Introduction to Financial Accounting

Spread the love

Welcome to Module 1:

in this module, we will learn all about the financial accounting but before we can prepare and understand the financial accounting which we will do in this post we need to understand some terminology some jargon when I was a beginning accounting student.

 I thought accounting was all about numbers all about math it really isn’t accounting is all about language. They call accounting the language of business and if you want to have a prayer to survive your accounting class you’re gonna need to understand these six words that we’re gonna introduce in this post.

so let’s do that this post. I bet it’ll be over ten minutes and all we’re gonna do is talk about these six words. But you need to have them super internalized you need to be an expert on understanding what these words mean and how they make sense in the world of accounting.

so let’s get to them here are the six words assets liabilities shareholders equity I guess that’s two words I’ve counted as one shareholders equity revenues expenses and dividends and the three that are in color there are really going to be key to your life as an accountant well.

they’ll all be key but those three particularly will be so let’s begin by talking about assets and when I begin a course I begin talking about assets and I ask my students hey make a list of all the assets you think a typical undergrad student at this university will have make a list of typical assets of an undergrad.

So here’s the things that they list out they’ll list out things like cell phone they might say you know textbook they’re looking around the classroom they see textbooks that’s a typical asset of an undergrad maybe a car you know and that’s the the list generated by students.

but I also get some more interesting or creative answers some might say they have beauty or youth or even something like a high school diploma because of course you’re not grad student at a university you probably have a high school diploma.

So these are all I think good examples of assets of an undergrad now the first three on my list are much simpler to discuss than the second three but we’ll discuss both here the thing.

that all of these things on the list have in common though and this is how I want you to think about assets they’re anything of value the word I want you to think of is they are things of value so that word should just be really tied to assets the technical definition gets a little bit more complicated.

I don’t ask my students to give a technical definition but your prof might if they asked for a technical definition it’s anything that a company owns or controls created from a past transaction that gives us a future economic benefit.

that’s a pretty technical definition but anyway it’s anything you own or you can typically think of it as owned an intro financial accounting but the leased assets also can count under this category but most of the time it’s just own stuff you own that’s good to own 99% of the time.

that’s a sufficient understanding of what an asset it is now let’s think about this list so cell phones text books cars those are all things of value and absolutely these types of assets find their way onto company financial accounting.

When a company is listing its assets it would list any cell phones the company has any textbooks or any cars the company has those would all fit very easily under the definition of asset the last three however absolutely would not find their way onto a company’s balance sheet even though I think their assets.

I think they are things of value right your high school diploma is certainly something valuable to you it’s useful for the rest of your life it makes you more employable than not having a high school diploma your youth your health.

These types of things absolutely are very valuable and should not be taken for granted but why don’t they find their way onto fine no statements and there’s a simple reason and the reason is it’s hard to put a number on it it’s hard to say how much they’re worth right I have a CPA designation that allows me to teach at this university.

well my CPA designation is definitely my most valuable sort of academic achievement but how many dollars is it worth is it where the thousand dollars is worth ten thousand dollars a hundred thousand dollars a million dollars it’s really hard for me to put my finger on.

how much that’s worth now my car I can put a number on it and be pretty close my cell phone I have an iPhone eight I can look up online what’s an iPhone 8 cell for right.

that I can put a number on my my beauty what’s my worth not much I would guess but who knows right what’s the number you would put on somebody’s beauty very difficult to measure and so company say look that stuff.

Yes we agree there may be a value there we’re not gonna try to put a number on it stuff like cell phones text books and cars absolutely yes. we will so anything a company can own or control that has value that’s good to own or control.

that can be reliably measured that’s sort of another piece of what makes an asset an asset so what are typical assets we find on a company’s financial accounting on their balance sheet well we would find something like cash of course that’s something you should want to own and own more of there’s something called accounts receivable and what accounts receivable are when somebody owes you money so you’re gonna collect money in the future.

future economic benefit I use that word well we’re collecting money in the future. That’s a future economic benefit so that is absolutely something that would be categorized as it excuse me as an asset easy for me to say inventory. If you walk into a Walmart or a retail store near you look around right all the stuff you see that they’ve bought from their suppliers that they’re planning to sell to you the customer.

that is inventory and his assets right that stuff they owned that’s good for them to own we have the broad category which I’ll call property plant and equipment and you know is it almost seems overly technical here property is land like literally the land real estate property plant is buildings plant.

I wished it’s such an outdated term but you do see it used all the time it’s buildings so you can own a building right that’s something of value and equipment all the stuff in their computer equipment or you might have machines these types of things a car would categorize as equipment it’s a broad category of asset.

now the list here I could make a lot longer we have things like investments right like Facebook bought Instagram well they spent a billion dollars buying Instagram that is an investment Instagram is an asset that belongs to Facebook and our list could go on and on but these are typical assets you find on company financial accounting moving over and actually before I move over just to reiterate when using asset.

I want you to think something of value something of value that a company can own or control okay something of value that a company owns or controls and the value can be reasonably reliably measured looking at liabilities if my key word for asset was value my key word for liability is even simpler it’s Oh liabilities are anything.

that has to be repaid in the future so you know from a student perspective you might have student loans those are liabilities they’re things you’re gonna have to pay back if you have a phone bill sitting on your table and paid it yet.

Great Example Of a Liability:

I have a mortgage on my house there’s a liability and companies can have very similar types of obligations right they have similar things they have to pay back and these are the liabilities of a company so anything a company owes and I think to give a technical definition we would say any future economic obligation in anything they have to pay back in the future.

so examples on a balance sheet well we said for assets there’s accounts receivable for liabilities there’s something called accounts payable is a very common liability that you’ll see on a baljeet and it just means within typically within 30 days.

you’ve got to pay it back and so I always think of a phone bill when you think financial accounting payable just think of phone bills and bills like that and you’re not far off other types of liabilities well all sorts of we’ll call them there’s a broad category here called notes payable and you know within that category is things like bank loans student loans mortgages the category is called note payable and know payable is just a piece of paper.

you know contract you sign saying I promise to pay you back on this date with this much interest right that’s a note payable and so that a bank loan fits that a mortgage fits that an informal they call it a promissory note fits that all sorts of things fit that category but those are typical liability and we could have all sorts of other ones we can have wages payable to our employees and bonuses payable things like this there there is no shortage of items I could put on my list.

but we’ll cut it off there so when I talk to my students about these categories people generally have a pretty good idea about assets and about liabilities where things get a little bit shaky IRR is when I asked about shareholders equity not very many people have a good definition of shareholders equity and largely because it’s defined by what it’s not and I’m gonna explain shareholders equity actually by explaining my house.

I own a little house and it is a house that cost $300,000. So there’s this asset right and it’s this house and it’s a $300,000 house. Now as I already suggested to you when I bought the house I did not have $300,000. So I took out a mortgage and if I look at that mortgage statement.

today it’s around a $200,000 more and a mortgage of course. We said is a liability so I have a liability of $200,000. I have a $300,000 house against which there is a $200,000 debt or $200,000 liability if and this is where equity comes in if I were to sell my house.

Spread the love