commission is 5% so the commission expense, and so the commission expense is 5% off the 105,000. All we're saying here is that we need to be recording the $5000 commission in the same accounting period as the 100,000 sales. Um, the reason why this becomes important is because What if you pay the commission in April? So most often this $5000 will be paid in the following months. Once you close the books, you have the sales numbers, then your process payroll, and you pay the commission off $5000. What you need to be doing in the months off Marsh is accruing for this $5000 Onda concept of a cruel, um, is you know, you haven't paid the cash yet, but what you do is you recorded John Entry basically says Debit commission expense for 5000 and Credit Accrued Commission 45 So basically a quick commission is a liability once you pay out the commission in April. Once April comes around, um, and you pay the commission April 2020 you will be debuting the liability to reverse it out and fretting care so you'll do a debit to accrued Commission 5000 and you'll dio credit to cash 5000. So this the matching principal, um, you need to be matching revenues and expenses in a given accounting period. This is an example to illustrate. We have a revenue of 100,000. We have an expense of a commission. 5000 even though we're paying the commission and the next month, we need to be recording the commission in Marsh. Um, and then one record the liability for it. Once April comes around, we reverse out the liability and pay the cash. So I hope that clears out the matching principle and see you in the next video. 7. Revenue Recognition: in this video, I'd like to discuss another core principle on accounting, which is revenue recognition. Revenue recognition principle states that you record revenue in the accounting period. Let's say a kind of period is March 2020 for revenue that you have the rights to on that you can measure. And so to give you an example for this, let's say you you are manufacturer and you manufacturer cars. And so let's say, um, if you make cars just quickly, visually give you a car here and this is how it turned again how to throw a car as a child . Look at that. Nice. Okay, So if I'm manufacturing cars and I want to record the sale over car this month, since they would've Marsh, um, and I sold the car for 100,000. That's a pretty expensive car. Maybe young Tesla, um, sitting this car in March 2020. Um, and I'm selling directly to consumer now. Revenue recognition states that I could only record this revenue in March 2020 if I fulfill Thebe performance obligation in the contract. And so, uh, let's say my contract with with the customer contract with customer states, um um the contract states that ownership transfers on delivery and this is gonna be the key phrase here. Ownership transfer on delivery, meaning up until the point of delivery. Andi To make the example even more clear, let's say delivery is happening on April 1. April 1st 2020. So based based on the contract, the risks of having this car belongs toa Tesla as long as they have custody of the car, and so the ownership will transfer on April 1st. So up until April 1st, this car belongs a Tesla. On April 1st, the car belongs to the customer on, so the revenue uhm recognition rule in this case states that just like only record this revenue in April. That's according to the contract, the ownership transfers on delivery April 1st, even if the customer paid Tesla before April 1st, revenue can only be recorded in a period where the rights on obligations off the car belongs to the customer. And that's when Test likened record Thebes transaction, which is April 2020 on. That's basically an example for revenue recognition. Obviously, there are more nuances now with a C six of six that are criterias that need to be fulfilled for a company to record revenue. But this is just the basic concept of revenue recognition, which is recording the revenue in the period in which the contract performance obligation has been fulfilled, which is in this case, if the delivery have been since April than just like only record the revenue in April. Nothing march. Even though the do you might have received the funds in Marshall 2020. I hope this makes it clear else you in the next video. 8. Accrual: in this video, I'd like to discuss another one of the core principles of accounting, which is a cruel um, let me just write it here so that we can see it visually. A cruel and accounting means that you reporting your business transactions on the books, even though the cash hasn't been laid out received yet. And so an example for this would be, Let's say, you're a company you're running a business on. Do you know that one of your vendors sending going invoice for the month of March 2020? And so, for example, let's say we are closing the books for Marsh 2020 and you know that one of your vendors, let's say, in this case of the vendor is Google. Let's say you use Google in the most of marsh for an AdWords campaign or any other marketing campaign. Um, you can pretty much log into your Google account and find out that your invoice for the months of Marsh is, um, let's say $20,000. However, you won't be built for it by Google until you know April third, let's say um off 2020 accrual accounting states that even though you won't be built for it until April. Uh, this expense belongs to the period off March 2020. And so in this case here, you'll be a crewing for it. And so, for example, let's say that the accounts are here. Um, this is advertising expense and the liability account accrued crude expense. So you'll be debuting. That's a debit off. $20,000. Thio added expense and a credit toe accrued expenses for $20,000. And now you've accrued for the expense in the marsh. In the months of Marsh, you recorded the expense even though you haven't laid out the cash to quickly remember our debits and credits we've mentioned before the concept off dealer. This is how I remember my debits and credits. Um, dealer is dividend E, um, is expenses A is assets. L is liabilities. E is for equity. R is for revenue. So in this case, here, what we got we got an expense to remember. Does it go on the debit or the credit side expense? Thes Here debits. These to me are so an expense is a debit right here and accrued expenses. A liability liability is a credit on DSO Basically, this is a quick example to illustrate accrual accounting. What is the flip side of that coin is cash accounting. Cash accounting is used by mostly small businesses and businesses that, um, mostly dealing cash because it's simpler. It's easier if this business, for example, was a cash was in cash accounting basis, which is not a gap. Um, cash accounting is not gabbed accrual. Accounting is gap. What is gap Generally accepted accounting principle. Cash accounting isn't gap, but cash accounting is used by small businesses to measure the transactions. Simpler is easier. If this was a smaller business and they're using cash accounting. The $20,000 is paid in April of 2020. That's when it gets recorded. It doesn't get recorded at Marsh, but the correct way the Gabba way generally accepted accounting principles is a cruel and to record this and Marshall 2020. Um, this is the basic difference between cash accounting and accrual accounting. We want abusing accrual accounting. Unless you're running a mom of moms and pops shop. That's when it's totally fine to use cash accounting. But the cruel is the way to go. I hope this clears up. What a cruel means. I'll see you in the next video 9. Historical Cost: in this video. I want to go over another one of the core principles of accounting, which is historical costs on. But it's just put it up here. You can see it for Rico. Cost historical course principle means that we record assets at their historical cost. And so they say, your business and you, you buy a new piece of machinery. Um, you know, the machinery does say cost you on the state's machine and the costs waas $10,000. Um, you reported a cost. And so, um, your debit here this Lortie accounts and this would be property, plant and equipment which machines is is, um, property, plant and equipment on. You have here your cash accounts when you buy a $10,000 you debit property, plant and equipment for 10 thousands and critic out for 10,000. And so historical course principle states that you record this machine at $10,000 because that's the historical cost. And, um, you don't increase that. Let's say over time this machine's value increased. For whatever reason, you, um this machine is maybe, you know, rare or you don't have it in the market anymore. You can just go up and increase the value by another 10-K You recorded a think A. This is what you keep in your books and then you advertise it over the period of its useful life. So the city is full. Life is five years. Then you advertise the 10,000 over the period of five years because that's the useful life . Now, what happens when this goes wrong? You know, the main example that we can discuss when we talk about the circle cost, um, is in run. So we old heard about Enron in 2001 and the scandal where the accounting practices were off and what they were doing is they violated that historical coast principle. And they used a new accounting technique that they came up with Mark to market, which is saying that what did it was is increased the value off the asset based on the market value. So if the market value of this machine in the market went up to $20,000 increase that on the books by 10,000 and book that uplift the differential as revenue, which is how the inflated the revenue and that's how in wrong got into trouble and that its collapse in 2001 eyes basically mark to market accounting. Which then this is, he said, that that you cannot be used for assets. It needs to be reported that hysterical costs. Um, that's the basic concept here. I hope this clears it up and I'll see you in the next video. 10. Enron's Fraud: Hey, guys, welcome to another video by the financial controller. My name is still had, and in this video, I'd like to discuss another interview question that comes up in accounting and finance interviews. And that is the Enron bankruptcy and the full out that followed. And so we'll be going over the timeline of events as well as the accounting practices that Enron adopted and that led to its demise. The story begins with a murder that happened in 1985 between two companies, the Houston Natural Gas Company, on into North Inc on then that resulted in the formation off the combined entity and Ron, the CEO of Houston Natural Gas at the time Waas Ken Lay and he continued to become the CEO of the combined entity and Ron. Then in 1990 Ken Lay, who was still the CEO, hired Jeff Skilling. Jeff Skilling will become really important in the story later because he becomes the architect off a an accounting technique which will discuss mark to market. Jeff Skilling was at the time one of the partners at McKinsey and Company, which was the consultant company advising and run in 1992. Jeff Skilling devised a new accounting technique called Mark to Market, by which you can adjust the value of an asset on the balance sheet from it's a circle post up to the fair market value and captured that difference a za gain or revenue. So basically, this allowed him to when he built the power plant, to look at the value of the power plant today when you built it, and then look at it's our future revenue and then adjust the value off the plant based on the cash flow that is expected to generate, allowing him to capture the projected revenue from that plant as revenue today, which is crazy about. Believe it or not, this technique got approved by the SEC in 1992. The effect of using the mark to market technique has been incredible for revenue and for the stock performance in general. So as you can see, the stock has gone from 1992 the year 2000 from somewhere around $10 a share to somewhere around $85 a share, also in the year 2000 and Ron entered the deal with Blockbuster Toe provide a service video on demand service. And so basically, this partnership was gonna allow Blockbuster to streamline movies online. This was before Netflix created the video on demand Service, and Enron was gonna provide the broadband or the Internet service behind it. Then what Enron did is that took the profits from the contract that they expect to make in the future and booked it as revenue today in the year 2000 obviously inflating revenue by a big margin. And so obviously this deal went nowhere because the technology wasn't there yet. And so this was the beginning of the end for Enron because the performance of the business , as for the cash that's coming in, wasn't matching up was the revenue that's being booked. But for investors, including retail and institutional investors, the stock was an operator to invest in because of the mark to market practice that Enron did. Revenue growth was incredible. So this is a stock that had amazing revenue growth and also that that to equity ratio. Because you had such an amazing revenue on your books, you're able to show tons of profit, and that inflated your retained earnings. Andan the end. You're that debt to equity ratio was really appealing, and as a result, when you have these two factors, the stock price was going through the roof. And so you really had to invest in the stock if you wanted to make money. And because so many people and institutions and pension funds were invested in the stock, the fallout of the bankruptcy of Enron in 2001 has such a huge effect of Wall Street. Ah, lot of people lost their pensions, lost their retirement funds on be just like a bad situation for many people. In 2001 after Enron declared bankruptcy, obviously the stock went from 85 or $88 a share, all the way down to about 50 cents per share on So, as you can imagine, Ken Lay and Jeff Skilling was arrested and prosecuted. Basically, the prosecution lasted from 2000 and one all the way to 2006 during which, in 2006 Khin Lay died from a heart attack. A Z was having health issues prior, and I imagine the stress from the prosecution was pretty tough. S o. He died while in custody, and then Jeff Skilling was convicted and sentenced to 12 years in jail. Jeff Skilling, by the way, just get out of jail in 2019. And, surprisingly, he's back in the business. He said that during his jail time he came up with a business plan for an energy software business. And so it's amazing. I'm not sure how he's gonna be able to get back into the business or if anyone is going to trust him. But that's that's basically the news Now, as far as who is accountable for this disaster at Enron, I think you have to think of two parties. One is management, which was Ken Lay and Jeff Skilling. And then to you have to think of the auditors, which at the time was the firm Arthur Andersen. At the time, there were five big accounting firms KPMG, PricewaterhouseCoopers, Ernest and Young and Arthur Andersen. And because of this fiasco here, Enron Arthur Andersen went out of business because many off the big public companies that for using Arthur Andersen for the audit engagements or advisory engagements, let go of Arthur Andersen and hired another firm because the public trust was just eroded and nobody trusted also Anderson anymore and So it was a big exodus off partners and staff from understand that went toe work. Then later for the other became big for after the dissolution off Arthur Andersen. The other big consequence off the fall of Enron was the enactment off the Sarbanes Oxley Act, also known as socks, for a four. Basically, Sarbanes Oxley states that every company has to have a framework of internal controls. The purpose of the internal controls is to ensure the integrity of its financial statements . And the management has to sign off on the integrity of the financial statements and on the effectiveness off its internal controls. Sarbanes actually also states that the auditory so signs off on the financial statements of the company not only signs off on the financial statements but also signs off on the effectiveness of day internal controls of the company. Theo 11. Objectivity: in this video, I'd like to discuss another one off the basic accounting principles, which is objectivity. Let me just put it up on the board here. And objectivity means that the accountant that's recording the transaction needs to record the transactions based on evidence not, you know, based on his own or her own bias on DSO. Basically to record a transaction based on evidence, reply our support. So, um, if you're recording a revenue, for example, what is support for revenue? Um, supports? Revenue would be a form of a purchase order from a customer S o supports. Revenue is a purchase order. Um, and what else? Invoice. So you received the purchase order from a customer you shipped in the goods. The other support is an invoice on the third and final type of support is payment eso you received the purchase order from a customer? You fulfil the purchase order sentiment invoice be paid you. This is support on this one. This is what comes up in an audit. Is the editor will come in and say OK, you recorded revenue a $1,000,000. Show me the money. Basically, they need to see evidence on DSO objectivity means that when you record transaction, you are recording and based on support back up. The other type of objectivity here is like for expenses. So if you are recording expenses, you know what kind of support would be valid for an expense? Well, same Aziz revenue. An invoice from the vendor is support, you know. Ah, purchase order from you from your company purchasing that's service or products. And, you know, payment. This is money coming in here. Positive payment here is negative. So we'll cash going out. And so support for expenses will be an invoice from the vendor purchase order from your company requesting that service onda payment. So, you know, the payment will be like a bank statement. Right. So bank statement, Um, same here. Thanks. Statement as well. So this is the one of the basic concepts of accounting objectivity. It means that you have support for your transactions, mainly revenue. These are like the basic transactions off a business revenues and expenses. I hope this makes sense on. I'll see you in the next video