An Introduction to the Accounting World (Part 1) | Uday Gehani | Skillshare

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An Introduction to the Accounting World (Part 1)

teacher avatar Uday Gehani, Dedicated to make complex topics easy!

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Taught by industry leaders & working professionals
Topics include illustration, design, photography, and more

Lessons in This Class

12 Lessons (54m)
    • 1. Trailer

    • 2. Introduction: What should you expect?

    • 3. Mind the GAAP!

    • 4. Types of Accounting - Financial Accounting

    • 5. Managerial Accounting

    • 6. Tax Accounting

    • 7. Understanding the Language of Accounts!

    • 8. The Accounting Equation

    • 9. Revenues, Expenses, Profits and Losses

    • 10. Gains and Losses

    • 11. A Deep Dive into the Accounting Equation Final

    • 12. Examples of the Acctg Eqtn

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About This Class

Does Accounting sound like a Foreign Language to you?

If you answered YES to that question - You've come to the right place. 

This 3 Part Course is designed to give you an introduction to the language of Accounts where we go over the Basic building blocks of Accounting together.   Let me add that this Course is not designed to be the be all and end all of all accounting courses - But, more as a start to give you a good overview of the most important aspects in Accounts. 

There are 3 PARTS to this Course -

In the First Part we go through Accounting Lingo so that you begin to understand the language of Accounts.  This Section is meant for those who have little working knowledge of accounts and will help bring you up to speed with Basic Accounting Vocabulary.  After all, if you were to learn any Language you would start with the ABC's right?

We learn about the different types of Accounting such as Financial, Managerial and Tax Accounting.  We also take a 'deep dive' into the Accounting Equation and learn why it is the Fundamental Building Block on which Accounts is based.   

In the Second Part - We go through the Accounting Cycle.  Ever wondered what Accountants really do?  Are they really working or busy playing the latest version of Clash of Clans on their phone.  In this Section, we walk through what Accountants really do.  Every transaction that happens in Business follows a certain process.  This process is called the Accounting Cycle.  Understanding this process helps you understand the world of Accounts better.  Once you know more about the Accounting Cycle you'll uncover the mystery behind the numbers.

In the 3rd Part - we will look at and understand Financial Statements.  If you have not understood Financial Statements in the past and why they are so important - You've been missing out!  Understanding Financial Statements is a MUST for anybody who wants to make a dent in the world of Business.  If you own a Business or ever plan to own a Business - Understanding how to read Financial Statements can take you from being a Good business owner to a Great one.  They can take you from an Average investor to a Savvy one.     

This course is made in an easy to follow, topic by topic format.  You will also be seeing a bit of my zany humor in bits and pieces so please find it in your heart to forgive me.  After all, most accounting courses have put me to sleep and if that's the kind, of course, your looking for then this course is not for you.  This Course is also NOT designed to save your Marriage or get you a Date with Katy Perry (Or Brad Pitt if you prefer).  See, I warned you about my zany humor, didn't I?

Apart from any of the humor - more importantly - This Course WILL give you a Good Introduction into the world of Accounts - something which I believe will help you in many ways throughout your lifetime.  

With Best Regards,

Uday Gehani 

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Uday Gehani

Dedicated to make complex topics easy!



The most essential learnings in life come from Failure. 

The classes below are a result of some of my epic failures and the lessons I have learned from them. 

I used to fail in Business and Investing and so I mastered ACCOUNTING & FINANCE to change that. 

I learned that 'Revenue' is the most important metric in Business so I learned MARKETING to change that. 

I learned Time is as important as money and so I learned PRODUCTIVITY hacks to maximize it. 

Having my fundamentals of Accounting, Marketing and Productivity clear has had a BIG IMPACT on my life and I am passionate about teaching what I have learned to others.    

I hope you enjoy the classes.

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1. Trailer: Hi there. A Modigliani. And thank you so much for joining me in my course, but I'm gonna be guiding you through the basic concepts of accounting. My goal in this course is to break down the sometimes complex language of accounting into something which we can all understand. Just like a boxing champion who knocks out all his opponent. Whoa. I want us to knock down accounting concepts one by one in the first round. Um, sorry. I mean, the first section we're gonna learn about the basic concepts of accounting what I call accounting speak. So the next time you're conference calls, you actually understand what he's saying and you go from this. I don't know. Maybe. Yeah, I got to go now. Yeah. Let you know later. Manley's accountants, I can never understand anything. Do this. No. The cost of sales is too high. It's affecting our margins. We'll have to get them to re negotiate Mandi's accountants. You have to teach them everything. In the next section. We're going to go through a journey of for transaction. From the moment it happens all the way till it reaches a financial statement. This process is called accounting cycle, and we're gonna go through it together. Lastly, we're alone about financial statements. What they are. What story? The Delabar, The business. One of the basic building blocks of financial statement. After each of the main sections of this course, I'm gonna have a mini challenge for you. It's basically a quiz. Think off each section like a video game on the quiz is you meeting the boss of the video game? If you can beat the boss, you can confidently move on to the next level. Once you complete all the sections in all the quizzes, you will be a warder. The king or queen off account will so let the games begin. 2. Introduction: What should you expect?: Hello there. I'm with Aggie, honey. And thank you so much for taking the time to check out my course accounting basics for success in business and in life. You're watching this video. You're probably wondering if this course is right for you. And if I as an instructor and right for you my correct in this introduction, I hope the answer Both these questions. The last thing I want for you is to go through this course and feel that you're in learned the right things or that you didn't enjoy the time that we spend together. From that perspective, it's important that you take a minute to review what we cover in this course and learn a little bit about. This course has three sections and a few quizzes sprinkled in between To keep things interesting. A business has many parts toe in the first section we go through these different parts together. Why is this important? Then why are we starting here? Well, if I want to tell you that I wanted to send you to medical school to become a doctor, a good place to start would be to know the different parts of a human body right in the same way. Business is a complex system, and it's important for us to go through and understand their different parts of a business understanding. This will make it much easier for you and give you a good foundation for learning the language off accounts. I like to call the section accounting Speaker. Apart from this in the section, we also gonna cower elements such as who sets the rules of accounting and who are. The regulators will also talk a bit about the accounting equation and much more for any time. I feel that this information is too basic for you, and you do want to start at the beginning. Feel free to start in Section two. I've tried to design each section to be a self contained as possible Section two. We walked through the accounting cycle together, and accounting cycle is a series of steps. Accounting goes through when each financial transaction happens in a company, it's important to understand the accounting cycle. Not only is an accountant but also for students who are learning accounts, business owners or anybody who has ever wondered what the bean counters in a company are doing is this process off the counting cycle that gives birth to Financial Street. And that's what we cower in Section two. Financial statements are the part of gold at the End of the Rainbow tells a story about a business. If you're a student, a business owner, an investor or a lifelong loner, it's important to have an understanding of financial statements. If you want. I understand how business has been performing. If you Devon up this expertise, maybe you could get skilled enough to profit from it. Did you know that Warren Buffett, one of the richest men in leading investors in the world, follows a strategy called Value and Missed, which is deeply rooted in the understanding, off accounts and financial statements? I'm not saying that you have to be the next Warren Buffett, but if you do, understanding accounts will be a great place to start. So there we have it. Three sections in one hour is equal toe a lifetime off knowledge. Lastly, if you're wondering who I am, my name is Bodega Honey and I have over 10 years of experience working as a financial analyst in banks all across the world, all the way from New York to Dubai. What I do is a financial analyst. I used to analyze financial statements of businesses to see if they would be eligible for bank loans. I've looked and analyze the financial statements off thousands of companies, and that's left me with a wealth of knowledge about financial statements and accounts. I have used this knowledge to create a business plan this financing and have since started and run to profitable businesses all in the past four years. Accounts and finances help me change my life. And my goal is to pay it forward and to help change yours. So thank you for joining me. These excusing is any humor you might see along the way. All in the better tryingto teach you and to entertain you. I'm so grateful we spend this time together. Thank you. Good luck. I will see you in the next lecture. 3. Mind the GAAP!: if you were toe become a doctor, understanding her check pulse, knowing the different blood types and knowing how to diagnose diseases would be a very important element. A few becoming a good doctor, right? If you're, ah, manager, a business owner, a student or lender, understanding accounts and understanding them well, it's so important. Maybe you just want to buy stock in a company. Oh, maybe you want to buy doors, hardware store on the corner. Or maybe you just want to understand what this England shock tank. In any case, you need to know accounts In today's dynamic and ultracompetitive world. A competency isn't just for accountants to keep a business's financial data organized thousands of years ago in Italian Corluka Patchouli, recognized today as the father of modern accounting, developed the system that sorts financial transactions off a company in tow file school accounts. That process of recording financial data has since evolved into today's modern day accounting. Now, like any sport you may play, maybe it's football. Maybe it's baseball or cricket. Every sport has a certain set of rules to be followed in the same way how we record transactions in a business and how these transactions are kept. Follow a certain sort of fruits in the game. Off accounting. These rules are called Gap Now. Gap is an acronym for generally accepted accounting principles to ensure that all players, all businesses, followed the rules. We have certain referees of watchdogs, depending on where you are, nor the watchdogs. Me change. But I'll give you the names off a few famous ones. The Fast B, which is F A S B or the Financial Accounting Standards Board. The SEC, which is the Security and Exchange Commission. And the Ai C P. Eight, which is the American Institute of Certified Public Accountants. Here's some of the famous watch dogs in the world. Recap this lecture gap or generally accepted accounting principles are the rules which are forward in accounting. Some of the famous watchdogs that ensure that businesses follow these rules are the fast be , which is the Financial Accounting Standards Board, the SEC, which is the Security and Exchange Commission, and the A, A C p. A, which is the American Institute of Certified Public Accountants. That's all for this lecture. I'll see you in the next one 4. Types of Accounting - Financial Accounting: So what comes to your mind when you hear the word accounting? Really? That's what comes to your mind. OK, in this lecture, I think it's time we start changing that to start with whenever you hear the word accounting. Next time I want you to think about the type off accounting being referred toe. So if you're wondering what they're different types of accounting, well, yes, they are. Accounting is award over the years to meet the needs of different audiences to serve different sorts of people, the most common areas of accounting today, our financial accounting, managerial accounting and tax accounting accounting can also get very specialised, very nish. Some of the specialized areas of accounting are project accounting, government accounting, social accounting, forensic accounting. Now what we're gonna do is we're gonna first take a look at and understand the three main areas off accounts which are financial, accounting, managerial, accounting and tax accounting. When people talk about accounting in the business world, it's most likely that they're referring to one off these three types of accounting. One consensus that I have grown by looking at people across the world is that religion, politics and money are often the source off a lot of heated debates. Okay, maybe nor data heated. But you'll often see people argue about these three things. And it's funny how accounting has basically everything to do with money. But you don't see people arguing about accounting. That's what it is, right? It's all about money. Counting is the collection, organization and presentation of monetary later, either for people within the organization or for people outside the organization. When accounts are prepared for an audience outside the organization, that type of accounting is called financial accounting. Financial accounting involves collecting and presenting financial later ah barter company and presenting them in the form off documents called financial statements. Financial statements give a big picture view on how businesses performed over a particular period daily real data on how the overall sales off a company have done what the expenses are. Has the business been profitable, what assets the business owns, what the business owes and how much money the business owners airport in. Amongst so many other things. Now, you might be wondering who outside the organization needs the financial accounting data. White outsiders off a company cared about how businesses performed any lease well. The financial statements are used by several people outside the company. Let's talk about a few key people who use financial accounting data outside the company. Let's start with the 1st 1 that lingers. If a business needs a loan or credit facilities, lenders such as banks rely on financial street mints toe. Assess the financial health of the business. Healthy financial statements play a major factor in a bank making a loan to a company. The prime concern for any lender is to see if they have given are alone. Will they be repaid? And they rely on the financial statements to answer that financial statements allow them to see how the business is performed in the past and forecast a business's ability to pay them in the future. The next segment of people that rely heavily on financial accounting data are the owners. Owners of her business use the information in financial statements to see how a company is doing. They have invested money in the business and obviously want to know what's happening in the business. Healthy, profitable financial statements often are able to attract more money from investors. If a company does well, people are always more likely to invest in it. On the flip side, if a company's performing poorly, the owners can always look at the financial statements and decide if they need to change something. Lenders and owners of the key people. But they're not the only people that want to know what's happening in a company. There are other people who want to know what's happening in a company as well. They are suppliers. If a business is asking for goods on credit, the supplier needs to know if the business has ability to repay, and they look at the financial statements toe assess this information Customers now in many business, especially in larger corporations, even the corporations customers want to know how the business is doing. For example, let's say if a building developer wants to develop a building, which will take 10 years and wants to buy steal from a manufacturer, the Devil operas likely look at the financial statements of the manufacturer to see the past track record and assess if the steel company will be actually around in the future competitors. Now this is the other side of the question. While private companies have no obligation to disclose their financials. You can be certain that publicly listed companies do keep a very close eye on each other because their finances are easily available on the Internet. If you're not sure about the difference between a private in public company, I do have a lecture later in the course covering Net. But getting back to my point, businesses view the data off their competitors to see how the competitors are doing to see what their strengths are to see what their weaknesses are. For example, you can be sure that Coke is looking at the financial treatments of Pepsi and Walmarts, looking at the financial statements of Target and so on. Since financial accounting represents how company has performed and outside parties rely on it, financial accounting is highly regulated. Understanding financial accounting is the ideal place for you to start your journey off accounts as it will build a solid foundation for you into the world of accounts. And it is the main area of focus off this course. So thank you so much for joining me in this lecture. I will see in the next one 5. Managerial Accounting: the information that I'm about to share with you in this lecture so secret that even I don't know what it is. Where are my notes? I found him. Okay, so maybe the information that I have to share with you in this lecture may not be so confidential, but the information in the next type of accounting that I want to discuss with you is completely confidential. The next table for counting that we're gonna discuss is managerial accounting, managerial accounting, a stop secret. And it's only meant for people within the organization. Let me explain. Let's say that your sea off WalMart and your financial statement showed that you've made a revenue off $500 billion this year. Yep, that's right. I said $500 billion because that's how much money Wal Mart mix. It's in the billions now. You may be happy with the sales figure 500 billion, but I CEO. That information isn't enough. You will probably want to know more. For example, you will want to know what stores sold the most. What products sold the most. How much sold by season. If you made more sales in the summer than in the winter. Now, should you consider expansion off any of those stores? Or should you consider outsourcing any part of your business? The answered All of these questions is in managerial accounting. Managerial accounting gives you as the CEO of Walmart, a detailed break up off all the information happening in your company. While financial accounting is fantastic and gives you a very good or view off everything in a company, managerial accounting helps you drill down into the details even further, helping you make better decisions now. Obviously, the information provided in manager accounting is extremely detail, and so the data generated from Manager accounting is not shared with outsiders off the company. It's completely confidential if this information leaks is always the danger off a competitors, using the information to prepare a counter plan and gain strategic advantage. Now I want to add here that managerial accounting is not just meant for big phones, and you don't have to be the CEO of Wal Mart to use it. Let me give you an example of how, if used well and consistently, businesses off any size can use managerial accounting. Begin competitive advantage in their market. Let's see you own a small business selling shoes. Now you are a good manager, and you know that your red shoes have sold more during this year than blue shoes. That's fantastic. Great job, but to take your management skills to the next level. Ah, good managerial accounting set up can help you tremendously. Here's how Ah, good managerial accounting set up will let you know all the intricate details, such as amongst the red shoes that sold what percent will men shoes and what percent for women shoes? If a woman's wretches sold more or they running shoes or high heels, what months did the wretch who sell the most is it? December, Maybe during Christmas time was the sale of red shoes correlated to anything else being sold in the store. For example, whenever seals of Rachel's increases, did you also sell anymore off any other item, maybe a certain style of socks or insoles? You get my point. Ah, good handle on managerial accounting can help a good business stone. Great. I would like to add my own personal north here. My experience is a financial analyst at the bank, having analyzed the financials off so many companies has been that often the financial statements of companies are direct reflection off the managers themselves. They're often a reflection of the people who are running the company. And what I noticed is the more the managers are familiar with the detail numbers in the business, there's a high likelihood of those managers being more successful in the business. Now. Consultants would charge a lot of money for fix broken businesses and give you this very information. But you're pretty smart. And that's why you've taken the scores. And now that you know this, you're gonna make sure they use this information to your advantage, right? And you always know your numbers. So that's all, folks. That's it for managerial accounting. In the next lecture, we're gonna be moving order packs, accounting. Thank you so much for joining me in this lecture. I will see you in the next one 6. Tax Accounting: you can't escape the tax man. Oh, the last type of for counting that I would like to talk about is backs accounting. Axe accounting is its own specialized field and determines the amount off axis that a business has to pay. It is very technical in nature and Berries in whichever part of the world you might be watching this in. It deals with issues such as tax compliance to make sure that the company's obeying the law tax planning to make sure that the company does not pay any more tax than it needs to often income reported in a company's financial statements is different than what the company reports to the government. In effect, that means that often accompany maintains more than one set of books, one set of accounts. That's because financial reports are prepared toe lenders and investors and tax accountants are prepared for the government. Now, you might be thinking, Is that illegal? Well, new and let me explain. Companies run for a profit. They think about profit first, so they think, let's pay the taxes that we owe and since we're not obligated to pay any more than that, and it will be illegal to pay any less than that. Let's do our best to pay exactly that. And that's where they seek the help off tax accountants so it will not show X accounting, even though it's very easy for me to explain. In practice, I've seen that it's quite technical in nature and hard to implement. So to wrap up now, you know the financial accounting is data which is accumulated for external stakeholders. Managerial accounting is detailed accounts which are prepared for people within the organization, and tax accounting is meant for the government. Thank you so much for joining me in this lecture. I will see you in the next one. 7. Understanding the Language of Accounts!: Hi, guys. I want you to meet my friend Joey. Say hi, Joey. Sorry. Joey can be a bit route sometimes. He's not from around here. Would you like to tell them a bit about yourself? Thank you, Joy. What? You didn't understand that? Well, that's probably because Joey was speaking Martian in the same way that you didn't get joy. It would be pretty tough for us to talk accounting if we don't get accounting Lingle Right in this lecture, what we're gonna do is go through a bit off accounting speak to make it easier for us to understand each other. As we know, a business goes to many transactions in its lifetime. For example, a business makes sales, pays its employees, pays rent, paces bills amongst many others. Now ruling accounting is that each transaction has an effect on at least two parts of the business. That's why we call accounting or double increased system. One part of any transaction is called a debit. Another part of the transaction is called. The credit and debits always equal the credits. But in any transaction, how do we know what's getting debited and wants to get credited? But in order. Know that first we need to know the different parts of the business. The nine major parts of a business. Our assets liabilities, owner's equity revenues, expenses, income, David. It's gains and losses. Was that too much information on it once? Well, don't worry. In the coming lectures, they're going to go through each part of the business together. We're gonna be breaking down debits and credits for the Thank you so much for joining me. I'll see you in the next lecture. 8. The Accounting Equation: in this lecture, we're gonna go through three parts of a business the assets liabilities and owner's equity . But first, I want you to think about your own finances. If you were to sit down and write down the dollar amount of all the stuff you own, which is the cash in your wallet? The money in your bank account how much your car's worth right now, Maybe how much your home for nature's what's right now if you want a house, how much is that? What's right now? And I tell you, Total, all of these amounts up and you will come up with the dollar. Figure off the stuff that you own. Each of the things that you own is called Asset. Now let's say you're total assets over $20,000. Then I asked you to total of everything that you all right Now. Any credit card debts, any car loans may be a home loan and utility bills or fondles each of the things that you all obligations off payments that are due from your side and according liabilities. Let's say you have a total amount of liabilities, which total up to $5000. I have to take your total assets of $20,000 and minus your total liabilities of $5000 you're going to come up with a figure of $15,000 that would be your networks. Maybe you should really do this exercise and see how much your work may be pretty happy. Maybe a little said. This is the same way that you calculate the net worth of a business. In the case of a business, we tell you things that are business owns or benefits from these are called assets. Assets can be things like cash land in men, tree or buildings. They can also be things which are all of the business from a client. And this is called accounts receivable, as it can also be a for non physical nature, like copyrights, patents, trademarks or a strong brand name, which is called Google. Also, like you have your own personal credit card, It companies have liabilities which are companies data obligations. They could be borrowings such as bank loans. They could be payments due to a supplier or taxes payable to a government. If you were to take all of the assets that a business owns and minus all the liabilities that the business owes it will be left over with Warner scored the business network in accounting domes. This is also known as Owner's Equity. Now, total assets minus total liabilities equals owner's equity. This can also be written as total assets is equal to total liabilities, plus Owner's Equity. This equation is famously called accounting equation. Accountants. Prepare or present the assets, liabilities and owner's equity off a business in a snap shop, which is scored. The balance sheet likely evaluated your personal network of businesses. Balance sheet shows us all of the assets, libraries off the business and what the business is worth at any point in time. Okay, so we've covered a lot in this lecture and the wrap up. Now you must be aware of what assets are and what liabilities are and what is owner's equity. We also know about accounting location on the balance sheet. Thank you so much for joining me in this lecture. I'll see you in the next one 9. Revenues, Expenses, Profits and Losses: in this lecture, we're gonna go through four parts of the business. Let's start by taking a look at your ports in life again. Let's say you have a 9 to 5 job and make a salary of $5000 a month. You also have expenses, which include things like, Are you rained? You fooled light bills, car loan payments, student loans, maybe some gifts for your girlfriend or boyfriend. Maybe you're married and your Childs birthday is coming up. Maybe you go buy gifts for your wife. Maybe you have to buy some gifts for your mother in law, but you really don't want toe. So let's see. Your revenue is $5000 a month and you have expenses, which averaged out to $4000 a month. If you take a Saturday of 5000 and minus your expenses of $4000 you're gonna have around $1000 left over. Just like in your profession, you work for a salary. Businesses generate money by providing goods and services and own a salary for themselves. The salary that a business owns for itself by providing goods or services. It's called revenue, and just as you have your own personal expenses. Ah, business has its own expenses. Businesses have their own rain salaries, which they need to pay to their employees. Utility bills marketing costs amongst many others in a business owns revenue, and its expenses are less than its revenue. It's left or with a certain amount. We call this leftover amount a profit or an income. For example, if a business makes it revenue of $50,000 a month and it has expenses of $40,000 a month, it's left or with the profit off $10,000 a month. In that case, we say the businesses made a profit income or warnings. It could also happen that a business expenses for the month have been more than the revenue it's made for the month. For example, if a business is making a revenue of $50,000 a month and it has expenses off $60,000 a month in such a case, the expensive the businesses have exceeded the revenue, and the business has made a loss of $10,000 for the month. Accountants prepare a document called Income Statement, which shows the revenue off the business and the expensive the business in the resulting profit or loss that the business has generated over a period of time. The income statement is a very important document because people run a business to make money, and if you want to know if the business is making money or losing it, you can always review the income statement. Now, if the business owner has donated a profit, sometimes they want to take the profits and put them in their pockets. In such a case, when a business owner takes the profits out of business for themselves, this is called or dividend to summarize this lecture. Now we know what revenues are and what expenses are. We know what profits on what losses are the also in order dividend is, and we know what an income statement is. Thank you so much for joining me in this lecture. I'll see you in the next one 10. Gains and Losses: Hi guys. In this lecture, I'm gonna introduce you to another friend of mine, David David Jones and ice Cream stand in the park recently. David, Notice that the machine uses to make ice creams isn't working. It's getting a bit old, so you want an upgrade. So we put an ad in the paper to see if someone was interested in buying his old life stream machine. He found a buyer, and he sort of the machine. Now when David made money on selling the machine, the money he made is not considered revenue, but a gain or a loss. Let me explain. Revenue is made from the core transactions off a business. In David's case, revenue would be made from selling ice cream. A gain or loss is made when a non core transaction results in an increase or decrease in owner's equity. In David's case, selling an ice cream machine is a one off event in North, a core activity of his business. Hence is entreated again. Our loss. Why do I keep saying gain or loss? That's because to see if they would meet again our loss, you would have to know the price at which the machine was bought if the machine cost him $75 when he bought it and he managed to sell it for $100 he made again off $25 on the sale of the machine. On the flip side, let's say he put the machine for $125 sold the machine for $100. Then he's made a loss off $25. So how much did you make of the machine, David? Great. Well, since David bought the machine for $75 sordid for $100 he's made a gain of $25. Great sear skills. David, thank you for joining us in this lecture. Guys. I'll see you in the next one. 11. A Deep Dive into the Accounting Equation Final: you may have heard of the saying good things come in small packages. Actually, I was talking more on the line off the accounting question, which is assets equals liabilities plus Owner's Equity. This is a tiny equation, but make no mistake, it really backs quite a big punch. If you want to remember, just think of the word Allah O. As in Talavera, Our goal is not to memorize this equation, but to truly understand it, to summarize work, you know. So far you understand assets, liabilities and owner's equity. You also understand revenues, expenses, profits and losses. We've also looked at gains and losses. This leaves a good foundation for us to talk more about the accounting question. So let's go ahead and do that in this lecture. The accounting equation is a foundational concept in the world. Off accounts. What do I mean when I say that this is a foundational concept? What I mean is it lays the foundation to a number of other concepts in the world. Off accounts you may previously have heard about the periodic table and chemistry on Newton's laws and physics. You may also be familiar with how important these eyes foundational concepts to those areas in a similar fashion. The accounting equation is a very important concept in the accounting world beyond the world of academia. Let me tell you that understanding the accounting in creation will do a lot of good to your skills as a business owner. First, the accounting equation makes you a better decision maker in the world of business. How you ask. Well, the counting creation ties directly into the double entry concept off accounting. A double entry concept off accounting states that any transaction that happens in the business impacts at least two parts of a business. Now the county in creation helps us understand the double entry concert better by being able to see which two parts or business are getting impacted by any transaction or any decision. Once you know the impact transactions have on different parts of a business, you automatically become a better decision maker. If this concept is a bit hazy for you right now, I promise you this. With more experience and practice, we will begin to understand exactly what I have said. The next thing is that the counting equations also the premise on which of finances statement called the balance sheet is built. The balance sheet is a report that helps us understand what a business owns or the business pose and owners equity in the business. Understanding the balance sheet can help you assess. The resource is off any business that you're looking at. It could be a local moment, Bob Shop or it could be a multinational company. That's the first step to becoming a better manager off those resources. So that's why I said that this is a tiny real equation, but backs quite a big punch. But let's just not take my word for it and dig a little bit deeper. In the introduction of this lecture, I told you that the accounting equation states assets equals liabilities, plus owner's equity. Now let's break this up and think about this for a second. If you really think about it, this one line encompasses all the different parts of a business. The asset side of the equation includes everything that a business owns, which means that this one category assets includes all of the assets in the company. That means it includes the cash in the bank inventor in the warehouses receivables due from customers, machinery, equipment, land and buildings, goodwill and so on. Similarly, the liabilities includes all the debt, such as any credit lines and bank loans, payments to be made to suppliers, salaries to be paid rain and so on. Finally, we have the owner's equity section. Now the assets and liabilities are pretty straightforward. But the owner's equity, part of the accounting in creation, has a few layers, which go beyond the obvious. What I mean is that the owner's equity section includes the owners contribution to the business, as well as the money the owners have taken out from the business, which is called the Dividends. Now that's the obvious part. But beyond just obvious, we need to also understand that all revenues and expenses that happen in the business are also impacting the owner's equity section when revenue gets generated by selling goods and services in a business, technically, the revenue is always increasing, the owners network. On the other side of spectrum, we have expenses like revenues, increase the owners network in a similar fashion expenses have the opposite effect in diluting the owners network. They take away from what would have been the owners world So if a business is generating a profit, which means that the revenues in the particular period are higher than the expenses, the profit increases the owners equity. And if the business is made a loss, it reduces the owner's equity. The same concept applies for gains and losses. When a business makes again, it has a positive impact on the owner's equity by increasing it. Similarly, a loss has a negative impact by decreasing owner's equity. As you progress, I will also introduce you to a concept called retained earnings, which will show you the impact of the overall revenues and expenses on the owner's equity side of the equation. But for now, all you need to understand this revenues help increase the owner's equity in the business and expenses through the opposite gains help increase owners. Equity and losses do the opposite. Going on, just like riding a bike, you can read all you want about, but you'll never be able to ride a bike well, if you don't get on one and start practicing, so I think it's saying that we move on, and in the next lecture we will do a few examples off the accounting equation together. Thank you so much for watching this video. I will see you in the next one 12. Examples of the Acctg Eqtn: Hi there. In this video, you'll continue learning the accounting equation by going over a few examples. What I request you to do is get a calculator, pencil and paper handy, or open up a north part on your computer because there will be times in this video. I will be asking you to solve something at those Stein's Press The Pause Martin and give the problem a short by yourself. Once you're done, pressed the play button again and Jack, you answer. So, without further ado, let's begin with a few examples off the accounting question. Transaction one. Let's start with the really simple one. Ah, business has $485,000 in total liabilities and $1.4 million in total equity. What is the amount of torture assets? Press pause and see if you can solve this by yourself. Okay, I'm hoping that you press pause and did try to solve this by yourself. Now let's talk about dancer. We know that they're counting creation states assets equals liabilities plus owner's equity . So adding the two variables we know here that the libraries are 485,000 and we have 1.4 million and equity, and we'll end up the total assets as one million, 885,000. Pretty simple, right? I hope you got this one right, but we were just getting warmed up. In the real world of business, it's very rare that you have transactions that affect all of the assets or all of the liabilities or the entire equity of the company. Usually, most transactions will affect just a few parts off a company. What I mean is the transaction will affect a few off the company assets or a few off the company liabilities and so on. Let's take a look at some of the transactions like this to profess this. I want to bring back my friend David, who owns an ice cream stand in the park. Remember him? He was introduced earlier in the course. There has been running the ice cream stand for a few years now, and so let's take a look at a few of the transactions that ever affected him transaction to When David started his business, he invested $18,000 in cash into the business from which he spent $15,000 in a state of the art ice cream Stein and the remaining cash of $3000 went into the bank in exchange for his investment. He's garden common stock off ah 100% ownership. Can you guess how the about transaction would affect accounting equation? In this case, since their investor to order off $18,000 total equity amount goes up by $18,000 the investment he has made a scoreless capital. On the other hand, we have the asset side increased by $15,000 which is the equipment abort, and then we'll have $3000 of cash still left or in the bank. And so our equation is perfectly imbalance, like it should be. Remember, the underlying concept to take away from these examples is that the accounting equation must always be in balance. Transaction three. Once David borders Ice Cream Stein, he decided to poach a some chairs and a table for his customers. The funny joke. Awesome. $600 which he paid for in cash. So let's see how this transaction affects the carpeting in question breast bores and give this a try for herself. Okay, I hope you heard pause. Now that you're back. Let's go through the transaction together. David paid $600 in cash for the funding show, so the cash violence goes down by $600. The furniture is now an asset for his company, so we haven't increasing furniture. Also, by $600 in this transaction to elements of a business or have been affected are both assets , which are cash and for nature. This example is a bit different to the previous one in the example. Earlier, he had two sides of the equation affected. They could decide and acid site in this example how our only one side of the equation the asset side has been affected. The bottom line, though, is that the accounting in creation is still in balance, since an increasing an asset which is for nature, corresponds with her decrees in an asset, which is cash. Now let's move on to our next transaction transaction for transaction, For since David says his ice cream in the park, he needs a poem, it from the pocket authorities to conduct his business. The poem. It is an annual permit and cost him $500. How does this transaction effect? Accounting question please press pause and see if you can see how this transaction plays up . Okay, now we're ready to move on to our answer. Each time David piece for the permit, the cash balance goes down by $500. The permit is really an expense to operate the business. And as we discussed in our last lecture, any expenses that happen in a business reduce the owner's equity. Therefore, the equity side of the business goes down by $500 whenever he makes a payment for the moment. And as you can see wala, the equation balances again. Fantastic. I hope you're being able to see how easy this really is. Once you start understanding on the lying principles transaction fight, David makes totally cash 70 off $100,000 during their How would this play out With respect the card in question, press bars and see if you can solve this for yourself. Great now for the solution. In this case, the cash revenue causes the cash balance to go up by $100,000. Now, remember that revenue increases owners equity, and so the owner's equity goes up by $100,000 keeping our equation and balance. If you're trying to do these by yourself and you can't figure it out, it really doesn't matter too much at this stage. What matters is that you're building a thought process. I'm confident that you are going to get the hang of this with practice and you're gonna be a pro in no time transaction. Six David has been in business for a while now and has a few stores. He supplies wholesale ice cream toe on a 30 day credit. He just delivered $2000 of ice cream to the local store on credit. Please calculate the impact on our counting in question. Press pause and see if you can do this for herself. Then Breast played the jack. You answer. Okay? I don't know your background with accounts and finance, so I'm gonna be see if you're and take a minute to explain how credit works for people who have not been in world with financial matters related to a business in the past, I will be going through credit and Howard impacts of business extensively later in the scores. But for now, I'll just give you a brief summary in many industries, companies supply goods and services on credit. What that means is a company supplies goods or services now and takes payment for them at a later date. The later date is based on pre agreed terms between two companies, such as 30 days, 60 days or 90 days. These terms of payment are largely based on the industry and the relationship between the two companies. In such cases, when goods and services supplied, they're recorded on the accounting books as revenue for the company that is providing these goods or services correspondingly. Because the cash hasn't been received yet. The company also records the amount to be received as more discordant accounts receivable. Now the accounts receivable is always concerned an asset as it signifies that the company will get paid this amount at a future date. For now, let's take a look at our transaction. To illustrate this very point, David has delivered $2000 worth of ice cream on credit, so David's accounting for sure $2000 is revenue he has made for the period. Correspondingly, the accounts receivable balance would be recorded as an asset and would go up by $2000 as you can see from an accounting in creation perspective. Revenue increases owners equity, and this is reflected on the right side of the equation, and he sells the goods on credit. The sale is an asset that David has created for his company and therefore appears on the left side by increasing the account Cecile balance by $2000. Now that keeps the card immigration and violence again, I hope you got some new insights into how accounts receivable affect the company transaction. Seven. I want O continue our previous example here and show you what happens when the local store actually comes and pays the council sealable amount off $2000 which is all David after the 30 day period. So here's the question. The local store pays David for the ice cream after 30 days. How does this affect accounting? Question. Please press bores and attempt this by yourself. Okay, going on killers work. You have to be a ran off. The revenue for this transaction has been recorded when David supplied the ice cream so it won't be recorded as revenue again when the cash is received by David and therefore will not affect owner's equity. The concept of recording revenue when it is own is called the matching principle and is one of the underlying guidelines and accounting. The matching principle means that revenue gets recorded when Orn not when the cash payment for the revenue is made. The matching principal ties in with the concept called accrual accounting. But I don't want to divert your attention too much right now. He will cover all the principles and accrual accounting in this course. But for now, all you need to be aware off is revenue is recognized when Horn based on the matching principle. So in this case, revenue is not being affected right now. And what will happen is accounts receivable balance, which is the $2000 that is ultra David goes down and becomes zero, and the cash balance would go up by $2000 keeping the accounting equation still in balance . Now let's go through one final transaction together. Transaction eight. David He's a salary of $1000 per month in cash was assistant. How would this transaction affect the accounting equation? Press pause and try to solve this by yourself. In this case, the cash balance goes down by $1000 because he has spent the cash of $1000 to pay his assistant and on the other hand, and he expends from the business reduces the owner's equity off the business. So the equities action goes down by $1000 again keeping the equation and balance super. I think we have gone over quite a few transactions together. It's time that we take the training wheels off and you attempt a few of these problems by yourself. So a quiz is coming up next. Thank you so much for joining in this lecture. Good luck with your quiz and I'll see you soon right after that.