Understand the accounting equation and the ability to identify transactions and its components.
Section 2 goes into the nuts and bolts of understanding all of the elements of accounting transactions. It starts off with the accounting equation and then Justin discusses a simple 4 step framework for how to learn double-entry 'debits' and 'credits'. The top transactions within each element of the accounting equation are discussed in a lot more detail with a more detailed look into retained earnings as well. By the end of this section, you will have a thorough understanding of how to translate ordinary transactions into a format that forms the basis of all financial statements in business today. At the same time, you'll have a deep understanding of what it actually means by following through an experienced accountant, as opposed to just rote learning a bunch of concepts.
The accounting equation is the basis of all accounting transactions and the underlying 'language of business' when you look under the hood of all transactions in any type of business. In this lecture, we will explore in detail the accounting equation and the typical elements that make up these individual items and their definitions. By the end of the lecture you'll be looking at the world differently in terms of assets, liabilities and owner's equity.
Most students learning accounting for the first time have a hard time getting their head around the sheer volume of possible transactions that could occur and how you classify these into a two-sided transaction with a debit and credit. In this lecture, we will explore a simple 4 step process to easily define a transaction into its two components. When learning for the first time it's a process of elimination to narrow down each side until you understand all of the possible combinations. This method will make learning double-entry accounting transactions much easier.
This lesson introduces the T-Account or Ledger account for the first time. This is the method of recording transactions in practice and all accounting systems are built upon the fundamental principles based on ledger accounts. Remember debits on the left and credits on the right. T-Accounts are used to keep a tally of the opening balance, increases, and decreases of transactions throughout the period and finally a closing balance which will then be brought forward to a trial balance to create financial statements.
In this lesson, we explore assets or 'future economic benefits' and will go into detail the mechanics behind the most typical types of asset transactions. Assets are the benefits that drive cash into the business and generate revenue. By the end of the lecture, you will have a detailed understanding of asset accounts and how you would create transactions into its two components.
In this lesson, we talk about the contra assets which have negative future benefits and they all follow a very similar pattern on how they work in practice. They are essentially reducing the book value of an asset to its net book value. Some examples include an allowance for doubtful debts, provision for stock obsolescence and accumulated depreciation/amortization. They are effectively writing down the asset based on events that reduce the likelihood they will result in a future economic benefit to the business.
In this lesson, we explore liabilities or 'future economic sacrifices' or money we owe to pay in the future. They are a necessity to running any successful business and not all debt should be frowned upon. We will go through the typical types of transactions that occur in practice in regards to liabilities. By the end of the lecture, you will have a reasonable understanding of which transactions to be looking out for that affect liabilities.
In this lesson, we will be exploring the owner's equity or equity, which is the share ownership and also any current or historic profits left over in the business. This is really the business's value of what is left to re-invest. We will be going through the key categories and whilst the transactions are too complicated, the applications of this in practice are massive. Most employees and managers in practice are working very closely with P's and classifying transactions into revenues or expenses and also have to manage them profitably.
We will be exploring in more detail the retained earnings account and the components that make up this account. Understanding retained earnings are the key to the link between a balance sheet and profit/loss statement. This is one of the most important concepts to be understood if you want to prepare and understand financial statements. The components are relatively simple and straightforward but the concept isn't widely understood in the real world.
We will explore the 'General Journal' and how these are used in a practical sense. We will go through the format of a general journal and translating how you take a debit and credit simple transaction and put this into a general journal format that accounting could use. These are used extensively by accountants and are the basis on how data is entered into financial systems globally.