Three types of business activities — Transcript

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1. 0:01Let's look at the three principal types of business activity.
2. 0:09So say you're gonna open a new business,
3. 0:12well if you're gonna open a shop, then you need a location, right?
4. 0:16Now that location, you could rent it or you could buy it,
5. 0:20depending on what your goal is and how much funding you have.
6. 0:24Now we have a store, what else do we need?
7. 0:27Well, we're gonna need some shelves to put our products on,
8. 0:30maybe a cash register to collect the money from our sales,
9. 0:35and then of course we're gonna need some products to sell, right?
10. 0:39So, here, maybe we have a grocery store and we're gonna sell some food.
11. 0:42Ok now we have our set up, well we're probably gonna need some supplies, right?
12. 0:48To clean it and keep it tidy, things like that.
13. 0:52And of course we're gonna need some employees, right?
14. 0:55Because they're the ones that are gonna be working in our business.
15. 0:59All of this is gonna take some money, right?
16. 1:02Were going to need to have some money to buy these things
17. 1:05because we need all of these resources before we even make a sale, right?
18. 1:09And so hopefully once we have all of these items
19. 1:13then we'll have our customers that will come in and start buying our products.
20. 1:18So all of these events are activities that happen at a business,
21. 1:25and we can take these activities and sort them into three categories:
22. 1:30investing, financing, and operating activities.
23. 1:35And so in accounting what we do
24. 1:37is take everything that happens at a company,
25. 1:40divvy it into these three sections, and input that into our accounting information system.
26. 1:46And the accounting information system
27. 1:50is what we use to keep track of all of these activities,
28. 1:53and how much we have, and how much we use
29. 1:56in terms of the dollar value of all of these items.
30. 1:59So let's look at these three types.
31. 2:01The first one is financing activities.
32. 2:03Financing activities are the ways we obtain our money, right?
33. 2:08And this is, you know, when you need money to start up a business or to grow a business.
34. 2:12You engage in financing activities.
35. 2:14There's two main ways for a company to obtain financing.
36. 2:18The first method is borrowing money.
37. 2:22So we can go to a bank, and we can take out a loan,
38. 2:26that's also a note, which is just another type of loan.
39. 2:29Or we can issue bonds, which is also a type of loan, that has interest
40. 2:33we'll talk about later in the course.
41. 2:35But borrowing money, what that does is. it gives the company money
42. 2:39but it also creates a liability because they're gonna have to pay it back.
43. 2:42And so liabilities are money that are owed
44. 2:46because there was a borrowing that took place.
45. 2:49The other way to obtain financing is through investors.
46. 2:53So a company can sell shares of stock to investors.
47. 2:56The investors give the company cash
48. 2:58and the company gives them shares of stock in return.
49. 3:01And that creates equity in the company.
50. 3:04So common stock is what we call the stock that an investor gets
51. 3:08when they give cash to the company.
52. 3:11It shows their ownership of the company.
53. 3:15And now when a company makes money and we want to reward those investors
54. 3:18we pay them dividends which are earnings that are paid out to investors
55. 3:22as a reward for investing, right?
56. 3:25You gave us some money to help our business get going
57. 3:27and now we're returning some of that in the form of dividends.
58. 3:31So common stock is money coming into the company,
59. 3:36while dividends are money going out of the company.
60. 3:39And remember in accounting we're doing it from the company's point of view
61. 3:42not the investor point of view.
62. 3:44The company point of view.
63. 3:47After companies have engaged in financing activities
64. 3:49then they do the investing activities.
65. 3:52Investing activities are getting those resources a company needs to operate, right?
66. 3:56So in our example it could be the shelving, the registers, the equipment that they need.
67. 4:03It could be things like computers, delivery trucks, furniture, buildings.
68. 4:07All of those are considered assets.
69. 4:10And assets are resources that a company has
70. 4:13to help it run its business to help earn money.
71. 4:17So assets are resources.
72. 4:19Once we've invested in these assets, now we can start running the company
73. 4:24which is what we call our operating activities.
74. 4:27So operating activities is just the regular business processes.
75. 4:30We call it revenues when we have earnings from providing products or services to customers.
76. 4:36We call that revenues.
77. 4:38If we sell a product we typically call it sales revenue.
78. 4:41If we provide a service, we call it a service revenue.
79. 4:44Inventory is what we call the items that were selling to our customers for a profit.
80. 4:48So that could be the food in the grocery store.
81. 4:51Or the soap and food on shelves at Target, something like that.
82. 4:55That's inventory.
83. 4:57Inventory is what a company would sell to make a profit, right?
84. 5:00And then not all of our customers always pay in cash,
85. 5:05especially when you're talking about business-to-business operations.
86. 5:08For example, if Target is getting some dog food from Purina to put on their shelves,
87. 5:13Target usually has 30 days or 60 days to pay Purina for that dog food.
88. 5:18So account receivable is when a customer owes a company money.
89. 5:22So if Target is buying dog food from Purina, Purina would have an accounts receivable
90. 5:27because they're gonna receive payment for that money in the future.
91. 5:32Inventory and accounts receivable are also assets that we would have in a business
92. 5:38because they are also resources.
93. 5:42Now of course we can't make money without spending money.
94. 5:46So expenses are kind of opposite of a revenue.
95. 5:49An expense is the cost of providing these services or selling the products.
96. 5:53We call it an asset consumed.
97. 5:55So expenses can be things like salaries and wages expense, which is paying our employees,
98. 6:00advertising expense, interest expense
99. 6:02that we have to pay because we borrowed money,
100. 6:06and of course income taxes that the corporation has to pay to the government.
101. 6:10Okay, so expenses are costs of providing those services
102. 6:14and sometimes expenses result in liabilities.
103. 6:18A liability is an amount owed from an expense.
104. 6:22So just like customers don't always pay right away, right?
105. 6:25Companies don't always pay what they owe right away.
106. 6:28For example, if you work at a company you don't get paid every day,
107. 6:31you get paid every two weeks.
108. 6:33So when a company owes employees money, we call that salaries and wages payable.
109. 6:38When it company owes interest but they haven't paid yet, that's interest payable.
110. 6:43And our general term for amounts that are owed to like suppliers is called accounts payable.
111. 6:50Because we've got to pay it out.
112. 6:52And so all these amounts owed to other parties are called liabilities.
113. 6:56And you'll notice they all have that word payable in it.
114. 6:59because we're gonna pay out money to another party.
115. 7:02So when we're looking at our operating activities,
116. 7:07We call it net income when the revenues exceed expenses.
117. 7:11When the money coming in from customers is more than the cost of providing those services or products
118. 7:17That's a net income.
119. 7:20And unfortunately when it's the other way around,
120. 7:23and our expenses are more than the revenues that's called a net loss, all right?
121. 7:26Which means the company isn't doing very well.
122. 7:29Okay so I hope that helps you understand
123. 7:32the three basic types of business activities: investing, financing, and operating