In this video, discover the difference between accounting and bookkeeping. This is foundational knowledge for accounting.
- The most fundamental type of accounting is bookkeeping. Just the routine, systematic gathering of data, making sure that everything gets recorded. - Financial accounting is the organization and summarization of these bookkeeping data into reports to be given to people outside your company who might be thinking of loaning you money. - Or who might be thinking of investing in your company. - Bookkeeping is the system in place to capture the raw data. Financial accounting is the organization of these raw data into summary reports. - And at its heart, bookkeeping is about collecting data, getting things recorded. - This capturing and recording process is crucial, because once events are recorded, then we can organize the data about those events and start making better decisions. - For example, Walmart has ten billion customer visits per year. In order to operate, Walmart must have an organized bookkeeping system in place to keep track of what those customers bought, how much they paid, what items need to be ordered, and so forth. With ten billion customer visits per year, Walmart needs a good bookkeeping system. - Bookkeeping seems mundane. But without it, Walmart could not continue to function. - Simply stated, bookkeeping is the preservation of a systematic, quantitative record of an activity. And until you have a record of an activity, you really can't make any sophisticated decisions with respect to that activity. - All right. Walmart has carefully captured and recorded bookkeeping data from its ten billion customer visits, and its millions of purchases from its suppliers, and its millions of paychecks for its employees. So what next? - Well, this is where financial accounting comes in. The accountants for Walmart will take up the information from these millions and billions of events, and summarize the meaning in just three reports, called the financial statements. - These financial reports can be thought of as three pieces of paper. The balance sheet, the income statement, and the statement of cash flows. It is amazing how much information can be summarized about a company on just three pieces of paper. - A balance sheet is a very fundamental report. It is a list of an organization's resources, accountant's call those assets, and an organization's obligations. Accountants call those liabilities. - Assets are cash, land, trucks, and equipment. Liabilities are bank loans, taxes you owe to the government, and wages you owe to your employees. A balance sheet is a fundamental report for any business. It reports what you have and what you owe. - And the next fundamental financial statement is the income statement, which reports how much money the company is making. For example, in 2018 the selling price of all of Apple's goods and services was $266 billion. Accountants call this number revenue, and that number is reported in the company's income statement. - Apple's total business expenses during 2018 were $206 billion. The difference between $266 billion in revenue and $206 billion in expenses, means that Apple's net income for 2018 was $60 billion. Not bad. - Not bad. All of this information can be found in Apple's income statement. - The third primary financial statement is the statement of cash flows, also known as the cash flow statement, which is a report of a company's cash receipts and cash payments. - In 2018, Apple's operations generated surplus cash of $77 billion. This is cash that could be used to buy new equipment, to repay loans, and to pay dividends to shareholders. The details can be found in Apple's statement of cash flows. - The balance sheet, the income statement, and the statement of cash flows are summary reports that are provided by businesses to people outside the company. So those people outside can decide, "Should we loan that company money?" "Should we invest in that company?" - Bookkeeping involves the capture and recording of the raw data. Financial accounting involves organizing those data into three fundamental financial statements.
- Describe line items that appear on financial statements.
- Differentiate between the three types of financial statements.
- Interpret current accounting issues and trends.
- Calculate the market capitalization of a company.
- Identify the most important expense for a retail company.
- Explain the use of common size financial statements.