Accounting is an information science.

It is concerned with analyzing collecting and

organizing information. 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'll learn best by
doing.

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.
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.

There are four main areas of accounting :

 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.
 Financial Accounting, which focuses on the three main statements, income statement,
balance sheet, and cash flow. It is prepared for the company's ownership.
 Financial analysts and four 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, a 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 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.

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.

There's more 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 centre 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. Modern society as we
know it simply cannot function without bookkeeping, bookkeeping is fundamental for
corporations Banks, investment funds and even individuals.

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 cost? 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 decided 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. 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. Financial
Accounting revolves around three, main statements. The income statement also known as
profit and loss or simply PL 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 own 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.

These 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.
 Revenue, also known as net sales. Usually the main type of revenue for a given firm
are its day-to-day sales customers buying goods. That the This item represents an inflow of
economic resources. firm sells, there can be other sources of revenue as well. Companies can
and 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 accounts that
unites these sources of additional revenue is called other Revenue. 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 some 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 of 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. It's expenses for advertising and promotions salaries of its
management and Personnel that is not directly. Equally 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 licenses 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 reductions.

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 at 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 had 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 arrived 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.

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 asset 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 by 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 all 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 and financial statements.

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 it slender 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 owner's. This Capital would not be
repaid to the shareholders, but the company will try to pay them. A decent amount of
dividends. If it's business is successful. These are some of the most frequently, seen balance
sheet items.

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 O's 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. Some 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.

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.