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Accounting Crash Course - Be job ready in 1.5 hours! — Transcript

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0:00welcome to learn accounting Finance in
0:02the next one and a half hour you will
0:04learn the basics of accounting so that
0:06if you have zero knowledge of accounting
0:08by the end of this video you will be
0:10able to prepare financial statements
0:12such as balance sheet income statement
0:14and cash flow as well as be able to
0:17explain how those financial statements
0:19are prepared and what is the meaning of
0:21each if you are interested in an
0:23accounting career or finding a job in
0:25the field of accounting
0:27I recommend that you watch this video
0:29till the end subscribe to my channel and
0:31like the video so that you can always
0:32come back to this video in case you need
0:35to refresh your memory if you understand
0:37the basics I share in this video you are
0:40pretty much ready to start a job as an
0:41accountant
0:42or maybe you already have a job as an
0:44accountant and you want to clarify the
0:46concepts in your day-to-day work go
0:48ahead watch the video till the end and
0:50let me know if you found this
0:52information helpful do you have any
0:53additional questions and whether or not
0:55you find accounting boring or
0:57interesting let me know in the comments
0:59and let's get right into accounting
1:04accounting is the language of business
1:06why is it called the language of
1:08business
1:09well it records every business
1:11transaction
1:12for example if there is a buyer and a
1:15seller let's say the seller sells a
1:17mobile phone to the buyer this is a
1:20business transaction and there are
1:21certain rules and methods to record this
1:24transaction in the books of the seller's
1:26business similarly the buyer if the
1:29buyer is also a business they will
1:31record a transaction which records the
1:33buying or the purchase of the mobile
1:35phone accounting defines the rules
1:38procedures and principles to record
1:40those transactions in the books of the
1:42business that's why it's also known as
1:44bookkeeping let's take a look at a few
1:46examples of a business of financial
1:48transactions a fast food restaurant
1:50purchases Burns for three hundred
1:52dollars
1:53so they produce burgers and they
1:56purchase buns that make the burgers
1:59another example is the fast food
2:01restaurant pays 100 for electricity
2:05it also buys a computer for one thousand
2:07dollars
2:08so these are three simple examples of
2:10business transaction note that all of
2:12them involve money and as per the rules
2:16of accounting there is a specific method
2:18to record these transactions each of
2:20these transactions will be recorded in
2:22the language of accounting
2:23every transaction in accounting will
2:25always have two consequences this is one
2:28important thing to remember all
2:29transactions have two consequences in
2:32the language of accounting we call them
2:34debit and credit so one of them is debit
2:37there's always a debit and there is
2:39always a credit in all accounting
2:41entries
2:42there are no exceptions every
2:43transaction will always have a debit
2:45entry and a credit entry
2:47so let's take a look
2:49so the first example of purchasing of
2:52buds how will we record it well a
2:54non-accounting entry which is also
2:56sometimes called single entry will be
2:59for example cost of Buzz 300 so if
3:03you're not an accountant and you are
3:04recording this transaction you have this
3:06business
3:07you would just be recording a single
3:09line showing the cost of bonds
3:12however an accountant will record it as
3:15a double entry with debit and credit and
3:18the entry will look something like debit
3:21Buzz inventory which is an asset of 300
3:24and credit cash paid which is also an
3:27asset of 300 note that there is a debit
3:31and a credit the total of the amounts is
3:33exactly the same so the debit always
3:35equals credit and in this case we have
3:38an increase in asset which is inventory
3:41and we also have a decrease in another
3:43asset which is Cash we will discuss what
3:46our assets liabilities Equity income and
3:48expenses in detail the key in accounting
3:51is to start thinking about each
3:52transaction in terms of the two
3:53consequences or results each transaction
3:56results in either an increase or
3:59decrease in assets liabilities expenses
4:02income and Equity that's pretty much it
4:04in a nutshell all of the transactions
4:06that an accountant will record related
4:08to a business will always impact one or
4:11more of these five categories which are
4:13assets liabilities expenses income and
4:16equity
4:17now let's look at the second example
4:19which was payment of the electricity
4:21bill
4:22so again a non-accountant will record it
4:24record a single line showing cost of
4:27electricity a hundred dollars but an
4:30accountant will record as debit
4:32electricity which is an expense 100 and
4:36credit cash because cash is paid out so
4:38there is a decrease in cash so credit a
4:41hundred dollars as well
4:44the example of purchase of computer very
4:46similar non-accounting entry cost of
4:48computer one thousand dollars and
4:51accounting entry would be debit computer
4:53which is an asset so you now have an
4:56asset physically available in the
4:57business
4:58in accounting we record that separately
5:00as an asset and then credit cash because
5:03cash was paid out so whatever cash the
5:06business had at that point there is a
5:08reduction of one thousand dollars and
5:10that is shown through the credit entry
5:15let's look at the rules of debit and
5:18credit so this is an important slide
5:20this is these are the rules which as I
5:22mentioned there are no exceptions so you
5:25can always count on these rules the
5:28rules say that you will debit assets
5:30when there is an increase and you will
5:31credit assets when there is a decrease
5:33in asset okay so in the previous example
5:36we saw that when we purchased a computer
5:38there was an increase in our computer
5:40assets so let's say the restaurant
5:42already had one computer and they
5:44purchased another one so now they have
5:46two so that's an increase in assets on
5:49the other hand we saw cash being
5:51decreased so when we paid out cash for
5:53electricity we paid out cash for the
5:56computer in those cases we have a
5:58decrease in cash so let's say if the
6:00company already had two thousand dollars
6:02and they paid one thousand dollars for
6:04the computer now the balance has
6:07decreased by 1000 and that decrease of
6:101000 is recorded as a credit to the
6:11asset
6:12okay liability equity and income they
6:16are actually opposite of assets and
6:18expenses so in case of liability when
6:20the liability increases or Equity or
6:23income increases there is a credit and
6:25when they decrease there is a debit
6:28and expense actually follows the same
6:30logic as assets so assets and expense
6:32have similar debit and credit response
6:36while liability equity and income also
6:39have similar but opposite to asset and
6:41expense a point to note that out of
6:44these five categories assets liabilities
6:46Equity income and expense
6:48asset liability and Equity are part of
6:51the balance sheet
6:53which is a financial statement and if
6:55you're not aware of this we will discuss
6:56that in detail
6:58and income and expenses are part of
7:00another financial statement which is
7:02called the income statement sometimes
7:04also known as profit and loss statement
7:06or p l statement as we noted assets and
7:09expenses have similar response or follow
7:11the similar principle of debit when
7:13increased credit when decreased
7:15liability equity and income credit when
7:18increased debit when decreased
7:20if you wanted to make it easy to
7:22remember you could think about only
7:24assets and expenses debit when increased
7:27and everything else is opposite right so
7:30if I focus on this alone assets and
7:32expenses debit when increased
7:36I can make an abbreviation of aedi
7:40now aedi is a little hard to remember
7:42because it doesn't make any word so do
7:45you have any ideas if we Shuffle the
7:48letters around can we make a word
7:53how about idea itself now if I use this
7:56abbreviation of idea
7:58it will sound something like increase
8:00will debit expense and assets so
8:03although these are very few rules you
8:05can remember them even without an
8:07abbreviation but if you had to use one
8:09this is one suggestion so any increase
8:12in expense and assets will result in a
8:15debit and everything else is opposite to
8:18it so if there is an increase in a
8:20liability equity or income it will not
8:23be debit it will be credit and similarly
8:25if there is actually a decrease not an
8:27increase in assets and expenses then it
8:30will be a credit okay we'll actually
8:32practice some examples don't worry if
8:34this is still confusing because of the
8:36rules that we just discussed there are
8:38default or common balance positions so
8:41assets and expenses you you will usually
8:43see a debit balance you can also see a
8:45credit balance but usually for most
8:48accounts you will see a debit balance in
8:50the books or trial balance and for
8:53liabilities income and Equity you will
8:54usually see a credit balance so we'll
8:56get back to the rules of debating but
8:58first we have to explain what are assets
9:01liabilities Equity income and expenses
9:05what is an asset what comes to your mind
9:08when you think about an asset
9:10maybe you're thinking about your house
9:13especially if it is paid for and you
9:15don't have to pay any money as far as
9:17loan or mortgage is concerned you can
9:20live in the house you could also be
9:22thinking about the money you have in the
9:24bank that is money that you can use to
9:27buy stuff it can buy you things it can
9:29buy you happiness Maybe
9:31and you could also be thinking about
9:32your car or the bike that you have that
9:35you ride and can go to places you can
9:37also go to work using the car or the
9:39bike which will result in money flowing
9:43in in the form of salary or wages
9:45so an asset is something you own or you
9:48possess and expect to use or have some
9:51benefit from it in the future
9:54so let's look at the definition of
9:56assets according to International
9:57financial reporting standards we'll talk
10:00about International financial reporting
10:01standards in a moment the definition of
10:04assets is a present economic resource
10:07controlled by the entity as a result of
10:09Pass events
10:11and an economic resources a right that
10:14has the potential to produce economic
10:16benefits so we'll get back to the
10:18definition of the assets according to
10:20IFRS in a moment but first what are IFRS
10:24a quick introduction about them
10:28IFRS on International financial
10:29reporting standards are accounting
10:31standards that are developed so that
10:34business entities corporations companies
10:37across the globe all over the world
10:39follow similar accounting standards and
10:43the real purpose is that you have
10:45internationally comparable financial
10:46statements so for example if investors
10:49or decision makers are considering
10:52buying a business in Canada but they're
10:56also looking at a similar business in
10:58say UK
11:00take a look at their financial
11:01statements and try to compare which one
11:04is a better option right
11:06and if both of those companies are using
11:09international financial reporting
11:10standards it means that the investors or
11:12decision makers can be assured that
11:14similar accounting policies are being
11:16formed so they can really rely on the
11:18information that is presented on the
11:19financials to compare the two if both
11:22these companies were using different
11:23Accounting Standards it would be hard
11:25for them to make a decision because they
11:27don't really know for example what are
11:29the basis of arriving at the
11:32profitability for one company compared
11:35to the other one and there could be
11:36misleading results so the purpose of
11:39international financial reporting
11:40standards is to have Global
11:42comparability to have consistent
11:45principles that are applied to financial
11:47reporting currently the ifrsr are
11:49required to be applied in more than 100
11:51countries and a few more permit them but
11:55not all countries require the
11:57application of IFRS notably there is not
12:00a requirement to apply IFRS in the
12:02United States and the same for India
12:05so we can take a look at the geographies
12:07where IFRS are required to be applied or
12:10permitted so the first one is Africa and
12:12the Middle East you can see a lot of the
12:13countries highlighted as red require IFR
12:16standards for reporting or financial
12:18presentation especially for listed
12:20companies and then you can also see a
12:22few countries where IFRS are permitted
12:26if you look at Asia you see again of
12:29quite a few countries but you can see
12:31India and China currently do not require
12:33IFRS but you see countries like Pakistan
12:36Australia requiring IFRS
12:39in the Europe IFRS is heavily adopted
12:42and you can see a lot of countries in
12:44Europe currently require IRS
12:47and then finally Americas on the left
12:49side you have North America and on the
12:51right side you have South America so you
12:53can see a lot of countries in South
12:55America currently have adopted IFRS in
12:57North America you can see United States
12:59has currently not adopted diaphras so if
13:01you want to check the profile of your
13:03own country wherever you live in you can
13:06go to this website here at the bottom
13:09and when you go to this website you can
13:11select your country and it can show you
13:13some info information like this where
13:15for example I selected United States and
13:17it shows the extent of IFRS application
13:20in this case you can see that IFRS are
13:23not required for domestic public
13:25companies in fact U.S gaap is the
13:28requirement however IFRS standards are
13:31allowed or permitted for listings of
13:34foreign companies right so and also
13:36currently more than 500 foreign
13:38companies registered on the SEC are
13:40applying IFRS
13:42similarly for India you can see there's
13:44no application requirement for IFRS in
13:47fact India has its own Accounting
13:48Standards which are required but they
13:51are substantially converged with IFR
13:53standards so uh there are a lot of
13:56similarities
14:00so I chose to use the definition from
14:01IFRS because it's a good different
14:03definition that can be applied to
14:05understand what are assets but as I
14:08mentioned different standards that are
14:09applied in different countries the
14:11understanding around the key elements of
14:14financial statements which are assets
14:15liabilities Equity income and expense
14:17are very similar usually you don't see
14:20many deviations from the treatment of
14:23assets liabilities inequities or the
14:25classification of assets liabilities
14:27Equity income and expenses
14:30so going back to definition a present
14:32economic resource controlled by identity
14:34as a result of past events and the
14:37definition also explains what an
14:39economic resource is it's a right that
14:41has the potential to produce economic
14:43benefits it's similar to what we just
14:44discussed and as it is something that
14:46you own or control that has a potential
14:48of providing you future economic
14:50benefits so key points are it is an
14:53economic resource so there is some
14:54economic benefit right Financial benefit
14:57the entity the organization controls
14:59that asset and then that economic
15:02resource means there will be a potential
15:04to produce economic benefits so that's
15:07looking in the future right so it's not
15:09any benefit that you've already received
15:11is not considered considered as an asset
15:14it's only an asset when there is a
15:16potential in future that you will
15:18receive economic benefits this will be
15:21really clear when we look at the
15:22examples
15:24this list that you see this is pretty
15:27much majority of the assets that you
15:29will encounter in accounting or when you
15:32are working as as an accountant this
15:35list pretty much covers everything so
15:37let's go through the list one by one the
15:39first one is cash at hand or Bank the
15:41cash or money in the in the bank or
15:44physically available at the business
15:45premises is an asset because of course
15:48it's something that the business
15:49controls or owns and then the business
15:53can utilize this money to receive
15:55benefits in future right so the company
15:58can buy stock the company can pay for
16:00rent pay for utilities for the business
16:03so the business will definitely get
16:05benefit from the cash with cash in a way
16:07is the ultimate asset a lot of the other
16:10assets ultimately convert into Cash
16:12second one is building or office so the
16:15building where the business is located
16:17is also an asset computer hardware so
16:21it's all the computer equipment asset
16:24Furniture inside the building where the
16:26employees come and work the office
16:28desktop office chair office equipment is
16:31also an asset so the next one is
16:33inventory inventory is really the stock
16:35uh the goods the products that the
16:37company sells as long as they are with
16:40the company premises not sold yet they
16:43are also considered an asset because
16:44they will be sold in future and bring
16:46money to the business similarly vehicles
16:48in which the business conducts its
16:50business or it helps in bringing the
16:52employees to office to customer
16:55locations and perform business they're
16:57also an asset any Machinery that the
16:59company has especially if it's a
17:01manufacturing organization all the
17:03Machinery is also an asset land or
17:06property that the company owns is on
17:08certain asset accounts receivable this
17:10is the amount of money that is
17:12receivable or due from the customer so
17:15if the company sells on credit and gives
17:17the customers a time some time to pay at
17:20that point the company records accounts
17:22receivable and this account receivable
17:23is an asset because of course this will
17:25convert into Cash When the customers
17:28settle the amount similarly prepayments
17:31prepayments are the amounts that are
17:32paid by the company in advance but the
17:34service or product that they expect to
17:37receive has not been received yet so
17:39again in future there's a benefit of
17:42that product or service so prepayments
17:44are also an asset Investments so if the
17:46company has invested in other companies
17:49the shares or invested in bank or
17:51invested in metals such as gold silver
17:54all of those Investments are also asset
17:56because they will convert into money or
17:59cash
18:00computer software is going to be
18:02utilized by the business so an example
18:04would be the implementation of Erp for
18:07example sap or Oracle financials any Erp
18:10any computer software that the company
18:12purchases can also be considered as an
18:15asset and then we have some other
18:16categories of assets of Goodwill on the
18:18purchase of business if a company
18:21acquires another business the Goodwill
18:23that that other business has will result
18:26in positive profit or cash flows for the
18:29company and there is usually a value
18:32determined or assigned for the amount of
18:33Goodwill which can also be recorded as
18:35an asset in the books of the company
18:38trademarks patents and copyrights
18:40purchased were are also considered an
18:42asset so this is a list of assets which
18:45pretty much covers most of the assets
18:47that you will encounter in real life
18:52let's look at type of assets so broadly
18:54there are three categories of assets two
18:57of them are based on time whether the
19:00assets are expected to be realized in
19:02short in a short term or a long term and
19:05the third one is whether the assets are
19:07touchable tangible or not right so let's
19:11go through them one by one
19:14current assets all cash and cash
19:16equivalents are considered as current
19:18assets and cash equivalents are really
19:21not cash but very short-term Investments
19:23or any assets that can be quickly
19:25converted into cash if required current
19:27assets are also expected to be converted
19:30into cash or cash equivalents within 12
19:32months and similarly any assets that are
19:35expected to be sold or consumed within
19:37the normal operating cycle of the
19:39business so normal operating cycle is
19:41really the business cycle you know when
19:43a company buys and sells so the average
19:46time it takes from buying something
19:49buying a product and then selling it and
19:51receiving cash for it is called a normal
19:54operating cycle and if any asset is
19:57usually expected to be sold or consumed
19:59within the normal operating cycle and
20:01really this refers mainly to inventory
20:03the stock because it is converted in the
20:06normal conversion cycle or it is also
20:08referred to referring to accounts
20:11receivable the amount that is due on
20:13amounts sold to customers this is
20:16usually already converted into cash in a
20:18normal operating cycle so this
20:20represents cash and cash equivalents
20:22let's take a look at the examples so if
20:24we go back to our list of assets and if
20:27we had to highlight current assets the
20:29current assets would be cash at hand or
20:32Bank the inventory as we discussed
20:34normal operating cycle accounts
20:36receivable again normal operating cycle
20:38prepayments and some prepayments could
20:41be long term as well it depends on the
20:43the time within which that asset is
20:46expected to be realized but usually we
20:48see prepayments are mostly short term
20:50and then Investments could also be both
20:52short term or current and long term so
20:55again it depends on the maturity of the
20:57Investments some Investments you will
20:59see as current or short term and some
21:01will be classified as long term now in
21:03which financial statement do we find
21:05assets
21:07you should know it by now
21:10yes it's the balance sheet so here is an
21:13example of Nike this is their
21:15Consolidated balance sheet for the year
21:18ended May 31 2022 and if you're thinking
21:21why it is May 31 and not December 31
21:23well December 31 is the calendar year
21:26end but many organizations do not
21:28necessarily have the same year end as
21:30the calendar so their 12 months period
21:33their fiscal year or their financial
21:35year could be any other month during the
21:38year depends on what is the year that
21:40they choose so in the in case of Nike
21:42they have chosen that May 31st is the
21:45year end so this is the balance sheet
21:47with balance sheet line items and we're
21:49looking at the asset side of the balance
21:51sheet this is not the complete balance
21:52sheet there is of course liabilities
21:54iniquity but we will see but the asset
21:57side has current assets with their
21:59amounts listed and in this section you
22:02see the top part is actually the list of
22:05current assets with the respective
22:07amounts here and the bottom part is
22:08non-current assets so so what are
22:11non-current assets really all the assets
22:13that are not current assets all the
22:15assets other than current assets are
22:17non-current assets but they are also
22:19expected to be utilized or converted to
22:22cash over more than 12 months let's take
22:24a look at examples so going back to our
22:26full asset list if we had to identify
22:28the non-current assets there are quite a
22:30few in there
22:33here you can see building an office is a
22:36long-term asset so you will see that the
22:38expected time of realization of their
22:41benefit is more than 12 months right so
22:43buildings computer hardware we know they
22:45are used for longer than 12 months
22:47furniture and Equipment could be very
22:49long 15 20 25 years then you have
22:52vehicles of course more than a year
22:54Machinery land or property well land
22:56could be forever Investments yes if
22:59these These are long-term Investments
23:00then they are considered as non-current
23:02assets computer software Goodwill
23:05trademarks patents and copyrights all of
23:07them are considered as non-current
23:09assets again where do we find them in
23:12the financial statements just saw that
23:13in the balance sheet and here in the
23:15case of Nike you can see at the bottom
23:17the non-current assets are listed here
23:19with the amounts of balances in the
23:21balance sheet let's look at intangible
23:23assets so depends on whether the assets
23:25by Nature are physical or not these
23:28assets can be created or acquired
23:30however created intangible assets have
23:33no Book value intangible assets can be
23:35definite or indefinite which means that
23:37they could they can have a fixed or
23:39defined period they could also have an
23:42indefinite or undefined period
23:44going back to our list of assets again
23:46the examples of intangible assets are
23:49computer software Goodwill trademarks
23:51patrons and copyrights and as you can
23:53see all of them are pretty much
23:54non-physical in nature that's why they
23:57are considered intangible assets
23:59so the current and non-current
24:01distinction will really become important
24:03when we look at financial ratios it
24:06really helps to understand which of the
24:08assets and on the same note which
24:10liabilities are going to be settled in
24:13in less than 12 months or in the short
24:15term versus the assets that are long
24:18term and on the same note this applies
24:20to liabilities as well which liabilities
24:22are due for settlement in the short term
24:24versus long term because this really
24:26helps us understand the current balance
24:28position of a company so this
24:30distinction between garnet and
24:32non-government is important and we'll
24:34see that once we start analyzing the
24:36financial ratios okay in the case of
24:38Nike's balance sheet we can see that
24:40they also have a couple of intangible
24:43assets that are listed on the balance
24:45sheet
24:46let's look at what is a liability so
24:49again the IFR is definition for
24:50liability is a liability is a present
24:54obligation of the entity to transfer
24:56economic Resource as a result of past
24:59events so the important points being
25:01it's a present application it's
25:03something that is due now and it arose
25:05as a result of a past event so event
25:08arising in an obligation was a past
25:11event and the liability is due now so it
25:15cannot be any future events that have
25:18not taken place yet that have not
25:20happened yet we cannot consider them as
25:22liability yet although in future we may
25:25need to record them as liability so
25:28let's take a look at examples
25:29um here are majority of the examples
25:31that you will see for liabilities the
25:34first one being accounts payable which
25:35is kind of the opposite of accounts
25:37receivable in accounts payable these are
25:39the amounts that are due to be paid by
25:42the company to its vendors or suppliers
25:45so if the vendor or supplier has offered
25:48credit to the company to make payments
25:50the company purchased something from the
25:52vendor and the vendor has allowed them
25:54some time to pay the amount then this is
25:57recorded as accounts payable for the
25:59period that the amount is not settled
26:01the crude liabilities are recorded in
26:02accordance with the accrual concept and
26:05we will go through the accounting
26:06principles accounting Concepts in a
26:09future video but this represents
26:12expenses that have incurred but we have
26:16not received invoices or bills yet so a
26:19good accounting press practice is to
26:21record those expenses in the period for
26:23example if the company has used
26:26electricity for the month of January and
26:29the bill has not been received at the
26:31end of January and the company is
26:33closing the period of January they will
26:36record and accrued
26:37electricity expense so there will be a
26:41debit to expense and credit to accrued
26:43liabilities in anticipation that the
26:45bill will be received in future but the
26:48service which is electricity has already
26:49been received the same applies for
26:51accrued salaries in various so company
26:53may be paying its employees every 30
26:55days or every month can also be paying
26:58every week or every two weeks but at the
27:01end of the month if there are wages or
27:05salaries that have incurred so the
27:08employees have already done the work but
27:10because the pay cycle is not there yet
27:12the company has not paid let's say at
27:15the end of January January 31st there is
27:1810 days worth of salary that has not
27:20been paid although work has been done
27:22and those 10 days will be paid let's say
27:24on the 4th of Feb let's say the company
27:27is paying in two weeks time so there is
27:29this 10 days that need to be accrued for
27:32the month of January to truly reflect
27:33the cost of salaries and wages in the
27:35month of January similarly any taxes
27:37payable to authorities are a liability
27:40long-term debt long-term loans that the
27:43company have any current portion of the
27:45long-term debt so you know how if the
27:48company acquires a loan there is a
27:50payment schedule so it could be that
27:52every month the company has to pay off
27:54some amount every quarter that portion
27:57becomes current usually the amount of
28:00debt that has to be paid within the next
28:0212 months is considered as current so
28:04that is also a liability then we have
28:06deferred revenue this is the amount
28:09received from customers in advance but
28:11the service that the company needs to
28:12provide has not been provided yet so it
28:15is considered as deferred revenue
28:17because the company needs to settle this
28:19through providing the service or product
28:21that it promised and similarly Bank
28:24overdrafts any overdraft money facility
28:26received from bank is a liability
28:28because it needs to be settled and again
28:31any short-term debts similar to
28:32long-term debts are considered
28:34liabilities so if you look at the
28:36balance sheet of Nike again now we are
28:38looking at the liabilities and the
28:40equity section so here you can see the
28:43top section shows all the liabilities
28:46that the company had for the year ended
28:48May 31st 2022 with the respective
28:51amounts shown in dollars
28:55types of liabilities similar to assets
28:57there is a current or short-term
28:59liability and then there is non-current
29:01or long-term liability and there is
29:03another category which is the contingent
29:05liabilities if we look at our list and
29:07if we need to identify the current
29:09liabilities the current liabilities
29:11would be all the accounts payable
29:13accrued liabilities accrued salaries and
29:15wages taxes payable usually the current
29:18portion of long-term loan bank
29:20overdrafts and short-term debt
29:24and then if we want to look at
29:26non-current liabilities deferred revenue
29:28is one non-current liability and then a
29:31long-term debt of course is a long-term
29:32liability
29:34contingent liabilities so contingent
29:36liabilities are liabilities which are
29:39dependent on an uncertain future event
29:41so good example is lawsuits so for
29:44example a lawsuit has been filed against
29:46a company but the decision is spending
29:49so the company does not know exactly
29:51what the decision will be and how much
29:54amount they need to pay such liabilities
29:56are considered contingent liabilities so
29:59they are recorded in the financials
30:02depending on whether the amount can be
30:04measured reliably or how probable it is
30:08that the amount will actually be settled
30:10another example is product warranties so
30:14any warranties that the company has
30:16offered to its customers this is a
30:19contingent liability because at the time
30:21of sales it's not clear how much will
30:25need to be settled in the form of
30:27warranties for example if company sells
30:29mobile phones and it offers a warranty
30:32period of 12 months then in that 12
30:34months how many customers will come back
30:37and ask for their warranties because of
30:39defective product or issues with the
30:42with the mobile phone right so this is
30:43again an example of contingent liability
30:45and another example is Bank guarantee
30:51okay so by now we have looked at assets
30:53and liabilities two elements of balance
30:56sheet and now we are looking at the
30:57final element which is equity so what is
31:01equity let's look at the IFRS definition
31:03first Equity is residual interest in the
31:06assets of the entity after deducting all
31:09its liabilities Equity represents
31:11ownership if you think about a company
31:14assume for a moment that the company
31:15only has assets and no liabilities right
31:19so in that case all of those assets that
31:22the company has belong to the company so
31:24we talked about buildings we talked
31:26about computer hardware any land or
31:29property we talked about the accounts
31:31receivable the amounts that are
31:32receivable from customers if the company
31:35only had assets all of those assets
31:38would actually equal Equity because this
31:40is the ownership the the owners of the
31:42business own these assets right however
31:45in most cases companies also have
31:47liabilities so
31:49these are the amounts that the company
31:51has to pay that actually belong not to
31:54the owners but to Outsiders right that's
31:57why Equity is assets minus liabilities
32:00so you look at the assets which the
32:02company owns or the owners own but to
32:05deduct liabilities from the assets and
32:08that gives you equity
32:10Equity usually represents ordinary share
32:12shareholders of a company they own
32:14shares and the value of those shares
32:16represented under Equity could also be
32:19preference shares and any accumulated
32:21retained earnings which means that every
32:24year that the company earns profit or
32:26even loss the owners or the equity
32:29holders own that right so again it goes
32:32into equity
32:34and we will see that when we go through
32:36the financial statements such as p l and
32:39balance sheet where accumulated radiant
32:41earnings come into play so accumulated
32:43retained earnings really show the
32:45accumulated profits over the years since
32:48the company has been in business for 10
32:50years over the period of 10 years all
32:53the profits that the company has earned
32:55will be reflected as accumulated
32:57retained earnings
33:00now this brings us to a very important
33:02point which is the balance sheet
33:04equation so while understanding assets
33:06liabilities and Equity we could see that
33:10Equity is equal to assets minus
33:12liabilities we just discussed that
33:15or we could also say that assets equal
33:17to liability plus Equity just a little
33:20bit of shuffling of the equation shows
33:22that assets are equal to liabilities
33:24plus equity
33:27so we're looking at the balance sheet of
33:28Nike again so this is the asset side and
33:30you can see the total assets are 40.3
33:33billion
33:36and if you look at this other side which
33:38is liability and equity
33:41these all these lines are liability and
33:43from here you see shareholders Equity
33:45this is the section of equity you can
33:47also see retained earnings in there so
33:50the total of liabilities and Equity is
33:5140.3 billion if you look at the prior
33:54year the balance sheet was 37.7 billion
33:57for equities and liability and if I go
34:00back to the assets you see assets were
34:02also 37.7 billion so the equation will
34:05always balance the assets will always
34:08equal liability and equity
34:11here you can see again the numbers as we
34:13just saw on the financial statements of
34:15Nike so as mentioned you can find equity
34:19in the balance sheet usually in the
34:21liabilities and Equity section you see
34:23here total liabilities and shareholders
34:25equity and these are the line items for
34:28the equity represented in the balance
34:30sheet
34:32if you have looked at the balance sheet
34:34items assets liabilities and Equity now
34:37it's time to look at the income
34:38statement items income and expenses
34:40let's look at the definition first so
34:43income is increasing assets or decrease
34:45in liabilities that result in increases
34:48in equity right so we have already
34:51learned about assets liabilities and
34:53equity and income is simply an increase
34:56in assets so it could either be an
34:58increase in assets or a decrease in
35:00liabilities but it results as always
35:03positively in increasing in equity we
35:05have to exclude any increase in equity
35:08directly done by shareholders or owners
35:10of equity for example if they provide
35:12additional funding to the business in
35:14the form of ownership shares that will
35:17not be considered income but other than
35:20that all the business transactions that
35:21result in an increase in equity and
35:23practically speaking this is really
35:24increased in profits this will be
35:27considered as income
35:29expenses on the other hand are the
35:31opposite of income they are decrease in
35:34asset or increase in liabilities that
35:37results negatively or decreases in
35:39equity other than the equity holders
35:42contributions
35:44so the key points for increment expenses
35:46income will result in an increase in
35:48equity or increase in profits and
35:50expenses will result in a decrease in
35:52equity or decrease in profits
35:55what is income then income is money
35:56received or receivable from sales
35:58services or Investments it increase
36:01assets for example cash it decreases
36:04liability for example we discussed about
36:06accrued liabilities so the company
36:09records the bill for January in the
36:11month of January but Bill has not
36:13arrived yet it comes in later let's say
36:16the bill comes in and it's actually
36:17lower than what the company estimated so
36:20that will be a reduction in liability
36:22that has already been recorded So that
36:25would be that difference of what was
36:27originally recorded as an expense versus
36:30now the revised amount will be an income
36:33so income increases Equity or profits
36:36and if you remember from the rules of
36:39debit and credit an income is a credit
36:41entry when increased and debit when
36:43decreased
36:44some examples of income when a business
36:47sells burgers for cash remember there is
36:49an increase in the cash asset right so
36:52the selling of burger results results in
36:55an increase in cash which is an asset
36:57and the accounting entry is Cash
36:59received
37:00debit and credit sale of burgers this is
37:03the income or Revenue so this section as
37:05you see this is the recording of income
37:07if you remember there's always Double
37:10Entry dual impact so the asset increases
37:13and income also increases but in the
37:16form of a credit just a point to note
37:18here uh cost of sales will also be
37:20recorded in this case in accordance with
37:22matching principle and we will be
37:24discussing accounting principles in a
37:26separate section shortly
37:28examples of income include sale of goods
37:30service income dividend income this is
37:33the dividend that is received from any
37:36Investments That a company has in other
37:38companies interest income rental income
37:41and gain on sale of assets so any assets
37:44that the company owns when they sell
37:45them and if there is a profit on that
37:47sale that's also considered income
37:50expenses so expenses are costs incurred
37:53in exchange for something remember from
37:55the definition it is a decrease in asset
37:57for example cash so when you pay for
38:00something that's an expense the asset
38:02cash is reduced it also can result in
38:05increase in liability for example
38:07accounts payable so when the company
38:09purchases something on credit it records
38:12An accounts payable liability
38:14and it results in decrease in equity or
38:17profit finally it's a debit entry when
38:19increased credit when decreased an
38:21example of expense when a business pays
38:24rent for the building
38:25accounting entry is debit rent this is
38:28the expense and credit asset which is
38:31cash so here you have the decrease in
38:33asset
38:34some examples there are many examples of
38:35expenses a few of them are salaries and
38:37wages training costs meals rent cleaning
38:41office supplies electricity gas water
38:45repair maintenance taxes interest paid
38:48depreciation Insurance expenses leases
38:53rental equipment and travel expenses so
38:56all of these you can see are outflows
38:58for the company these are expenses where
39:00the company has to pay and as a result
39:03the asset is decreased but also profit
39:07is decreased so it has a negative impact
39:08on the equity
39:10let's look at Nike's income statement so
39:13here all the income and expenses are
39:15listed on the income statement if you
39:17look at this revenues and other income
39:19are the income in an income statement
39:21when you see revenues and if you see
39:24other income which is a
39:25negative number in this case and in
39:28bracket you can see it shows if its
39:29income it will be a negative number or
39:32shown as in Brackets so these are the
39:35two lines for income and everything else
39:37is an expense so cost of sales so cost
39:40of the products and Nike sells plus any
39:42demand creation expenses operating
39:44expenses operating is really the
39:46business expenses to run the business
39:47interest expense and then tax expense
39:51all of them are expenses and finally you
39:53have net income which is a difference of
39:56income and expenses income minus
39:58expenses is your net income so for the
40:01year end date so for the 12 month period
40:03ending May 31st 2022
40:07Nike had a net income of 6 billion
40:11roughly
40:12so now we have looked at all the
40:13elements of financial statements from
40:15assets liabilities Equity income and
40:17expenses as discussed earlier assets
40:19liabilities and Equity are part of the
40:21balance sheet and income and expenses
40:23are part of the income statement we'll
40:26now look at the accounting principles
40:27and then we will jump back into rules of
40:30debit and credit and some accounting
40:31entries as a practice
40:34okay now let's look at the accounting
40:37principles these principles are applied
40:39when preparing financial statements or
40:42preparing accounting entries so a few
40:45principles that we will be discussing
40:46are a cruel principle
40:49matching principle consistency
40:52cost or historical cost principle
40:55going concerned
40:57materiality
40:59Revenue recognition these are the
41:00principles that we will be discussing
41:02but of course there are some more
41:03accounting principles as well
41:05so a cruel principle very important
41:07accounting principle rule principle
41:09states that we need to record
41:11transactions in the period when they
41:14actually occur not when related cash is
41:17paid or received this is the opposite of
41:19cash passes of accounting so we
41:21discussed a little bit of that earlier
41:23but an example would be if you pay the
41:26electricity bill for the month of
41:27January in the month of February
41:30according to the accrual principle
41:32record the expense in January
41:34so if you were not following a cruel
41:36principle you would only record the
41:37transaction when you receive the
41:39invoicer when you receive the bill
41:42but according to accounting principle
41:44you know that the service has been
41:47provided electricity has been provided
41:49for the month of January that is the
41:51period when the expense has actually
41:52incurred so we will record this expense
41:55in the period in the month of January
41:57and you could also use an estimate if
42:00you don't have the bill and you don't
42:02know what the exact amount is but you
42:04want to be able to show the users of
42:07financial statements the the people who
42:09look at the results they should be able
42:11to understand truly when our expenses
42:13taking place this is one of the key
42:16principles to remember
42:18the next one is matching principle and
42:20another very important principle and
42:22it's somewhat similar to the accrual
42:23principle
42:24and what it says is match revenue and
42:26expenses or costs and benefits so that
42:28they are recorded in the same period so
42:32an example is we record cost of sales
42:35expense in the same period as when the
42:37sales revenue is recorded So if a
42:39company buys some stock to sell again
42:42let's take the example of mobile phones
42:44right so so the company buys mobile
42:46phones and the company plans to sell
42:48them but let's say they bought 10 mobile
42:51phones in the month of
42:53January but they actually sold those
42:56mobile phones in the month of Feb okay
42:59so in the month of January we will not
43:01record any cost of sales although we did
43:04purchase those mobile phones and we
43:06actually even paid for them
43:08but they will be recorded as inventory
43:10which is not an expense yet they will be
43:13recorded as an asset an inventory this
43:16is not an expense and this asset will
43:19only be converted into expense when the
43:21actual sales happen and this is in
43:23accordance with matching principle
43:25because we want to reflect the cost of
43:27sales in the same month as the sales is
43:30recorded so as soon as we record the
43:32revenue or sales which is the amount
43:35received from customers for those mobile
43:37phones and in that month or in that
43:39period we will record the cost of sales
43:42as well so this is what is matching
43:44principle if we did not do this then
43:47what would happen is we would be
43:48recording cost in the month of January
43:50and sales or revenue or income in the
43:53months of February and this way there is
43:55a mismatch in the timing of when income
43:58and expenses are recorded which may be
44:00misleading
44:01another example is the recording of
44:03depreciation expense in each period for
44:06an asset according to its useful life so
44:08when we buy assets with uh which are
44:11long term or non-current assets for
44:14example if we purchase Furniture this
44:16furniture is going to be used by the
44:18company over a long period of time and
44:20usually a useful life is determined by a
44:24company for each type of asset so let's
44:25say for furniture a company has
44:27determined the useful life of 10 years
44:29as an example
44:31so the cost of furniture originally will
44:34be recorded as an asset the the day it
44:36is purchased it's not immediately
44:38expensed out but it will be actually be
44:41expensed or recorded as an expense in
44:43the income statement over the period of
44:46its useful life so over the period of 10
44:48years the cost will be allocated as
44:51expense this is a matching principle the
44:54next one is cost principle also
44:55sometimes called as historical cost
44:57principle and what it states is we have
45:00to record assets at their purchase price
45:02and do not adjust for inflation or
45:04market value fluctuations
45:07an example would be if a company
45:08purchases a vehicle a car
45:10so the company will record the cost in
45:13the books at the original cost of
45:15purchase and depreciate it over use over
45:18its useful life without considering any
45:20market value changes so if the car if
45:23you look at the market value of the car
45:25it may be fluctuating all the time and
45:27maybe in a year or two market value of
45:29the car has either gone up quite a bit
45:31or has decreased quite a bit but those
45:34fluctuations are not to be recorded the
45:37historical cost the original cost at
45:39which the vehicle was purchased at is
45:41what will be recorded in the books for
45:44accounting purposes you have to make a
45:45note that this does not apply to all
45:47types of assets for example if we have
45:49short-term Investments the historical
45:51cost principle does not apply the
45:53historical cost principle also does not
45:55allow recording of assets which were not
45:57acquired in a transaction so we do not
45:59have a cost a reliable cost to measure
46:01them for example internally generated
46:04Goodwill or trademark
46:07the going concern principle it's also an
46:09important principle what it states is
46:11that there is an assumption that the
46:13business will remain in operations for
46:15the foreseeable future we do not expect
46:17the business to be shut down in the near
46:20future so the business is expected to
46:22continue as it is the business is
46:23expected to have sales have customers
46:27have revenue and profits in the
46:30foreseeable future and we are not
46:31shutting down the business
46:33therefore as a result we do not need to
46:36write down assets because think about it
46:38this way if the business is continuing
46:41all the assets that the business have
46:43that have been recorded at original cost
46:45or historical cost are still valid it's
46:49it's still considered correct to keep
46:50the assets at their Netbook value the
46:53original cost less depreciation but if
46:55the business is discontinuing if the
46:58business is not going to continue the
46:59the management has decided to sell it
47:01then in that case those assets may not
47:04be truly reflecting their value if we
47:06keep them at historical cost so for
47:09example a business has a very specific
47:11Machinery that costs a lot originally
47:14but that Machinery is not required Now
47:16by any other businesses there are no
47:19buyers for that Machinery so if the
47:21business is shutting down that asset
47:23value is then inflated it's overstated
47:26because really those Mutual economic
47:28benefits that were expected to be
47:30received from this Machinery are no
47:33longer valid the only way that Machinery
47:36was going to provide us those benefits
47:37was if we continued business and that
47:39Machinery continued to produce those
47:41products but now if when we are
47:44discontinuing the business for sure we
47:46are not going to use that machine and
47:48nobody else is looking to buy that
47:49machine as well maybe we can sell that
47:52machine as scrap and that is really the
47:54true value of that machine then in that
47:57case the value of the assets needs need
47:59to be written down so unless there is a
48:02clear intention of management to sell
48:04the business or discontinue the business
48:06the going concern Assumption of
48:09principle applies which means that the
48:11carrying value of the assets which is
48:13their original cost less depreciation is
48:18still valid and can be kept in the books
48:21this is an important principle and you
48:24will notice that Auditors external
48:26Auditors when they audit the financial
48:27statements of a company they also assess
48:30the company's going concerned status
48:32they have to they have to do that and
48:34they have certain criteria or indicators
48:36which help them make that decision that
48:38the company can present or prepare their
48:41financial statements with the going
48:42concern assumption the next one is
48:45materiality principle and what it states
48:48is that if the amount is not large
48:49enough to influence the decision of
48:51investors or decision makers a
48:53misclassification or Omission is not
48:55Material a there is an asset with a
48:58useful life of 10 years that costs only
49:0025 dollars right so an example would be
49:03calculator some of the calculators last
49:06many many years right so in this case we
49:09if we look at a calculator which cost us
49:10only 25 dollars but we know its useful
49:14life is 10 maybe even more years right
49:16but
49:17according to the principle of
49:19materiality if we prefer to expense that
49:22asset immediately basically not require
49:25it as an asset instead recorded as an
49:27expense in the income statement we can
49:30do that this is allowed
49:32so in this case we don't have to match
49:34the useful life of the asset with the
49:38allocation of its cost okay so this this
49:40is kind of an exception principle where
49:43only if the amounts are small enough you
49:46can choose to ignore some of the other
49:48accounting principles or you can even
49:49choose to ignore some of the practices
49:53materiality varies by size of
49:55organization so if it's a very very
49:56large organization of course its
49:58materiality would be larger it's amounts
50:01that are considered small or immaterial
50:03would be larger but if it's a small
50:05organization the amount that is
50:07considered in material will be smaller
50:10based on this principle many
50:11organizations have a policy to record as
50:13expense asset costing less than a
50:15certain amount so you will see that very
50:16often that many organizations have an
50:19amount identified already that any
50:21amount that is less than this amount for
50:24example let's say five thousand dollars
50:26so a company may have a policy that any
50:28amount that is less than a five thousand
50:30dollars even though the nature of that
50:33item is an asset it's a it's an asset
50:36which has a useful life of more than a
50:38year still for accounting purposes that
50:41amount will be recorded immediately so
50:43entire amount will be recorded as an
50:44expense in the month of purchase
50:47Revenue recognition principles so the
50:50principle states that we have to record
50:51Revenue as and when goods or services
50:53are delivered regardless of when cash is
50:56received so it's a combination of
50:58accrual and matching focusing on Revenue
51:00an example is when a product is sold for
51:03credit revenue is recorded when product
51:05is delivered not when cash is received
51:07okay
51:08similarly when revenue is related to a
51:10project work so it's a it's a long
51:12project it takes some time over which
51:15it's completed revenue is recorded based
51:17on percentage of completion not when
51:19payments are received so while the
51:21company may receive Advanced payments of
51:23let's say 50 on a project they will
51:27record Revenue based on the percentage
51:29of completion of that project and they
51:31are there are very specific guidelines
51:33in the standards on how to record the
51:35revenue in accordance with percentage of
51:37completion principle
51:39consistency principle but we need to
51:41consistently apply accounting principles
51:43policies and methods unless a better one
51:45is available and this is again to help
51:48the users of the financial statements
51:49the decision makers understand the
51:52performance of the business over
51:53multiple periods of time if the company
51:56is changing its accounting policies and
51:58principles which also may change the
52:01treatment of accounting entries or
52:03assets liabilities income expenses in
52:06the financial statements then it is
52:08difficult for the decision makers to
52:10make decisions because they cannot
52:11compare the financial result between
52:13periods
52:15an example is a straight line method of
52:18depreciation so we discussed about an
52:20asset with a useful life of 10 years the
52:22company may choose either a straight
52:24line method to record depreciation which
52:27is really total cost of the asset
52:29divided by 10 and then that is the
52:31amount that is recorded every year or
52:33they could also choose a reducing
52:34balance method which is not an equal
52:37allocation of depreciation over the
52:40useful life it's actually dependent on
52:42certain other factors which will result
52:44in higher depreciation being recorded in
52:47the first years or in the earlier years
52:49and then the amount of depreciation
52:51reduces every year company is allowed to
52:54choose any one of those methods but if
52:57they have chosen one the consistency
52:59principle requires that they continue to
53:01use that method over a long period of
53:03time unless there is a significant
53:05reason a major reason to make the change
53:07and it is better for the users of
53:09financial statements to have to make
53:10that change another example is the
53:13capitalization policy we just discussed
53:15for example the amount of materiality
53:17the amount considered as the threshold
53:20under which all amounts are recorded as
53:22expense instead of assets the company
53:24should not change it every year right
53:26there should be a consistency in
53:28applying that threshold
53:31so now we will go back to the rules of
53:33deben and credit I think we have
53:34developed a very good understanding of
53:36assets liabilities Equity income and
53:38expenses we've also learned some of the
53:40key accounting principles we already
53:42know the rules of debit and credit so I
53:44think it's a good time to do some
53:46practice on the accounting entries and
53:49after we have done that practice we'll
53:50look at the flow of accounting entries
53:52into general ledger trial balance and
53:55finally financial statements such as
53:56balance sheet and income statement
54:00okay so are you ready to apply whatever
54:02you have learned about the rules of
54:04accounting and accounting principles to
54:06actual accounting entries let's go so
54:09the first example that we are going to
54:11deal with is a business owner deposits
54:14thirty thousand dollars in the bank as
54:17Equity this is one of the very early
54:19entries or very early transactions in a
54:21business when a business owner is
54:23setting up the business initially they
54:26allocate some money they invest some
54:28money in the business and they have
54:30deposited thirty thousand dollars in the
54:32bank as original Equity of the business
54:35okay if you remember I mentioned the key
54:38in accounting is to understand the Dual
54:40impact that every transaction has so
54:43what will be the accounts that will be
54:45impacted by this entry you can clearly
54:48see there is an entry in the bank so
54:50basically one count is asset which is
54:53cash and by the way in accounting we use
54:56the term cash roughly to also refer to
54:58About the Money in the Bank okay so uh
55:01the first item is Cash what is the other
55:04one
55:05well actually you can see that in the
55:07example it's the equity this initial
55:09deposit is made by the owner of the
55:11business as Equity so this is a
55:13contribution from the owner and it will
55:15directly impact the equity of the
55:17business okay so we have cash on one
55:19side we have owner's equity on on the
55:21other side what is happening to cash in
55:23this case is it increasing or decreasing
55:25well because the amount is being
55:27deposited it is increasing so cash is
55:30increasing what is happening to owner's
55:32equity is it increasing or decreasing
55:34well for the business it is also
55:36increasing because the business had no
55:38equity or there was no business and with
55:40this deposit the business now has Equity
55:42so from zero to thirty thousand dollars
55:44there is an increase in equity what is
55:46the nature of the cash account is it an
55:49asset liability equity income and
55:51expense by now I'm sure you know cash is
55:54an asset and what about Equity well the
55:56name says it Equity is equity right so
56:00we can see that there is an increase in
56:02cash which is an asset and there is an
56:04increase in equity which is equity so
56:07what did we learn about the rules of
56:09accounting we know that when asset is
56:11increased there is a debit and when
56:14Equity is increased there is a credit
56:16remember assets and expenses debit when
56:19increased everything else Credit One
56:21increased so the accounting entry would
56:23be debit cash 30 000. credit owners
56:26Equity thirty thousand okay so this was
56:30the first entry let's go to the next one
56:33okay the company buys furniture by
56:35paying ten thousand dollars cash
56:38okay what are the accounts here you can
56:40see that you can always see that in the
56:42in the example or the statement itself
56:44right so cash is one but what is the
56:46other one Furniture right so we have
56:48furniture and cash
56:50what is happening to the furniture of
56:53course there is an increase because the
56:54company purchased Furniture so company
56:56had has more of furniture by an amount
56:59of ten thousand dollars so there's an
57:01increase what about cash well this this
57:04time the cash is being paid out remember
57:07in the previous example the business
57:09owner was paying cash into the business
57:11bank account so that's why there was an
57:13increase but in this case the company is
57:15paying gas so there is a decrease in
57:18cash okay what is the nature of
57:20furniture
57:21it's an asset what's the nature of cash
57:24it's an asset so we have an increase in
57:27asset but we also have a decrease in
57:28asset what we've learned from the rules
57:30of debit and credit
57:32as it increases debit as a degree asset
57:34decrease is credit so the accounting
57:37entry will be debit Furniture 10 000
57:39credit cash 10 000. you see how the
57:42rules are applying and there are there
57:43is no exception let's move on to the
57:45next one
57:48the company now buys furniture on credit
57:50for ten thousand dollars so the company
57:52buys additional furniture they already
57:54purchase for ten thousand and they
57:55purchase additional furniture for ten
57:57thousand but this time they did not pay
57:59cash they actually purchased it for
58:02credit which means they have some time
58:04before which they need to make the
58:06payment right so it's just Furniture
58:08coming in
58:09but what is going out
58:12well at this point nothing is going out
58:14but there is now a contractual
58:17obligation there's now a liability for
58:19the company and this should maybe jog
58:23your memory a little bit about a
58:25principle we discussed which is the
58:28accrual principle so we are not paying
58:30cash right now but we are purchasing and
58:34this needs to be recorded as a liability
58:38so the accounts that will be impacted
58:40are again Furniture but the other side
58:42is account payable
58:44because whoever we purchase the
58:46furniture from is now expecting a
58:49payment from us of ten thousand dollars
58:52okay so the transaction has already
58:54happened the event that led to that ten
58:57thousand dollars of amount due has
58:59already happened and what we learned in
59:01the definition of liability is a past
59:04event resulting in an obligation to pay
59:06so the event has taken place we have
59:08purchased the furniture this has also
59:10resulted in a liability which is account
59:12payable although we're still not paying
59:14cash yet so what happens to Furniture in
59:16this case of course there's an increase
59:18what happens to liability or accounts
59:21payable there is also an increase and we
59:24know when asset increases there is a
59:26debit but when liability increases there
59:28is a credit you see how every time there
59:31is always a debit and always a credit
59:34so entry would be debit Furniture 10 000
59:36credit accounts payable ten thousand
59:40let's go to the next example
59:43the company now settles the amount
59:45payable for furniture okay so naturally
59:47we recorded the liability last time now
59:49the company has to settle that amount so
59:52there will be another entry at this
59:53point this is a financial transaction
59:56so what are the accounts now being
59:57impacted well first there will be the
1:00:00account payable that we recorded
1:00:01previously that ten thousand dollars
1:00:03that is that was a credit to the account
1:00:05payable now it will be reversed okay so
1:00:07account payable and the other side of
1:00:10the entry is of course cash because now
1:00:12we are paying out the money okay so
1:00:14account payable is now decreasing
1:00:17because in the last entry it increased
1:00:19now we are settling it so it's going
1:00:22back to zero so it's decreasing and cash
1:00:25is also decreasing because now we are
1:00:27paying the ten thousand dollars so we
1:00:30know account payable is a liability cash
1:00:32is an asset liability decreasing
1:00:35is a debit and asset decreasing is a
1:00:38credit remember the rules of debit and
1:00:40credit so the entry would be account
1:00:43payable debit by ten thousand and cash
1:00:46credit by ten thousand
1:00:50let's look at another example the
1:00:52company pays twelve hundred dollars in
1:00:54rent for the building okay
1:00:57now we know one side because this is
1:00:59again a cash payment we know one side of
1:01:01the entry is Cash what would be the
1:01:03other side of the entry it's not account
1:01:05payable because the company has already
1:01:07paid
1:01:08but this time this is an expense because
1:01:11this is a transaction which is resulting
1:01:14in a decrease in asset which is cash and
1:01:18we learn from the definition of expenses
1:01:20our expenses are items that decrease an
1:01:23asset and also negatively impact the
1:01:26equity or profits of the company because
1:01:28it's an expense it's a reduction in the
1:01:30profit so one side of the entry is rent
1:01:33expense and the other side is Cash is
1:01:37the rent expense increasing or
1:01:38decreasing
1:01:39well in this case the expense is
1:01:41increasing right because there was again
1:01:44let's say the company started from
1:01:45scratch this there was no rent expense
1:01:47so far but now in the first month they
1:01:50have already paid twelve hundred dollars
1:01:51so there's an increase in rent expense
1:01:53and there is a decrease in cash because
1:01:55cash is paid out so this is a good
1:01:58example we know assets and expenses
1:02:00follow the same debit and credit logic
1:02:02right so if there is an increase in
1:02:05expense it's a debit and if there is a
1:02:07decrease in asset it's a credit right so
1:02:10the accounting entry would be rent
1:02:12expense debit 1200
1:02:14and cash credit twelve hundred dollars
1:02:16let's take a look at our next example so
1:02:19the company receives 500 in dividend
1:02:22income from an investment okay maybe we
1:02:24we skipped a transaction where the
1:02:26company would have invested in another
1:02:28company as their investment but let's
1:02:31say the company had invested in another
1:02:33company and now they have received
1:02:35dividend on that investment what are the
1:02:38accounts that will be impacted
1:02:39one again we know is Cash because the
1:02:42company has received 500 what is the
1:02:45other one well in this case this is the
1:02:47opposite of the expense because the
1:02:49company has received money
1:02:51which is actually increasing in asset so
1:02:54we know that definition of income is an
1:02:57increase in asset and also an increase
1:03:00in profit because now the company has
1:03:01five hundred dollars more for the owners
1:03:04of the company
1:03:05so one account is Cash the other one is
1:03:07dividend income what's happening to cash
1:03:10is it increasing or decreasing of course
1:03:12it's increasing dividend income is also
1:03:15increasing so we know when asset
1:03:17increases there is a debit and when
1:03:19income increases there is a credit so
1:03:23the accounting entry would be debit cash
1:03:25500
1:03:26credit dividend income 500 dollars
1:03:31let's go to the next example the company
1:03:33buys 10 bicycles for resale at the cost
1:03:37of five thousand dollars in cash
1:03:39so what are the two accounts that will
1:03:41be impacted
1:03:42again one is easy if the company has
1:03:44paid cash
1:03:46and the other one bicycles these
1:03:48bicycles will be kept by the company
1:03:51as long as they are sold right so the
1:03:54bicycles are an asset to the company
1:03:56because they are expected to provide
1:03:58economic benefit or money in future
1:04:01right so one of the account is inventory
1:04:04now any assets that the company buys for
1:04:07resale and as long as they are with the
1:04:09company and not sold yet are considered
1:04:12stock or inventory in accounting
1:04:14language and the other side of the entry
1:04:16would of course be cash
1:04:18so what's happening to inventory of
1:04:20course it's increasing the company has
1:04:22let's say zero inventory of bicycles now
1:04:24they have 10 bicycles so there is an
1:04:26increase in this asset and on the other
1:04:28side there is a decrease in the asset
1:04:31which is cash
1:04:33so increase in asset is debit decrease
1:04:36in asset is cash so accounting entry
1:04:38would be debit inventory five thousand
1:04:40dollars credit cash five thousand
1:04:42dollars
1:04:43so note that we discussed this in the
1:04:46accounting principles as well the
1:04:48matching principle although the company
1:04:50has purchased this these bicycles for
1:04:53sales but they are not recorded as an
1:04:56expense yet and the reason is because
1:04:58they have not been sold yet the amount
1:05:00will be recorded as expense depending on
1:05:03when and how many bicycles are sold so
1:05:06we are waiting now we are keeping the
1:05:08bicycles in the inventory as assets
1:05:10until sale is made and that is the time
1:05:13when we receive the revenue or income
1:05:15from the bicycles and according to the
1:05:17matching concept that is when we will
1:05:19record the cost of sales
1:05:21and now we get to that so the company
1:05:23now sells five remember they originally
1:05:25purchased 10 bicycles but they sell five
1:05:27of them for four thousand dollars in
1:05:30cash okay
1:05:31so there will be two entries at this
1:05:33point one will be to record the sale and
1:05:36the other one to record the cost of sale
1:05:38matching principle
1:05:41now what is the cost per bicycle we know
1:05:43the company purchased bicycles for five
1:05:45thousand dollars and there were 10 10
1:05:47bicycles so that means the cost of each
1:05:49bicycle is five hundred dollars
1:05:53and the selling price is four thousand
1:05:55dollars divided by five because the
1:05:57company sold five bicycles for four
1:05:59thousand dollars so the price selling
1:06:01price is 800 but you can already see on
1:06:04each bicycle they are making a profit of
1:06:06300 which is 800 minus 500 okay
1:06:10so the company sells five bicycles for
1:06:12four thousand the first entry is this
1:06:15will be the sales side of the entry so
1:06:17the accounts that will be impacted are
1:06:19one is Cash of course because the
1:06:21company has received four thousand the
1:06:23second will be the sales or income so
1:06:26cash is increasing we're receiving cash
1:06:29or the company is receiving cash and
1:06:31sales are also increasing because the
1:06:32company had no sales up until now but
1:06:35with the sale of these five bicycles the
1:06:37company now has a sales of four thousand
1:06:40dollars so cash is an asset and sales is
1:06:44income
1:06:46accounting entry for this one will be
1:06:48debit cash four thousand dollars credit
1:06:51sales four thousand dollars remember
1:06:52again the rules of debit and credit when
1:06:55liability liability equity and income
1:06:58increase there is a credit when
1:07:01liability equity and income decrease
1:07:02there is a debit on the other hand when
1:07:04asset and expense increase there is a
1:07:07debit and when asset and expense
1:07:09decrease there is a credit the rules of
1:07:11debit and credit always apply
1:07:13the second entry for the same
1:07:15transaction the same transaction which
1:07:16is sales of five bicycles now we apply
1:07:19the matching principle and and record
1:07:21the cost so originally those 10 bicycles
1:07:24were recorded as inventory now five of
1:07:26those need to be recorded as cost of
1:07:29sales so one of the account that will be
1:07:32impacted is the cost of sales what is
1:07:34the other account
1:07:36that will be the inventory account
1:07:38because the inventory was an asset and
1:07:41with expected future benefits now those
1:07:43future benefits are actually being
1:07:44realized the asset now converts into
1:07:47expense as cost of sale and we will
1:07:50record cost of sale of five bicycles and
1:07:52a decrease in assets of five buy Cycles
1:07:55okay so cost of sale inventory cost of
1:07:59sale is an expense and this is now being
1:08:01increased so really this is because of
1:08:03matching principle because
1:08:05truly the expense is not happening at
1:08:08the time of sale we had already
1:08:09purchased it but because we are matching
1:08:12costs in Revenue the expense is being
1:08:14recorded now the other impact is
1:08:16inventory will decrease so we had
1:08:18inventory of 10 bicycles now it has
1:08:20decreased by five so there is a decrease
1:08:22in inventory cost of sale is an expense
1:08:26inventory is an asset
1:08:28so the accounting entry would be debit
1:08:31cost of sales 5 times 500 we know the
1:08:34cost per single buy cycle is 500 so the
1:08:37cost of five bicycles would be 25 100
1:08:40and credit the same amount which is
1:08:43inventory by 2500. now what happens to
1:08:46the remaining five bicycles they are
1:08:47still part of the remaining inventory
1:08:49balance so original five thousand
1:08:51dollars that was the original cost of
1:08:53inventory of 10 bicycles we sold 2500
1:08:56remaining 2500 will still be in
1:08:59inventory account the books of the
1:09:01company
1:09:02when the company sells more bicycles the
1:09:04inventory balance will be reduced
1:09:06further with the cost of sale entry the
1:09:08entry number two that we just looked at
1:09:11note that both sale and cost of sale
1:09:13entries impact the company's profit and
1:09:15ultimately equity
1:09:17you saw that we noted that the company
1:09:19is making about three hundred dollars
1:09:21per bicycle but the way it's recorded in
1:09:23accounting is through two entries one is
1:09:25the sale entry where we record the
1:09:27income and the other entry is the cost
1:09:30of sale entry where we record the
1:09:32expense and both these entries have an
1:09:34impact on the profits or Equity of the
1:09:37company
1:09:38next up we will learn about the flow of
1:09:41accounting entries
1:09:44so far we have practice 9 accounting
1:09:47entries so we have a little bit of
1:09:49practice of Double Entry now it's time
1:09:51to see how these entries flow in the
1:09:55accounting books or accounting records
1:09:56of a company so if you look at the flow
1:09:59in these days modern times where mostly
1:10:01accounting is done through a computer
1:10:04system
1:10:05the flow would be like this it starts
1:10:07with the journal entry or the accounting
1:10:09entry itself
1:10:10this is summarized in a general ledger
1:10:13which then transfers to the trial
1:10:15balance and then finally from the trial
1:10:17balance the financial statements are
1:10:19prepared
1:10:20so if you look at each one of them one
1:10:22by one with example let's start with
1:10:24journal entries
1:10:27so General entries record all business
1:10:29transactions or double entries in
1:10:32chronological order
1:10:34so in old times when there were no
1:10:36computer systems imagine you are the
1:10:39accountant and you have a journal in
1:10:41which you are making sure that all of
1:10:43the accounting entries are being
1:10:44recorded So the best approach would be
1:10:46that you record each accounting entry or
1:10:49business transaction based on when they
1:10:51take place so that's why the general
1:10:54entries were recorded in a chronological
1:10:56order that is based on the date and time
1:10:59let's take a look at the example of our
1:11:01accounting entries that we just
1:11:02practiced so here I have summarized all
1:11:05of the entries we have done in Excel in
1:11:07a general journal format so in our case
1:11:10let's say the name of the company was
1:11:12bold bikes company so in the books of
1:11:15board bikes company for the month of
1:11:17January you can see all of the entries
1:11:19are entered based on the date so it
1:11:22starts with 1st of January when the
1:11:23owner of the business invested thirty
1:11:26thousand dollars so the entry was Cash
1:11:28debit owner's equity credit and there is
1:11:31usually some description as well such as
1:11:33in this case to record initial
1:11:34contribution to equity and then all the
1:11:37other transactions that we just
1:11:39practiced are also entered so you can
1:11:42see on the same day he purchased
1:11:44furniture for cash then on 5th of
1:11:46January he purchased he made another
1:11:47purchase of furniture but this time on
1:11:50credit right then on the 10th of January
1:11:53he paid timeout payable for the
1:11:56furniture purchased on 15th of January
1:11:58he paid rent
1:12:01on 16th he received dividend income on
1:12:04the 20th of January there was a purchase
1:12:06of 10 bicycles so it was regarded as
1:12:09inventory on the 23rd January there was
1:12:13a sale of five bicycles so the
1:12:15accountant recorded sales
1:12:18and on the same day 23rd January he also
1:12:22recorded cost of sales so these are
1:12:23about nine entries which are shown or
1:12:26which are entered in the general journal
1:12:28or this is the first step where the
1:12:29accounting entries are recorded in a
1:12:31sequence based on the date and time okay
1:12:35so the next step is the journal Ledger
1:12:39now general ledger is where all of these
1:12:42accounting transactions are summarized
1:12:44but this time they are based on the
1:12:46account number or jail account type
1:12:48let's take a look at that so the general
1:12:50ledger will look something like this so
1:12:52as you can see each account will have an
1:12:55account numbers in the case of cash for
1:12:57example we have at account number 1100
1:13:00it may be different for each company
1:13:02each organization there's usually some
1:13:05logic applied when assigning account
1:13:07numbers if they are usually in a
1:13:09sequence so for example it may start
1:13:12with the current assets so account
1:13:13numbers for current assets first then
1:13:16non-current assets then liabilities and
1:13:18Equity so in this case you can see that
1:13:21for cash the account number is 1100
1:13:23double one double zero and you can see
1:13:25all of the entries are summarized here
1:13:27so general ledger is a very good summary
1:13:29if you want to see what happened in the
1:13:32cash account right and this will give
1:13:34you a summary of all the transactions
1:13:36that took place so on the 1st of January
1:13:38cash was deposited and then there were
1:13:41these purchase of Furnitures payment of
1:13:43rent receiving of dividend on investment
1:13:46and then purchase of bicycles and
1:13:48finally sales of bicycles right the same
1:13:51way all the other accounts are also
1:13:52summarized there's usually a date period
1:13:54description debit and credit and final
1:13:57balance as well which is important so
1:14:00how is the final balance calculated as
1:14:02we are looking at an example of a
1:14:03company that just started brand new so
1:14:06the start of the month on the 1st of
1:14:07January before any transaction took
1:14:09place the balance in the cash account
1:14:11was Zero the first entry increased the
1:14:13balance to thirty thousand the second
1:14:15entry which was a payment reduce the
1:14:18balance by ten thousand to twenty
1:14:19thousand and similarly all the way down
1:14:21to at the end of the month the balance
1:14:24is eight thousand three hundred dollars
1:14:26the same for inventory it started with
1:14:29nothing but then five thousand dollars
1:14:31worth of inventory was added half of
1:14:33that was sold so you have now the
1:14:36balance of 2500 at the end of the month
1:14:39Furniture was purchased twice ten
1:14:42thousand dollars we have twenty thousand
1:14:43dollar balance you can always see in a
1:14:45general ledger what amounts were debited
1:14:46and what amounts were credited the same
1:14:48for accounts payable we started there
1:14:51was a balance but it was already paid
1:14:52off during the month so the closing
1:14:54balance is zero owner's equity at start
1:14:57of the business thirty thousand dollars
1:14:58were deposited no change in there the
1:15:01owner's equity usually Remains the Same
1:15:03unless any changes are done by the
1:15:05owners of the business
1:15:06and then of course we have the sales we
1:15:09recorded the sales of four thousand
1:15:10dollars note that this is showing a
1:15:13negative balance usually negative
1:15:15balance denotes a credit balance and
1:15:17positive balance denotes a debit balance
1:15:20similarly dividend income of 500 cost of
1:15:23sales of 2500 and see it's a positive
1:15:25balance because it's a debit balance and
1:15:28then rent of twelve hundred dollars if
1:15:30you look at total debits and credits
1:15:32this is the sum of all of the entries
1:15:34that are done so far you will see that
1:15:36they're always equal okay
1:15:38now in this flow the third item would be
1:15:40the trial balance
1:15:43so what is a trial balance a trial
1:15:46balance is a list of all accounts with
1:15:48balances let's take a look at example of
1:15:50the trial balance as well so from this
1:15:52journal Ledger
1:15:54we can see a summary of all of these
1:15:57individual account balance in a trial
1:16:00balance
1:16:01so here you have the trial balance you
1:16:03can see now we don't have that much
1:16:04detail we just have the account account
1:16:07number and name and then the whether the
1:16:10balance is debit or credit and what is
1:16:12the amount of the balance so remember
1:16:14cash at the end of the month was 8 300
1:16:17inventory at the end of the month was
1:16:192500 and so on so this is a summary of
1:16:23all of the balances you may recall I
1:16:26mentioned that assets usually have a
1:16:28debit balance and which is exactly the
1:16:29case in this case accounts payable if
1:16:32there was a balance would probably be a
1:16:34credit balance but in our case in this
1:16:36example we have already paid them up for
1:16:37accounts payable so there's no balance
1:16:39there similarly owner's equity we have a
1:16:41credit balance by default and then we
1:16:43discussed also that all income accounts
1:16:45usually have a credit balance and all
1:16:47expense accounts usually have a debit
1:16:49balance so again you can see all the
1:16:51debit and credit balances are equal and
1:16:54this is a very good summary of all of
1:16:56the accounts in the books and what are
1:16:58their balances at any given point in
1:17:00time and when I say any given point in
1:17:02time as you can see it says trial
1:17:04balance January 31st so this is
1:17:06information as of January 31st however
1:17:10if you wanted to see all the
1:17:12transactions that took place you could
1:17:13actually go back to any single Journal
1:17:15ledger so again for example for cash you
1:17:17can see all the transactions that took
1:17:19place in the month and here you have the
1:17:22final balance of January 31st now this
1:17:24trial balance is a very important report
1:17:26from this report we prepare financial
1:17:29statements the financial statements
1:17:31include the balance sheet income
1:17:33statement also known as profit and loss
1:17:35statement cash flow statement changes in
1:17:38equity and comprehensive income we will
1:17:40take a look at balance sheet income
1:17:42statement and cash flow from the entries
1:17:44that we have learned so far and changes
1:17:47in equity and comprehensive income are
1:17:49two other statements which we will look
1:17:50at a little later
1:17:53so going back to our example as you can
1:17:56recall assets liabilities and Equity are
1:18:00reflected in balance sheet while income
1:18:02and expenses or sales and expenses are
1:18:05reflected in the income statement so
1:18:07first we are creating the balance sheet
1:18:09so we focus on the asset liability and
1:18:11Equity account so this is a very very
1:18:13small balance sheet based on the entries
1:18:15that we have done so far these balances
1:18:17you can probably remember now we have a
1:18:20cash balance of 8 300. again it's coming
1:18:23directly from the trial balance
1:18:24inventory 2500 that's the sum of current
1:18:27assets Furniture we know is a
1:18:29non-current asset and the balance at the
1:18:31end of the month is twenty thousand so
1:18:33we have total assets of thirty thousand
1:18:35and eight hundred dollars
1:18:37on the other hand we have no accounts
1:18:38payable at this point zero our current
1:18:40liabilities are zero however we have
1:18:43owner's equity of 30 000 which is this
1:18:47and then you see retained earnings which
1:18:49is really the accumulated profits at any
1:18:51given point so for the month of January
1:18:53with the sales and dividend income and
1:18:56the cost of sales and rent paid we know
1:18:58that our profit was eight hundred
1:19:00dollars so that is reflected here in the
1:19:02equity section because again this profit
1:19:04belongs to the owners belongs to the
1:19:07equity so it is shown in the equity
1:19:09section
1:19:10and you can see that the total of assets
1:19:13and liabilities and Equity is equal this
1:19:16is our balance sheet equation or the
1:19:18accounting equation that we discussed
1:19:20earlier
1:19:23now let's look at the income statements
1:19:25so now we will focus on the income and
1:19:27expense account in the trial balance and
1:19:30those are reflected in the income
1:19:31statement as follows again a very very
1:19:33simple basic income statement
1:19:35one important distinction between a
1:19:37balance sheet and income statement that
1:19:38we need to understand is as you can see
1:19:41income statement is for a period so it
1:19:44is a summary of the transactions for a
1:19:46given period and in this case we are
1:19:48looking at the full month of January so
1:19:51all the transactions that impact income
1:19:53and expenses for the month of January we
1:19:56see the net result here however balance
1:19:59sheet is at a given point so this
1:20:02balance sheet shows the balances shows
1:20:04the assets liabilities and Equity as at
1:20:07January 31st right so it's a snapshot
1:20:10it's as if somebody took a picture of
1:20:12the situation at the end of the month
1:20:13and that situation shows that the
1:20:15company has balance in the bank or in
1:20:18Hand of 8 300 the company on 31st
1:20:22January has inventory of 2500 and the
1:20:25same for furniture equity and retained
1:20:28earnings however income statement shows
1:20:31the impact for the period so in our
1:20:33example we only had one transaction
1:20:35action on the 23rd of January which is
1:20:38resulting in sales of four thousand but
1:20:41if there were other transactions for the
1:20:42month of January they would all be
1:20:44summed up together and shown here and
1:20:47the same applies for cost of sales other
1:20:48operating expenses and other income okay
1:20:51remember the distinction income
1:20:53statement the report for a period and
1:20:55balance sheet is a report for a given
1:20:57point in time and an example that you
1:21:00could think of is that if I ask you what
1:21:04is the bank balance that you have in
1:21:06your bank right now and if you check
1:21:08your bank account or tell me the balance
1:21:10that is the balance sheet but if I ask
1:21:12you how much money have you earned
1:21:14during this year in the last 12 months
1:21:17so that total money in that 12 month
1:21:19period that would be something that
1:21:22would reflect in an income statement so
1:21:24that's the difference between a period
1:21:26report and a point in time report right
1:21:28so income statement is a period report
1:21:30balance sheet is a point in time report
1:21:33so we can see in this example we had
1:21:35sales of four thousand dollars we also
1:21:37recorded cost of sales of to two
1:21:39thousand and five hundred dollars that
1:21:41makes our gross profit of fifteen
1:21:43hundred dollars so gross profit is
1:21:45really the the amount of money that we
1:21:47earned on a net basis after deducting
1:21:49the cost of selling a product so gross
1:21:52profit is strictly related with the
1:21:54product itself and then if you add other
1:21:56expenses operating expenses in other
1:21:58income then you get to net income right
1:22:01in our case the operating expenses were
1:22:031200 which is really only rent in this
1:22:05case and then other income reflects the
1:22:08dividend income that the company
1:22:09received of 500 so in total the company
1:22:12made fifteen hundred dollars in gross
1:22:14profit but then after deducting
1:22:16operating expenses and adding other
1:22:18income we have net income of eight
1:22:21hundred dollars and this eight hundred
1:22:22dollars of net income will be reflected
1:22:24in the balance sheet as retained
1:22:27earnings at the end of the year all the
1:22:29income statement accounts are settled
1:22:31and turned to zero and that balance is
1:22:33transferred to the balance sheet in the
1:22:35retained earnings account
1:22:39now let's look at the cash flow
1:22:40statement so again we are only using the
1:22:42nine accounting entries that we
1:22:44practiced together or we learned
1:22:46together so these are again very simple
1:22:48financial statements in reality the
1:22:49financial statements are a little more
1:22:51complex with a lot more number of
1:22:52transactions first point statement of
1:22:55cash flow is similar to the income
1:22:57statement it is for a period and not a
1:22:59given point in time like the balance
1:23:01sheet okay so the cash flow statement is
1:23:05divided into three sections the first
1:23:08section is Cash provided by operations
1:23:10or operating activity second section is
1:23:13cache provided by Investments or
1:23:15investment activities and then finally
1:23:18the third section is Cash provided by
1:23:20financing activities okay so what are
1:23:23operations or operating activity it is
1:23:25the regular business that the company
1:23:27performs so for example in this case
1:23:28bold bikes companies in the business of
1:23:31buying and selling bikes so it is really
1:23:33related to the operations of buying and
1:23:36selling bikes
1:23:37investing activities when the company
1:23:39invests in other assets so for example
1:23:42purchasing of assets property plant and
1:23:45equipment or any income received on
1:23:48investments would be classified as
1:23:50investing activities
1:23:51financing activities reflect how the
1:23:54company's sources funds sources money so
1:23:56of course in our example the only source
1:23:58so far is the issue of shares the
1:24:00initial Equity investment that the owner
1:24:03has done so any financing activities are
1:24:05reflected here and again we will look at
1:24:08each of these financial statements
1:24:09balance sheet income statement cash flow
1:24:11in detail this example is just to show
1:24:13you the flow of the entries that we just
1:24:15learned okay
1:24:18so we are looking at cash flow from
1:24:20direct method there are two methods to
1:24:22prepare cash flow one is the direct
1:24:23method the other one is the indirect
1:24:26method so the direct method is where we
1:24:28actually look at all individual
1:24:30transactions or we summarize them to
1:24:33understand what was the cash flow what
1:24:36was the Cash inflow or cash outflow from
1:24:38each activity this is actually the
1:24:40method that is recommended by standards
1:24:42but it's not an easy method it's not
1:24:45easy to have all the information readily
1:24:47available so most organizations prefer
1:24:49the indirect method and the difference
1:24:52between direct and indirect method is
1:24:53that in the indirect method we start
1:24:55with net income from the income
1:24:57statement and adjust any non-cash items
1:25:00that we are aware of out of that net
1:25:02income to arrive at the cash provided by
1:25:05operations okay so it's more like an
1:25:08indirect method of arriving at the cash
1:25:10flow from operations compared to the
1:25:13direct method where actual direct cash
1:25:15flows are reflected in the cash flow
1:25:17statement
1:25:18okay so if you look at Cash used by
1:25:20operations so we know customers cash
1:25:23collected from customers is an operating
1:25:25activity it's the normal business
1:25:26operations so we know that we had sales
1:25:29of 4000 and all of that money was
1:25:31received in cash so we have cash
1:25:33collected 4 000 cash paid to suppliers
1:25:35we know that when the company purchased
1:25:3710 bicycles It ultimately paid them five
1:25:40thousand dollars in the month of January
1:25:42so that's a negative amount or a cash
1:25:44outflow similarly the company also paid
1:25:47rent of twelve hundred dollars and
1:25:49that's pretty much it for the cash flow
1:25:50from operations these are the three
1:25:52operating
1:25:53activities which impacted cash flow and
1:25:56there's the net total of negative 2200.
1:25:59now if you look at the investing
1:26:00activities the company purchased
1:26:02Furniture costing twenty thousand
1:26:03dollars that's negative cash flow
1:26:05however the company also received
1:26:07dividend income of five hundred dollars
1:26:10in the investing activities so the net
1:26:13cash flow from investing activities is
1:26:1519
1:26:15500. now we look at financing activities
1:26:18and that's only the issue of shares or
1:26:21really it's only the investment of the
1:26:23owner deposit cash for equity and that's
1:26:26thirty thousand positive
1:26:28now this gives us the total from
1:26:30financing activities and if we add all
1:26:32of these activities up which is cash
1:26:34flow from operations cash flow from
1:26:36investing activities and cash from
1:26:38financing activities we arrive at a net
1:26:40balance of 8 300. so in the cash flow we
1:26:44also reconcile the total movement which
1:26:47was 8 300 for the period to the final
1:26:51closing balance now in this case we are
1:26:53really looking at the start of a
1:26:54business where initially there was
1:26:56nothing so cash and cash equivalence at
1:26:58the beginning of the period was zero and
1:27:00the movement during the period of
1:27:02January in cash is 8 300 positive net
1:27:05positive movement at the end of the
1:27:08month the cash balance is 8 300. so
1:27:11these three cash flow activities shown
1:27:13in the three sections show the period
1:27:15activity okay and that's the sum of the
1:27:18total period however we add the opening
1:27:21balance at the start of the period to
1:27:23give us the final closing balance and
1:27:24this amount cash and cash equivalence at
1:27:27the end of the period would match your
1:27:29cash balance cash and cash equivalence
1:27:31in the balance sheet at the end of that
1:27:33period so in this case you can see it
1:27:35matches it Nets let's say in the month
1:27:37of January the company had further cash
1:27:39flows so then all of those further cash
1:27:42flows will also be added and then your
1:27:44total cash and cash equivalence balance
1:27:46at the end of the period will always
1:27:47match what you see in the balance sheet
1:27:49a quick look at the indirect method of
1:27:52cash flow so in the indirect method
1:27:54instead of directly going to the cash
1:27:55collected from customers or cash paid to
1:27:57vendors or suppliers we start with the
1:27:59net income which was eight hundred
1:28:01dollars if you recall from our income
1:28:02statement this is the 800 dollars
1:28:05then we will adjust for any non-cash
1:28:08items or any items that should actually
1:28:10be reflected in the investing activities
1:28:12or financing activities okay so we don't
1:28:15have any non-cash items but a good
1:28:16example of a non non-cash item is
1:28:18depreciation expense in our example we
1:28:21did not have that entry so far so we are
1:28:24not excluding any depreciation expense
1:28:26here but we do have dividend income and
1:28:28dividend income should really be
1:28:29reflected in the investing activities so
1:28:32we exclude it from here so you see a
1:28:34negative 500 here but you see positive
1:28:37500 here because we are actually showing
1:28:39the cash flow from dividend out of
1:28:41operations but in the investing
1:28:43activities then we have indirect method
1:28:45of calculating the cash flow from
1:28:46accounts receivable inventory and
1:28:48accounts payable we call it the changes
1:28:51in working capital so you really need
1:28:53the balance sheet to calculate these and
1:28:55you can see in case of accounts
1:28:57receivable it is no change right there's
1:29:00no accounts receivable so far in this
1:29:02balance sheet and you see I have created
1:29:04a comparative balance sheet of the
1:29:05previous this period that should
1:29:07actually be December 22
1:29:09yeah so end of December 2022 there was
1:29:12nothing so in accounts receivable there
1:29:14is no change there's no activity so we
1:29:15leave it as zero inventory we had zero
1:29:18inventory at the end of December but
1:29:20during the month or say at the end of
1:29:21January we have now inventory of 2500 so
1:29:25when we do indirect cash flow any
1:29:27increase in inventory and account
1:29:29receivable is a negative cash flow as
1:29:32you can see with the brackets here and
1:29:34any increase in accounts payable is a
1:29:36positive cash flow so in this case
1:29:38inventory has increased you can see from
1:29:400 to 2500 we see a negative cash flow of
1:29:442500. and we don't have although we did
1:29:48have accounts payable during the month
1:29:50but by the end of the month there is no
1:29:52accounts payable you can see it's still
1:29:53zero so for cash flow perspective it's
1:29:56it's neutral there's no change in
1:29:58accounts payable again this is indirect
1:30:00it's a little complicated to understand
1:30:01but impact is exactly the same so if you
1:30:04see cash provided or used by operations
1:30:07is showing two thousand and two hundred
1:30:09dollars negative which is exactly the
1:30:11same as what we calculated for cash
1:30:13provided from operations so as I
1:30:16mentioned we will discuss the cash flow
1:30:17and other financial statements in more
1:30:19detail later but for now it's important
1:30:21to note that the cash from operations in
1:30:24total is the same whether you use the
1:30:26direct or indirect method okay cash from
1:30:29investing activities and financing
1:30:30activity is usually very similar or the
1:30:33same as what you see in the direct
1:30:34method there's no real change there so
1:30:37again at the end you have the same
1:30:39balance cash flow for the full period is
1:30:41eight thousand three hundred dollars
1:30:43positive mainly driven by the owners
1:30:45investment all the other activities such
1:30:48as investing activities had a negative
1:30:49outflow and also operations had a
1:30:51negative outflow that is also why it's
1:30:54important to look at cash flow because
1:30:56if you just look at the income statement
1:30:58and you see the company has made a
1:30:59profit of eight hundred dollars in the
1:31:02month of January but if you look at the
1:31:04cash flow you see the company actually
1:31:06has a negative cash flow of two thousand
1:31:08two hundred dollars from operations
1:31:10right so the operating activities
1:31:12actually resulted in an outflow of cash
1:31:14similarly investing activities resulted
1:31:17in an outflow of cash the only reason
1:31:19why you're seeing positive cash flow is
1:31:20the owner invested the money there was a
1:31:23deposit of thirty thousand dollars at
1:31:25the start of the year so if you look at
1:31:27it from the owner's perspective he
1:31:28invested thirty thousand dollars and at
1:31:30the end of the month he is actually
1:31:32looking at eight thousand three hundred
1:31:34dollars so there appears to be a loss of
1:31:36twenty one thousand and seven hundred
1:31:37dollars but it's not a loss it's an
1:31:39investment in business and now he has a
1:31:42few Assets in the balance sheet right he
1:31:44has Furniture of 20 thousand okay he
1:31:47also have inventory of 2500 that he can
1:31:49sell and he's of course still has eight
1:31:51thousand three hundred dollars in cash
1:31:54hope this clarifies the flow of
1:31:56accounting entries so again these are
1:31:58the four major activities these days
1:32:00with computerized systems of course
1:32:02there are more steps involved there has
1:32:04to be accounting reviews of all the
1:32:06entries sometimes you have to adjust the
1:32:08trial balance sometimes you have missing
1:32:10entries but if you are using a
1:32:12computerized accounting system a lot of
1:32:14those issues are already taken care of
1:32:16all you need to do is start entering the
1:32:18entries in the system in the accounting
1:32:21system it will automatically be
1:32:22summarized into general ledger and trial
1:32:24balance some systems will also provide
1:32:26you the financial statements depending
1:32:28on the setup of the system and even if
1:32:30the financial statements are not
1:32:31provided by the system you know how to
1:32:34prepare the financial statements
1:32:35utilizing the trial balance wow you have
1:32:38come a long way you have learned a lot
1:32:40in this video do you have any questions
1:32:42you like more clarity on do you have any
1:32:44comments did you find this information
1:32:46helpful
1:32:47every comment matters let me know and do
1:32:49not forget to subscribe to my channel
1:32:51for more accounting and finance related
1:32:53tutorials and videos so till the next
1:32:56time my friend wish you all the best
1:32:57take care and bye for now

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